Found a Deal...Lacking the Capital to Execute.

[Kelton Johnson]

Hi guys, 

I'm an new investor here in North Dallas and I've recently been looking for duplexes to buy and possibly house hack with or simply buy & hold.   The opportunities have been rather sparse, however, I recently stumbled upon several similar duplexes being sold on the same street. Each one has been nearly identical, 3 bed 2 bath on each side 2600 sq ft total. I was able to get ahold of the seller and it turns out he is trying to unload quite a few on this street that he has bought over the years in order to do a 1031 exchange.

Each duplex he is asking $214k and at that price he still has 4 left that he hasn't even put on the market/MLS yet. They are currently renting for $1095 for each side but could easily be rented for $1195 (several others on the block are already at this price). This puts each property at an ~7.% cap rate as-is if I paid the asking price and over 8% cap rate with the expected increased rents. Both those cap rates include taxes, insurance, vacancy, repairs, and capex. There is definitely lots of opportunity to decrease my estimates expenses and and increase rent prices. Not to mention I could certainly offer much less than the asking price if I came with cash and especially if I wanted to buy all 4 properties.

I've attached my spreadsheet that I've been using to analyse the deals and hope you will check it out and let me know if there is anything you think I might be missing. You can simply create a copy and adjust financing rates, expenses, buy price, etc. It is being ran as if I were paying 100% cash, however, I could get a much better return (COC over 15%) if I was able to finance these properties at 25-30% down.

Unfortunately, I only have about $25k in capital on hand right now.  I'm looking for ways to make either one or all of these deals happen, be it crowd-funding, hard money, etc.  

I'd love any and all advice on how to structure a deal like this (as I'm no expert).  Feel free to message me for info on this if you'd like.

https://docs.google.com/spreadsheets/d/1Oqj74PxE7q...

Thanks, 

[Roger Poulin]

@Kelton Johnson the multi family market has grown very tight in most of the country.  All that @David Light pointed out is correct. Please don't think I am raining on your parade, but thorough analysis is needed before you spend 800K. I have a couple more questions, then a suggestion.

1. What do you base 8% vacancy on (Performance of this property, local average, regional MLS statisic)? Generally you want to go a little pessimistic on your projections, this will make it easier to out perform projections and keep investors happy. Typical is 10%.
2. What is 1% appreciation based upon?  Commercial property is priced based upon the cash flow.  It does not go up in value unless the profitability goes up.  Do you have a plan to do that.  What direction are rents headed in your area?
3. Are utilities billed direct to the tenant?
4. It sounds like you want to be the manager.  That is great. do you have experience in screening tenants? Have you ever evicted a single mom with a  baby on her hip? Do you know what to do if a washer overflows at 1 am on a Saturday morning? It is not a job for the faint at heart.  What compensation do you expect for that service? Put it in the spreadsheet.

If you are not scared yet, good. I suggest you revise your calcs to show an all cash scenario, and show the project P&L today, and a reasonable projection for 5 years. Then create another tab, to show 75% financing at 4.5% (again showing today vs 5 years). Show the COC both ways today and in 5 years.

If you can come up with a scenario where you can offer at least 12% return to your investors (15% is even better) and still make something for yourself, move forward. Send the seller a Letter of Interest (LOI) with the terms and price you want. The LOI is a negotiating tool that may go back and forth several times to reach an agreement. Once everything is agreed upon, translate it into a contract with a 30 day due diligence period.

One common strategy is to offer 2 or 3 LOIs to see which one the seller is most agreeable to. One may offer him 80% of his asking price paid in full at closing. The second may offer full price, but paid 20% at closing, then he carries a note that balloons in 5 years (make him your banker).  The Third may be a Master Lease Option, where you offer to lease all 8 units for $7200 (8*$900) per month for 4 years and assume the management, then buy it for today's asking price (if it works out). There are other options also.

When you have the deal under contract re-post on BP your spreadsheet with hard numbers (and send a copy to me).  If you can offer good returns and have a sold plan, the money will come.