24 units. Options for a win win?

Question

I have a partner who has found a 100% financed deal in rural area. Owner is about 75. 24 units(duplexes) so 12 buildings. My friend has been managing this property for 4 years( screening tenants and leasing properties). Only one unit is unoccupied(painting to turn over for a new tenant) and one unit is lived in for free by an on sight “cleaner” when apartments turn over. Four units are rented through HUD. The owner and family do maintenance and lawn service, so I’m not sure if I can get an accurate figure on what that would cost. They are all 3BR/2BA and rent for 550/month. Owner wants 950,000 at 7% for 15 years. He started at 1.2 million. Payment around 8,500/month. I believe rents can be raised to 600-650 but need to research area and don’t want to plan on it. I’d prefer to stay conservative. I’m waiting on tax and maintenance costs( pest, parking lights, repairs, lawn). The units look well maintained on the outside. I’m told they are well taken care of on the inside as well. My concern is cash flow for now and if I want to sell in the future. I don’t want a second job as a maintenance man for 24 units if they just break even. I’m looking for creative alternative financing options that would be a win win. I’m told owner wants cash flow for retirement. Partner would handle the leases and I would do inside maintenance. It seems like a decent deal as is, but if they become harder to rent due to no growth in area then it may become a real headache to cash flow. Any advice would be appreciated. We are still in pre negotiation phase.

Andrew Johnson · Answer

Benjimen Elliott Johnston Your partner is managing the property for 4 years, rents for $550, and you think you can raise rents to $600 or $650? Either your projection is off or your friend is incompetent. Even $50 per unit is $14,400 in gross rents that left on the table annually. So my advice, build a pro-forma with 25% down and a 5% or 5.5% interest rate with a 20 and/or 25 year amortization table. See what the deal looks like (from a “quality” perspective) just based on that. If it looks good then look at how to make it worth with owner-financing. I wouldn’t do a “bad deal” just because of “great financing”. Not to mention that many owners will try to sell a property right before some big cap-ex items are coming due. If you’re looking at *this* deal because you don’t have funds you need to make sure you can handle HVAC repairs, replacements...roofs...parking lots...etc. out-of-pocket.

Julie Haveman · Answer

I wonder if they would do a 15 year loan with a 30 year amortization at like 6%. It's hard to cashflow with a 15 year amortization. I would figure for each duplex $100 each per month for maintenance and $100 per month for capex. I would also raise rents and get rid of cleaning lady. Owner finance is so great that I would try to make the numbers work! Offer a number that works, they might just take it!

Benjimen Elliott Johnston · Answer

Andrew Johnson. Thanks for the reply. Partner is just finding tenants and taking care of paper work as a side job and not really “managing”. Sorry if I misspoke. She is the one that told owner that he probably could raise the rents. I’m familiar with the rents in this area and feel that she is correct but don’t want to depend on that as means to cash flow initially. As of now this deal doesn’t cashflow enough for me to take on risk. Makes much more sense with 20-25 year schedule and smaller price for property. We both have cash to put down or take care of maintenance issues and can do conventional financing but want to use owners money. I read somewhere where I am limited in number of properties if finances traditionally and I’m under the impression that the bank would not consider these if owner financing if I wanted financing on SFH in future. John WarrenThanks for your comments. I ran the numbers after getting Taxes $8000 and Insurance $8500. Estimated repairs at $8000( may be too low) and it doesn’t cash flow enough. Tenants pay all utilities including trash. Lawn maintenance and pest control are the only expense outside of repairs, taxes and insurance. I agree it isn’t a good deal as is. I want to be creative in suggesting other options so it cash flows better. Julie HavemanI agree totally on cleaning lady and appreciate your suggestions on amortization. I will look at that as an option.

John Warren · Answer

@Benjimen Elliott Johnston this is the tough part about creative financing! This deal sounds badly over priced. You didn't mention the mechanical set up, so I am not sure hat utilities the tenants are paying, but this deal sounds way over valued by the owner. The income stream is probably around $12,000 per month, and most likely 50% of that (or more) is eaten up by expenses. This is a good "rule of thumb", but I have found it to be eerily true. For maintenance, I like to use about $75 per unit per month. I do $50-100 per unit per month depending on the complexity of the mechanical setup. So your maintenance and capex ends up being about $3,600 per month if you hire it out.