14 Unit off market seller financed opportunity

[Karl Butenhoff]

Hello all! I am looking for input on an off market deal I found for a 14 unit building 10 minutes from where I live in the Midwest. I feel like I should pull the trigger on this deal, as I have been mainly in analysis paralysis for the past 2 years, only buying 2 units since I started looking. The numbers are as follows: Asking price $1.2 Million, 11 2bed/1 bath, 2 3 bed/1bath, 1 efficiency, 1 garage/unit, 20 year old building built by owner, owned free and clear.

Owner provided monthly financials (He self manages):

Taxes $1180, Insurance $312, Common area electricity $200, sewer $235, trash $75 

Total monthly expenses = $2002 

Gross Income: $683.50/month/door*14 doors = $9570/year

Additional garages rented to non-tenants = $420/month, $5040/year

Laundry Income = $200/month, $2400/year

Total gross income = $10,190/month, $122,280/year

I proposed owner financing and the seller is open to it at very good terms. He said he would do $100,000 down, 3.5% interest with a 10 year balloon with a 30 year amortization. I also proposed doing interest only payments and he said he may be open to that as well.

Obviously the owners expenses are missing a lot of things so I ran multiple scenarios below:

This assumes Interest Only payments on a $1.1 million note.

50% expense ratio (I/O payment) cash flow/month = $1887, COC return = 22.6%

45% expense ratio (I/O payment) cash flow/month = $2397, COC return = 28.8%

40% expense ratio (I/O payment) cash flow/month = $2906, COC return = 34.9% (I believe this will be the closest to true expenses with cap ex, vacancy, maintenance, management fee (although I will self manage)).

35% expense ratio (I/O payment) cash flow/month = $3416, COC return = 41.0%

Now assuming 30 year AM on same $1.1 million note:

50% expense ratio cash flow/month = $156, COC return = 1.9%

45% expense ratio cash flow/month = $666, COC return = 8%

40% expense ratio cash flow/month = $1175, COC return = 14.1%

35% expense ratio cash flow/month = $1685, COC return = 20.2%

The market this is in is a cash flow market with minimal appreciation, so that could definitely come into play in 10 years when I have to refi with a bank, especially if I am doing interest only payments. I am thirty years old and my wife and I make $250,000 combined/year at our W2 jobs and we have a large amount in savings (enough to buy this property without owner financing if we choose). The $1.2 million he is asking is definitely market price or a tad above, but current rents are 10-15% below market and he never has vacancies so there is a little room to add value through rent increases, but that is about it. I have been looking for all medium to larger value add deals in the past since I can do almost all the work myself to force appreciation, but this one being turn key seems like it could be a great deal especially with the interest only payments. Also, he would most likely put new roofs on the building and garages before he sells (without increasing the price). 

I would love to hear others thoughts on this deal. Thanks for reading, I appreciate it!

[Zach Westerfield]

Hope you dont mind me working through your numbers as practice, i have developed an underwriting guide but want to put some properties through it to vet it. 

i think on your gross income, you meant 9570/month, not year. 

what would your acquisition costs be? will you be funding those out of pocket as well? also, do you plan on maintaining reserves? 

my expense estimator comes out to about 54%, since i always stay conservative i will stay with that. i also assumed a 10% increase in rents. i assumed an 8% vacancy rate. 

based on these assumptions, with rents as is im showing an NOI of $56,342 per year. At the loan terms you mentioned, your debt service is $59,274, meaning your yearly cash flow is negative (-$2,932).

if you increase rents by 10%, your NOI increases to $66,037, and yearly cash flow is $3,477.

seems like a pretty slim deal if you factor in all assumptions. IF you raise rents and dont affect vacancy, you are looking at a 3.4% COC return.