Posted by VanMD55 on July 19, 2008 at 19:46:19:
Thanks Ed and everyone for your insight.
I will continue my due diligence on the property.
Ed, I like the finance structure you proposed based on the information I gave for reference because it eliminates the private investor from the picture.
I do have properties for cross-collateral. I will continue my pursuit if the deal flourish.
Best Regards,
VanMD55
Ed Garcia Help: 36-Units Apt. 75% Seller-Finance - Posted by VanMD55
Posted by VanMD55 on July 18, 2008 at 22:03:08:
I am beginner investor in purchasing multi-units. My focus for the last 3 years has been single-family homes and managing tenants. Now, I am looking for passive cash flow through multi-unit investing.
Currently, I am evaluating a potential deal for 36-units for $900,000 ($25,000.00 per unit)in a college town in TX. The owner is ready to retire, and is willing to finance 75% of the deal @ 6.5%-30 years ammo with a 10 year call.
I need to find a commercial lender and/or private money for the other 25% needed to finance the deal.
At this time, my funds are tried-up in another investment property so I need a Equity Share Investor to pull off this potential deal.
Here are the numbers per the information from the Broker: 92% occupany-level as to date, with most of the tenant-base are college students. The properties are 2 blocks from the college campus.
Income
Annual Scheduled Rent = $ 232,020.00
Less 10% Vancancy & Credit Loss =$ 23,202.00
Net Rental Income =$ 208,818.00
Other Income = $3,600.00
Effective Gross Income = $212,418.00
Expenses
Fixed Operating Expenses
Real Estate Taxes = $15,745.00
Insurance = $ 11,508.00
Utilities = $28,224.00
Variable Operating Expenses = $61,200.00
Note 1: The broker will not forward the last 2yrs of actual income and expense statements until a purchase price is agreed on between the seller and I. So, I would not have these statements until the due diligence period while under contract.
Total Operatig Expenses ($3,241 per unit) = $116,677.00
Net Operating Income = $95,741.00
Seller Financing- Annual Debt = $51,198.00 ($675,000.00 Financed by Seller @ $4,226.46)
Potential Equity Share Investor: $225,000.00 down (25% of the Equity in the property and 25% of the cash flow) with the option for me to buyout the investor in 5-7 years.
Cash Flow = $44,543.00 -$11,135.75 (25% to Investor) = $33,407.25 per year
I think I have a great deal here. With 25% Down, this deal will reflect a CAP Rate of 10.6% and Cash on Cash Return of 19.8%
Will a commercial lender finance this deal or will I have to do private money?
Ed Garcia: Could you recommend a mortgage broker and/or a private lender to assist me on this deal if securing a purchase contract is feasible per the numbers?
Thanks for any feedback you can give me.
Re: Ed Garcia Help: 36-Units Apt. - Posted by Ed Garcia
Posted by Ed Garcia on July 19, 2008 at 18:49:38:
Van,
First of all Iâ??d like to tell you that Eric has given you some sound advice.
What you have done here is pencil a deal and on the surface you think that the figures seem to work, but by the way you have structured it, it shows your lack of experience.
All youâ??ve done is play with some numbers and then dream that maybe this could be a deal. Now Van, Iâ??m approaching you in this manner not just for you, but for anyone who wants to do a deal like this one that youâ??ve just presented.
If you had some family members or private investors who like you, lack experience in a deal like this, you might get lucky and do a deal like this. You might get lucky or maybe you might not be so lucky because you may make a deal that you shouldnâ??t have.
In this business there has always been an old cliché that sayâ??s if you find the right deal, the money will come.
The right deal does not always mean the subject property that you’re buying, but how the deal on the subject property you’re buying is structured.
The way youâ??ve structured this deal thus far itâ??s not attractive for the investor whoâ??s putting up the 25% which equates to $225,000 down plus closing. Theyâ??re taking all of the risk and youâ??re reaping the reward.
There is a lot more to doing a deal other then just do the numbers when doing a commercial deal. For starters, when you purchase an apartment building, youâ??re buying an income stream. So you need to know how this property is going to compete with other income property in the area. That being said the first thing I do is ask myself a battery of questions to help me analyze the deal.
Here are 18 questions I ask myself when doing a commercial deal just to get started on the deal.
Now donâ??t get these questions confused with a due diligence list. You can go to Ray Alcornâ??s Commercial section of this site and find an appropriate due diligence list. This list is just to help us to decide not only how competitive this property will be, but how to structure the offer to the seller as well.
Van, I realize youâ??ve already asked a couple of these questions one being will the seller carry-back any financing which is why youâ??ve gotten excited about this deal to begin with.
Itâ??s also important to know what Cap Rates are being enjoyed in the area. If I bought a property above market cap rates, thereâ??s a chance that I have some upside in the deal to use as part of my exit strategy when it comes time to refi the property to pay off the seller. So many times I see investors purchase a property assuming that they can pay off the sellers carry-back in 3 to 5 years and then find that the market values have stayed put not giving them appreciation to build equity leaving them no equity f or the refi.
Van, there are just so many ways to work this deal that youâ??ve presented that I donâ??t feel like presenting them due to I donâ??t know your financial circumstances or have enough information about the deal etc.
What Iâ??m going to do for the sake of time is structure one way to do this deal with little money down. Now bare in mind that doesnâ??t mean Iâ??m endorsing your deal, as I said I donâ??t have enough information so here goes.
I would go to the seller and tell them I went to my banker to get the $225,000, 25% down and the banker said they would prefer to lend me 40% in first position giving the seller $360,000 having the seller carry 60% in second position rather then 75% in first position.
Assuming that your strong enough to negotiate the deal and can convince the seller to carry-back in second position, I would then go to the bank and structure the deal as follows. If the banker finances this deal at 40% LTV in first position, it would have boo-koo positive cash-flow to debt service the first. I would then offer the banker one of my existing properties to cross collateralize with as additional security, just to show good faith. Van, even if your property doesnâ??t have that much equity in it, it makes no difference. The units are at 40% LTV giving the banker what equity they need to do the deal, so the only reason Iâ??d offer the additional property as collateral is just to demonstrate to the bank that I have my butt on the line.
Van, you came to me for my opinion and now you have it. I hope this help,
Good Luck,
Ed Garcia
Re: Ed Garcia Help: 36-Units - Posted by Eric in FL
Posted by Eric in FL on July 19, 2008 at 10:23:05:
First, take a very deep breath and realize this is an investment and it takes a ton of research to even come to an offer. The first thing to do is if you are very serious after crunching numbers is a LOI (Letter of Intent) through your broker. At first glance there are some real problems with expenses:
Go with the LOI with a deposit of xx amount when the offer is accepted.
Best Regards,
Eric