First deal. 22 unit apartment. Will lenders even say hello to me?

Question

A guy bought a 22 unit class D apartment several months ago in a class C area from absentee owners. He's done the heavy lifting: evicted half the tenants, rehabbed 3/4 of the building, raised rent from 400 to 520, and signed new contracts and filled the building.

He paid 400k for the place and is wanting to flip it for 700k. I believe he bought from the previous owners with seller financing.

I asked him for tax returns, profit and loss statements, rent rolls etc. All he could give me were utility bills and gross rents. Since he's only owned the property a few months, it's understandable that he wouldn't have much in records yet, and apparently the previous owners didn't provide him with any records either.

How would I approach any lender with just some pro forma estimates from the seller? Since he bought it with seller financing, all those documents weren't required to do the deal.

Idk if this guy is just hoping for a cash buyer or what...

Aaron Montague · Answer

@Andrew Scott

1. Is the building worth buying at 700k?  This might make this a short discussion.

2. Do you have 30% to put down? The "standard" method of financing something like this would be with a commercial loan.  Terms usually look like 30% down, 6% rate, 20 year amortization.

3. You mentioned that 3/4 of the building was rehabbed.  How much is left and are any of the big ticket (roof, HVAC, plumbing) left in that 1/4 unfinished?  How much more money is this part going to cost you?

I assume if you have the 30% down, a few months of rent rolls and a good idea of the operating costs that most lenders will talk to you.  @Joel Owens can give you a commercial pro's insight into the exacting details here.

Can you assume the note?  He might be happy to have his costs covered and put 50-75k in his pocket.  That might be cheaper for you than 30% down.

Andrew Scott · Answer

@Derek Carroll Thanks. I'll pm you.

Napkin math here. Assuming I could get a comparable loan to what @Aaron Montague mentioned,

• 700k purchase price
• 20 year amortization
• 6% rate 
• 30% down=210k
• 490k financed
• 42k in yearly payments

• Gross rents 137k
• sellers reported expenses= 30k
• 50% rule expenses= 68k

DSCR=68k/42k=1.6

The owner has had the property for 9 months. Hopefully, he's kept good records.

Andrew Scott · Answer

Thanks for the help.

It seems strange that banks wouldn't do a purchase loan under current circumstances, yet they'd do a refi almost immediately. Just the way things are?

Jon Holdman · Answer

I have an investment in a mini storage that we had to refi two years ago.  The lender looked at the previous five years operating numbers.  Weak numbers in the first two years of that five year period reduced their appraisal of the property and required we do a cash-in refi.  That wouldn't apply if you're buying for cash, but you may have a hard time showing a new, higher value for quite some time.

Andrew Scott · Answer

If we paid cash, how long would we need to operate it before eligible to cash out refi?

Joel Owens · Answer

Few months of time isn't enough to show seasoning and stabilization of this property. Just as easy as it went up it can go down maybe even more in vacancy from the time he bought it.

Not going to get a loan putting 25 to 30% down on an asset like that. Likely the seller will need an all cash buyer or one with some to put down and finance the note on the rest. I like to see trailing 12 to 24 months of being turned around with occupancy and income. If they can't provide that it's a no go.

Andrew Scott · Answer

Thanks for the info.

The 3/4 rehab is all that was needed. The roof is 3 years old.

The operating costs are 30k/yr not including reserves for big ticket items and vacancy. 30k includes water sewer trash, taxes, insurance, and about 5,000 extra for misc.

Obviously, calculating things using his numbers paints a very pretty picture. However, Using the 50% rule provides a pretty picture as well.

The 20 year amortization. Is that for a 20 year term or a balloon payment at some point?

I have two partners that are interested. Together we'd have enough to pay cash for the asking price. I'd love to get it financed though.

Assuming the note is not something I had thought of. Although, I don't think he'd go for it. He mentioned wanting to sell this place in order to buy one in his home town. He drives 2hrs to manage this one himself. But I'll definitely inquire.

First deal. 22 unit apartment. Will lenders even say hello to me?

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