Owner Financing on Apartment Complex

[Chang Hee Lee]

Hey BP,

So a friend of mine is looking at a $1.4 million 14-unit apartment complex and has convinced the owner into talks for owner financing. The owner is selling because their partner is leaving for California and it is simply too much given her obligations to family and etc. A common theme it seems. Anyways, he has come up with four different avenues and wanted a second opinion on them (This is his first owner financing proposal on an apartment complex). My experience with such large properties are limited so I thought I'd throw it out to BP..

Annual Net Operating Income = $102,560/year   

Taxes = $38,000/year (2015)

Listing Price = $1,400,000.00

Previous Purchase Price = $1,000,000 (4/29/2013)

1) Principal Paid at Later Date - $1,400,000.00 paid in 25 years

2) Principal Divided into Monthly Payments (No Interest, 30 Year-Term) - 

Estimated Payment (Including Taxes) = $7,055.56/month or $84,666.72/year

Profit (Before Rent Raises & Etc.) = $102,560 - $84,666.72 = $17,893.28

3) Interest-Only Payments & Balloon Mortgage (5-Year) -

Assuming 2.875% interest rate for 30 years and $1,200,000 purchase price

Estimated Payment (Including Taxes) = $6,041.67/month or $72,500/year

Profit (Before Rent Raises & Etc.) = $102,560 - $72,500 = $30,060.00

4) Principal & Interest Divided into Monthly Payments -

Assuming 1% interest rate and $1,200,000 purchase price

Estimated Payment (Including Taxes) = $7,026.34/month or $84,316.08/year

Profit (Before Rent Raises & Etc.) = $102,560 - $84,316.08 = $18,243.92

This is a lot but any feedback would be greatly appreciated. Also, hailing from Champaign, IL so if there's any state specifics in relation to these types of transactions (I'm more SFH), I thank you for any input you may have.

[Scott Dixon]

@Chang Hee Lee

Curious if this is a student rental?  If so, are all the units leased for the 2017-2018 school year?  There is a good amount of competition nowadays in the campus town area with all the new units built over the last 5 years and if you don't already have leases on all the units you could be looking at some vacancy for the first year of ownership.  In addition there is a high likelihood of considerable differed maintenance (roof, plumbing, electrical, exterior, etc.) which eventually will need to be addressed and will drive up your capital expenditures.  Just looking at this deal at a very high level without digging too deep I don't love the numbers you have presented for the Champaign/Urbana market.   Best of Luck!