1st Deal Analysis

[Todd Witt]

Hey everyone, I am looking for some help in putting together my first buy and hold purchase. In my area, multi-family units do not typically go on the MLS, so my partner and I started a small direct mail campaign targeted at duplex owners in a neighborhood where we want to invest. Our second response was from a guy who owns 4 properties (7 units total) that is looking to get out of the rental business. He is willing to owner finance (there are no liens on the properties) and provided us with the follow information for his properties.

Total price he paid = $531,000 (we estimate the properties are currently worth $560,000)

Annual Insurance = $4,700

Annual Taxes = $5,350

Total Monthly Rent = $5,290

He gave the initial offer of $550,000 with a $50,000 down payment (his CPA told him 50k was the max down payment he should accept), 5.5% interest with a 15 year term on the loan. However, he is willing to negotiate.

With our calculations including 5% monthly maintenance, 8% vacancy, 5% capital expenses, 10% property management (which we will be doing ourselves) his offer will give us a negative cash flow.

We are planning to counter offer with $490,000 with a 5% down payment, 5% interest amortized over 30 years with a 10 year balloon payment. This offer would allow us to cash flow $470 per month after the maintenance, vacancy, etc.  are factored into the equation, while still getting him his cash in the relatively near future.

Before we submitted the counteroffer, I wanted to throw it out on the board to see what more experienced investors thought of the situation and if our offer sounds reasonable.

[Brent Coombs]

My good-investment Sensor-Wand has not beeped. Something about: where is the balloon payment coming from in 10 years time (given that there has been no provable appreciation so far!)? I don't know how my Sensor-Wand works - so if it is wrong, blame it. Cheers...

[Todd Witt]

Thanks for taking a look @Brent Coombs ! That is the kind of gut check we were looking to get. 

For the balloon payments our exit strategies were to 1. Get refinancing convientionally 2. Find private money for someone else to more or less buy the note for the remainder of the 30 year amortization 3.Sell two of the properties to pay off the other two (one property is worth about double each of the other three individually) 4. Sell all of the properties below current market rate to get out of the deal. 

Obviously option 4 would be the worst case for us, and I guess it assumes another 2008 doesn't hit right at that 10 year mark.

[David S.]

Originally posted by @Todd Witt:

With our calculations including 5% monthly maintenance, 8% vacancy, 5% capital expenses, 10% property management (which we will be doing ourselves) his offer will give us a negative cash flow.

I'm new to REI as well, but this seems unrealistic. Most people use the 50% rule to estimate expenses not counting the mortgage, and you're at 28%. You're only looking at a combined $500 a month on CapEx and maintenance. That's $6k a year, to cover 7 residences each with a fridge, oven, furnace, etc. Plus, four roofs, paint, siding, etc.

[Roman Pak]

IMO, I wouldn't take the deal, even with your counter offer. Your monthly cashflow of $470 is a tiny percentage of the $5290 rental income. That comes out to be less than $70 per door. That to me is terrible CF. The financing is what's killing the deal. You've got a loan to the guy for 30 years, it's practically guaranteed that we'll have another crash within 30 years, what then? You aren't making enough CF to recoup your investment fast enough.