Advice requested - please help me analyze this deal

[Amy Skaar]

Hi all,

I'm looking for some help stepping through analyzing a deal. I'm open to any and all feedback - I'm new to this so please go easy. :) What I'd like to know is if I'm too ambitious to start with, and whether or not this is a good deal. I am also looking at some pointers on how I might finance this or if I should start smaller.

My financial situation

I have a stable job with a good income. I own my own home, it's worth 410k, I owe 374k. I have a rental unit, worth $160k, I owe 65k on a 10year mortgage with 9 years to go. I have $110/mo positive cash flow on it. I just went through a separation so I don't have much in cash savings, but I do have excellent credit (740+). I have 50k in 401k's I could borrow against if I had to, and over 30k available in credit cards (don't really want to go that route though). I have about 2k/mo from my job that I could invest.

The prospective property

9-unit 2-bed, 1-bath, brick apartment building, with current rents at $6100/mo. $6700/year in taxes. Out of state owner. Asking price is $595,000 - it's been on the market for 4 months and was listed earlier this year at $699k and removed. Street parking. It's in a gentrified part of town, in the best school district in town, and walking distance to neighborhood cafe's, grocery stores etc. Great curb appeal. It was built in 1926, new boiler, new windows. Looks to be original hardwood floors in good shape. Hard to say what it needs as I have not been through it.

Running through the numbers, I'm looking at $100/mo per unit following the 50% rule, but I'm wanting another set of eyes to make sure I'm doing it right. I think there is room to boost the rents to at least $6700/mo ($750 per unit) if it's in good shape.

Here's how I did my #'s

595k asking (assuming the worst)

10% down

$2850 mortgage. Doubled is 5700, which leaves the $100/mo per unit. This is obviously better with a higher % down, as I'm also not likely to get regular financing with this low of a down anyway.

My questions are

1) Am I missing something in the #'s?

2) I don't have 20% or even 10% down in cash. There may be an opportunity for seller financing here, I'd need to investigate. If it is worth pursuing, what are some ideas on how to finance?

Thanks all for taking a look and offering what advice you have.

Best,

Amy

[Jean Bolger]

I don't get the $2850 doubled? I think you may be doing your 50% thing backwards

The 50% rule (of thumb) says that your NOI (net operating income) will be around 50% of your gross. So you'd be looking at $3050 before your debt service. If that is indeed $2850 then you're looking at $250/mo cash flow for the entire property. But you mention a boiler, which makes me think there are owner paid utilities- so you'd better use 60% expenses. That puts you in the hole $410 a month.

Also: 10% down commercial loan is not at all likely. Maybe possibly, with seller financing- but probably only if you were really overpaying ;)

In other words, I don't think this is a deal even if you could swing it. Keep looking!

Also- taking on a big property without plenty of cash reserves in the bank is really, really risky. I know it's tempting to "go big!". But it's better to go smart and careful until you've laid the proper groundwork. Then go big!