14 Unit off market seller financed opportunity

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14 Unit off market seller financed opportunity

Karl Butenhoff
Member since 2018 · 11 posts · 4 votes

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!

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Zach WesterfieldPro Member
Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
5y

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.

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  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    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.

    2Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    3.4% COC does not factor in if you come out of pocket for acquisition costs and reserves. with 6 months of reserves and acquisition costs of roughly $62,000, your COC is 1.56%.

    if anyone sees it differently, please chime in. 

    0Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    FYI, with interest only payments and same assumptions, im showing yearly cash flow as $24,251, or 12% COC return. Better from a cash flow standpoint, but with little appreciation, what is your long term exit strategy?

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  • Charles Large
    Rental Property Investor · Brownsville, TX · Member since 2019 · 60 posts · 33 votes
    5y

    Interesting.

    I believe that the only way to go is purchasing value-added properties. And I don't think that this always means repairs or remodels, I mean rent increases  and lowering expenses. 

    I new owner situation is a great opportunity to increase rents by simply talking to current tenants, doing a few inexpensive upgrades such as good cleaning and paint here and there. Most tenants, specially long term, do not want to move because it will cost them money, time and headaches. 

    By simply increasing rents, your DSCR will be much better to help you qualify for a no income mortgage loan. The question is: how sure are you that income can increase?

    Take the plunge! Best of luck.

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  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    The expenses seem really light at $2000/month = $153/unit/month.

    Did you include utilities, management, insurance, prop taxes and maintenance?

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  • Ray Johnson
    Irvine, CA · Member since 2016 · 545 posts · 614 votes
    5y

    @Karl Butenhoff What condition are the units in? In my experience when analyzing these Owner Financing properties with below market rents, the units will need the rehab which is the typical reason rents will be below market for all the units. Has he done any extensive rehabs in the 20 years since he built the building? If not recently, the owner doing the financing is basically getting the new owner to assume the rehab cost, the vacancy absorption cost during rehab, and the marketing for new tenants to lease units at the higher rental rate. I don't see any of this cost factored into your analysis. You covered your various cost scenarios out for a long-term hold with the 10 year balloon/30 year Amortization. 

    The owner is also having you pay at market rate, or slightly above as you noted, Unless all units have been recently rehabbed to compete those units with units at the higher market rent rate in the area, there is zero reason to pay market rate, as you will blow this deal up by doing the rehab, and holding the vacancy cost in a non appreciating area. 

    Let us know the state of the units, and the last rehab on the property.

    Also, $200 a month on the laundry, I would assess the age of the washers, and dryers, are they 20 years old as well, have some been replaced, ect.. this could have an impact on your projected $200 a month in laundry income. 

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  • Karl Butenhoff
    OP
    Member since 2018 · 11 posts · 4 votes
    5y

    Thanks for the input!

    @Zach Westerfield: Yes, $9570 per month. Acquisition costs should be minimal, around $5K max for lawyer to draw up the contract, title work, and an appraisal if I order one and they would come out of pocket so I should have accounted for that in my underwriting. I have cash on hand that I would hold as reserves. My strategy is a long term hold so that is my main concern if I do interest only payments and the property does not appreciate in 10 years when the balloon is due, however, the cash flow is not good doing the 30 year amortization. I will most likely have enough cash available to pay the down payment in 10 years if it doesn't appreciate, but that is not something I want to have to do. I always like to underwrite conservatively as well, but a 54% expense ratio seems high for this property giving its age and current condition as well as cost of local labor, but I definitely would rather overestimate. I just don't want my being too conservative to cause me to walk away from the deal without digging in and negotiating further. 

    @Charles Large Thanks for your thoughts. I agree with your value-add sentiment for sure, I just haven't been able to come across a true value add opportunity that the owner wasn't wanting top dollar for. Inexpensive upgrades are exactly what this property would need to increase rents since most things have been upgraded in the past 5 years and self managing and doing a lot of the repairs and maintenance myself to keep expenses down is the main reason the numbers would look better on this deal. Without self management, the numbers start to look pretty tight which makes me nervous.

    @Steve Morris Yes the owner's stated expenses are very low, that is why I ran scenarios with different expense ratios to try to account for everything that was missing.

    @Ray Johnson I appreciate your insights. The units would not need any major updating, as they have all been updated within the past 2-5 years. The units are in the same, and some cases, better condition as other units nearby that are renting for 10-15% more. The main cap ex thing that I need more info on yet is the condition of the furnaces and A/C units because I am assuming most are original. Same thing goes for the laundry as well, as you mentioned. So that may be some leverage for me to get the price lower. The 1.2 million asking price was just what he threw out to start, I may be able to get him down to closer to 1.1 million. 

