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!