100% Owner Financing Deal - Chicago Heights

[Samson Kay]

I just sent in a LOI (Letter of intent) on the purchase of a twelve unit apartment building using Owner financing. Basically I will be able to take possession of the property for his cost of commisions and any closing costs related to creation of the mortgage.

I wanted to see what everyone thinks about my strategy. Here are the numbers

Purchase Price: 290,000

interest rate is 8.5% with 5 year bubble payment, 30 year amort.

NOI is 27,868

for a cap of approx. 9.6%.

Cap Ex in the near term I estimate to be around 25000, for basically a new rubber roof and water heaters.

Current owner is retiring and is looking to sell his property for some passive income. But at these numbers I'm getting into the property for basically a thin cash on cash return of 1109.85 for the year. Terrible numbers.

BUT.

Rents are below market by about 100 bucks each unit. All the tenants are at will. So my intention is to immediately raise rents for a quick return of 1200 a month after Debt service. Then I plan on spending approximately 10000, to submeter both gas and water and pass this expense on to the tenant. This will reduce my annual Operating expenses by approximately 11000 per year.

Changing my NOI to approximately 48400.

At the same cap rate as what I bought it the value of the property will increase to $504167, a net increase of approximately 504167 - (290000+25000capex+10000submeter) = 179167 in less than one years time.

In addition to this, Since my loan to value is 290,000/504167 = 57%, I plan to cash out refinance to recoup my cap ex and submetering investment and reduce my monthly payment in 6-12 months to the market rate of approximate 5.5% for additional cashflow.

I think this looks like a great deal since I have low front end cost and barrier to entry.

What do you guys think?

[Wendell De Guzman]

Samson,

How old is the building? How is the house heated? If it's through water boiler - submetering it might cost more than what you think or it might not even be possible to submeter it. Make your contract contingent to you being able to submeter the utilities at a cost of $10K or less.

Also, when you submeter the property - I assume you will pass the cost of heat (or the other utilities) to the tenant. You can raise the rent $100 per month but if on top of that you pass the cost of the utilities too, you are not being reasonable. Passing the utilities to the tenants is basically a rent increase. If the units have a lot of section 8, section 8 may not necessarily approve a higher rent. Or, you might end up with a lot of vacancies when you raise the rent $100 AND pass the utlities to the tenants also.

Lastly, in Chicago Heights - there are good parts of it and then there are not so good parts. I walked away from 2 deals from Chicago Heights recently. One is a house I can buy for $760 and another, a 4-plex I can buy for $36K. I walked away from these because they are in bad parts of Chicago Heights.