    0Reply
  • Charles Large
    Rental Property Investor · Brownsville, TX · Member since 2019 · 60 posts · 33 votes
    5y

    @Karl Butenhoff, 

    I'm currently working on a 31-unit property in my area that is off-market. The asking price seems to be around normal, but I see opportunity for a 10% increase in rents over a 12 month period. What I would have to do is a basic interior remodel as units become vacant which will cost around $5,000 each: paint, flooring, light fixtures, faucets, revamp kitchen cabinets, door knobs and hardware, etc. I hire "not professional" workers, meaning handymen, college students, etc.

    These small changes will help me attract a "different type of tenant" that appreciates more modern looking apartments and are willing to pay an additional $100/month (current rents average $650).

    In my humble opinion, how you market your vacant units make all the difference in the world. 

    I do not do any of the work myself! I value my time (for business, family or whatever). I do supervise diligently. 

    May I suggest looking for properties with differed maintenance? Find out who owns it and chances are a few will be willing to sell at a good price to you!

    0Reply
  • Randall Weatherall
    Real Estate Agent · Memphis, TN · Member since 2019 · 261 posts · 253 votes
    5y

    If you're going for cashflow since there is a known lack of appreciation, I would say that this isn't the deal for you unless you can get that price down a bit.  You're going to have a flood of capex coming your way over the next couple of years most likely, and it doesn't appear that you can get your costs down any more than his unless you'll be self-managing as well?  

    I'd factor at least 50% expenses and run with that as your baseline; if the numbers work at that point then it could be a decent deal for you.  If they don't, then I wouldn't try and make it work with numbers that aren't supported and hope you can get them that way.  Turns out you can get the numbers where you want later - awesome!  But if not, you'll be selling it to someone else that'll be posting about it here in a year or two when you're tired of a low-%age return and have a very large estimate from an HVAC company and roofing company on your desk.

    All that said, I really hope you can work it out and get them; they seem really simple to manage if you end up doing that, and sounds like they have solid tenants (until you jump the rents on them and have to do turns - try and stick with a small increase and spread it over a couple of years, like $25/month or so every year until you're matched with market).

    0Reply
  • Karl Butenhoff
    OP
    Member since 2018 · 11 posts · 4 votes
    5y

    @Charles Large I couldn't agree more about marketing units. I have had really good luck getting well above market rent on my current units by staging them nicely and having professional looking pictures. If you have a lot of units with the same floor plan, staging can work very well to target a certain tenant demographic.

    0Reply
  • Karl Butenhoff
    OP
    Member since 2018 · 11 posts · 4 votes
    5y

    @Randall Weatherall Thanks for your insights. I am thinking along the same lines as you of trying to either get the price down so the numbers look better without just paying interest (since I would like to have principal pay down prior to the 10 year balloon if I happen to not see any appreciation) or go to the negotiating table and try get a better interest rate. But the last thing I want to do is buy something just for the sake of buying, so I will only pull the trigger if I can get better terms than laid out above. 

    1Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    @Karl Butenhoff here is how i got to the expenses in my assumptions. Again, not to say this would be the same for you, just sharing the assumptions i made FYI

    Taxes (given) = $1180

    Insurance (given) = $312

    Common area utilities (given)= $75, $200, $235

    Contract services (common area cleaning, lawn care, etc) = $140/mo

    Legal Fees (lease review, eviction filings) = $175/mo - this amortizes the cost of an eviction to a monthly expense

    Property Management (9% of gross income) = $927/mo

    Repairs/Maintenance (10% of gross income due to age of building) = $1030 - this also amortizes major CAPEX to a monthly expense

    Admin/Marketing (1.5% of gross income) = $155/mo

    Total monthly expenses = $4429

    I made a few tweaks as i took a second look, and this  assumptions yielded 47% of current income. still right around that 50 mark.

    Im curious if anyone, especially experienced operators, has feedback on these numbers. 

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  • Karl Butenhoff
    OP
    Member since 2018 · 11 posts · 4 votes
    5y

    @Zach Westerfield Thanks for breaking down your numbers. Based on your numbers I got a 43.5% expense ratio (4429/10190), which is right in the ballpark of what I was estimating as most likely, so that is good to see. 

    For your contract services number, I would probably up that to around $200/month to be conservative. The property is in the upper midwest, so snow removal can add up. 

    0Reply
  • Zach WesterfieldPro Member
    Warner Robins, GA · Member since 2016 · 244 posts · 167 votes
    5y

    @Karl Butenhoff thanks for the tip. Being from Georgia, I always forget about snow removal.

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