How to fund a 8-unit Apartment Building

[Lin Ding]

Hi BP investors,

Out of excitement and also confusion, I decided to post about this new "treasure" I found. I found an 8-unit multifamily building that's for sale. It first got me excited because of its great location. So I did some math on it and it seems it's going to work. Here's a short description about it:

This 8-unit multifamily property is located at a prime location at the part of the city where house prices are very high and there're a lot of activities around. It's also just a couple of blocks away from a main street, a golf course and country club. Highly rated schools are nearby (an elementary school, a middle school and a high school rated 8 or 7 out of 10). The building sits on two corner lots (about a quarter of an acre) with plenty parking spaces, access and redevelopment potential. Building size 6,686 SF with 2 stories (on the small end for 8 units). It's currently fully rented (100% occupancy). All tenant leases are $500 to $600/m below market and they're on month to month or have landlord termination rights. I plan on bringing them up to the market level after acquisition with minor improvement and proper marketing. Because of its desired location, I expect to have little to no vacancy issue (in my numbers I did add 5% vacancy factor just in case). I'll show more numbers at the bottom of this post.

According to the listing agent, the property has been recently renovated, including a new roof, new stucco, new concrete sidewalks, new exterior & interior paint and new landscaping. So I expect little work is needed and I drove by the building tonight and saw they have window AC units. I do want to get rid of those and change to central cooling.

My challenge is with funding. The listing price is $1,050,000. I did think maybe I can try seller financing if the seller is willing to carry the loan. I do not have rich friends or family that can lend me that kind of money. I personally own a single family home as my primary residence which I think I can take a HELOC on. But since I've only lived here for less than 3 years, even with the property value having gone up, I still don't have 20%. I may be able to put down 5%. I think most commercial loans require 20% down. If you know some good options, please message me. I also thought about partnering but again I don't have anyone that has that kind of money. If anyone is interested in talking about this deal and partner up, please feel free to reach out.

I have done Airbnb in the past so I'm not afraid of the landlording/property managing part of the business. But I included 10% for property management expense in case down the road I want someone else to manage it.

I'd like to hear your opinion and recommendations you have for this deal and ways to get financing on this deal. If you know some good commercial lenders, I can use some help. Here's the math I did:

Monthly Income Rent $12,000 ($1,500 a door)
less monthly Operating Expense $5,613 (including vacancy factor $600, property taxes $1,333, insurance $560, maintenance $960, management $1,200, replacement reserves $960) which fits almost 50% rule
Then, Net Operating Income (NOI) $6,386.67/month
less monthly Debt Payment $4,816.79 (based on purchase $905,000 w 20% down, estimated 7% interest rate on a 30-year loan)
CashFlow $1,569.88/month (on average $196 a door)
Total Investment: $198,000 (including $181,000 for 20% down plus $10,000 for repair budget and $7000 for closing assuming Seller doesn't help with the closing cost)
Cash on cash Return: 9.5%
DSCR (NOI/Debt payment): 1.33

Cap Rate: 8.4% (I used purchase price $905,000 plus repair budget $10,000 for the market value)

Thank you so much! Any help is help. I very much appreciate any feedback you have.

All the best,

Lyn

[Lin Ding]

Hi Jack,

Thanks for responding! The property is in Tampa. It's in my backyard and I've been here for 5 years. There are a lot of new development and activities in the city. I love these older properties that have character. This apartment building is located in a great area and quiet neighborhood where other million or half-a-million dollar homes are at. It's a rare find. The listing agent is also the seller (just found out today) and he's wanting to sell it to fund other developments. It's not listed on Zillow or Realtor but I found it on LoopNet. 

After I changed math to reflect 25% down, 6% interest rate and 25-year amortization, CashFlow is $2,013.47/month ($251.68 per unit) and the Cash on Cash Return is 9.93%, even better than what I had before. But again I don't have 25% down. Last time I talked to my bank that carries my mortgage on my primary residence, she said I can probably get a HELOC 35k-40k. And I have some investment, 401k and savings that I can gather maybe another 10k. I know I need help with the down payment, maybe through partnership or a gap loan. But I need cheap financing for the down payment. I don't want to go get HML for the down payment if I don't have to. I'm having a few calls this afternoon with a few lenders. Hopefully something works out.

Lyn