Bought a 9-Unit as a Broke Law Student w/NO Money Out of Pocket

[Account Closed]

**This will be post 1/2. I will post an update w/pictures and final numbers after refinance**

Please read and let me know what you think of the deal!

I'm a 26 y/o full time law student in the DMV area who graduates in May. I work at a RE firm/settlement co in the Tysons area and have been closing deals as a licensed settlement agent for 3+ years now. I began getting anxiety about my post grad life which would consist of a 60hour a week desk job closing other people's deals.. and making other people financially free.. Over the past 2-3 years I've probably listened to 70% of the podcasts, read several RE books and met everyone I could to get an advantage on everyone else out there, so when the right deal came up, I'd be ready. 

After closing the deal this past Friday, I couldn't be more thankful for BP and everything it's brought to my life, whether that's knowledge, positivity, or the encouragement to take that first step. Here's to many more!

1. The Buy

How the Deal Broke Down: My brother sent me the deal off loopnet where it had been listed for a few months, but the price had just been dropped to 325k from 350k. We immediately went out to see the property and could see why it hadn't sold yet. It wasn't very appealing, has an ugly a** roof, and is in WV, but it was FULLY rented and each tenant was wonderful... and upon further inspection, has a waiting list of tenants waiting to move in. I went back to the seller and offered 275k cash w/a 30 day study period, no other contingencies, he countered at 290k and I accepted. After having a commercial inspector out there we discovered several issues (some expected), so I went back to the seller and asked for a 20k credit, he agreed to a 5k credit. Then the septic/well inspection came back (both need work), and I asked for the full 20k credit again, he then agreed to the 15k CREDIT! So, I ended up getting the original 275k price I had asked for! 

NOTE: I said I didn't pay any money out of pocket, however, there was a $2k EMD and $2.5k paid in inspections + $100 in LLC fees

Final Purchase Price: 275k + an expected 40k Reno + 15k Closing Costs = 330k NEEDED

Funding: I have OK credit, little time, and even less cash to my name, so, I had to find the absolute best "wedge deal" out there where a lender couldn't say no. In the meantime, I developed a great relationship with a hard money lender who really trusts me. He could tell I had done my HW and put in the time, and even more importantly I'm HUNGRY. He agreed to lend 70% of the ARV. I knew that hard money, combined w/the BRRRR strategy was the way I had to go. All of this was pretty uncertain until I received all the inspections and told the hard money lender I planned on closing in 5 days. I put him in contact with the refi lender I planned to use, who confirmed the numbers, and the rest was history.

I needed about 315k (PP 275+ Rehab 40k) but ended up having to borrow 330K because of 15k in closing costs. 

He charged 3 points at closing (9,750 which is tied into the loan) and 10% interest only (of the 275k amount/$2708 per/mo) paid per month which is paid in arrears, so... the first payment isn't due until April 1, 2020, meaning I get about a month in cashflow w/out any debt service. The remaining 5k consisted of survey, title insurance and settlement fee.

2. The Rehab

Plans: 

   - Replace current septic tank w/2 new tanks ($12.5k)

   - Add UV filter to well/raise well ($3.5k)

   - Fix Plumbing in Crawlspace ($3k)

   - Properly vent bathrooms through attic + new gutters ($8k)

   - Coin operated w/d ($1k estimate)

   - Blow insulation in attic/other handyman work ($2k)

Total Rehab Estimate: $30,000 (leaves slightly less than a $10k buffer)

NOTE: We received estimates for mostly all of the above listed items. Because of the area, the cost of labor is much cheaper than most urban areas. The first estimate we received for the septic from a NOVA company was 22k, a smaller local WV company will do it for almost half.

Plans to Increase the NOI

   -  Adding insulation to the attic should greatly reduce our $11k per year utility bills

   - As leases expire, new leases will have a 30$ per month utility fee implemented w/RUBS

   - Coin operated w/d

   - Actually enforcing late fees

   - Hiring a different property manager at 7% per mo

3. Rent

   - It's fully rented!

4. The Refinance
     NUMBERS

NOTE: Because this is over 4 units, what's most important, is the NOI  

9-unit (8 singles + 1 double) $5640 per/mo (5640 x 12 = 67,680 x 10% vacancy = 60,912 effective gross income)

Expenses: 3.2k taxes, 11k in utilities, 2k insurance, 5% maintenance, 7% management

CURRENT NOI based on Lender's Numbers: $37,203

CURRENT Income Cap Value: $37,203/.08 = $456,037... then $456,037*.70-.75 LTV = $325k-$342K

Potential Refi Loan Terms: 20-25 yr amo, 4.75% rate that will adjust every 5 years, at a 70-75% LTV. 

- (DSCR comes out around 1.40 depending on terms. It must meet a minimum of 1.3 per lender requirements)

NOTE: Because of my lack of experience, credit, or cash, I had to call 10+ local banks until I found one that would lend off income cap with ZERO of my own money invested into the deal. I ended up finding an AWESOME loan officer at a local bank w/50 units himself who agreed to lend, and who has been more helpful than I ever could have imagined.

I may have the opportunity to get cash back after the refi, especially if I increase the NOI or if I get a loan at a 75% LTV. For those wondering how I'll get approved as a student w/little savings, I've found a family member who will personally guarantee the commercial loan for a few K worst comes to worst.

Potential Post Refi Cashflow

Terms; 25 yr amo, 4.75% rate w/a principal balance of 330k

(-) 3% vacancy (all units are filled combined w/the waiting list of tenants make a 3% vacancy more realistic)

(-) 5% maintenance (-) 7% management = $18,795 in Potential Cashflow

5. Almost time to REPEAT

**Stay tuned for part 2 w/pictures and final numbers**

I really appreciate any feedback! Hope you enjoyed the read!