Passing on a 10%CAP/ 13% CoC Deal...What would you do?...

Multi-Family and Apartment Investing
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Passing on a 10%CAP/ 13% CoC Deal...What would you do?...

Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes

Alright, so I have a seller finance deal in the queue...it 's a duplex...solid property...decent location...cash-flow is $191/month...10%CAP, 13%CoC, DCR 1.33. The deal would be a 84-month balloon, 10% down, 6% interest on a 30yr amortization schedule...not bad...and I would need to leverage about $18,000 total to get closed, cleaned up, organized, and ready to start collecting cash...

Here is why I am passing on this deal: Looking at the future provides a grim outlook...so, there is little appreciation in this neck of the woods...meaning 3% per year would be generous...and my exit is a re-fi to settle the principal balance on the note...but, at 70%LTV and a favorable appraisal leaves me significantly short to settle the debt...I simply can't do this deal because I would be unable to perform on the balloon and either have to come out of pocket, or...foreclose...

What would you do?

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Roy N.Pro Member
Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
9y

@Brandon Sturgill

When we play in cash-flow only sandboxes, we model properties with no appreciation (sometimes even depreciation).   It'a all about cash-flow ... and, when there is a vendor carry, about paying down to a point where you can easily refinance.

 If you can step-up your payments from monthly ($500/month) to accelerated bi-weekly ($250 every two weeks), your balloon will only be $70,320 at the end of year 7. 

If you are able to put-up the downpayment w/o financing it, then you can re-allocate the $81/month slated to service the second position in your analysis across the 26 accelerated bi-weekly payments per year ($37.38 per payment).  The balloon in this scenario would drop to $61,880.

BTW: CAP is a meaningless measurement on a residential property.

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    9y

    @Brandon Sturgill

    When we play in cash-flow only sandboxes, we model properties with no appreciation (sometimes even depreciation).   It'a all about cash-flow ... and, when there is a vendor carry, about paying down to a point where you can easily refinance.

     If you can step-up your payments from monthly ($500/month) to accelerated bi-weekly ($250 every two weeks), your balloon will only be $70,320 at the end of year 7. 

    If you are able to put-up the downpayment w/o financing it, then you can re-allocate the $81/month slated to service the second position in your analysis across the 26 accelerated bi-weekly payments per year ($37.38 per payment).  The balloon in this scenario would drop to $61,880.

    BTW: CAP is a meaningless measurement on a residential property.

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  • Brandon SturgillBusiness Member
    OP
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    9y

    thanks @Roy N. I definitely considered the increased focus on debt pay-down...and I really don't need cash flow from this one...just trying to capitalize on the opportunity and play this one long term...

    We may still look at this one as a project for housing folks on voucher...market rents in the area are pretty solid...my wife wants to end homelessness, so this may be her start ;)

    Cheers, and thanks again! 

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y

    I will change your numbers even more. you did not allow for property management ( should always allow for that, even if you do it your self) so - $110 / month. so your at $81 / month, but i would not include CAPEX in your numbers, what i like to do is not withdraw any money not allocated for expenses and keep it in an account until it hits a certain amount ( in a 24 unit building i would put away at least 15k) then start withdrawing money. so you are now making that 1,200/ month so your income is $1281 / month. in one year you will have the 15k in the bank and year 2 you can start withdrawing. this is a quick way to built up for any emergencies. @Roy N. suggestion of accelerated payments would help like he suggested and agree on his comment about CAP.

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  • Cody McCraw
    Rental Property Investor · Roanoke, VA · Member since 2017 · 11 posts · 7 votes
    9y
    I agree with Patrick, always include a management expense...your time is worth something and if you've budgeted for a manager you can hire one in the future without going in the red. I don't usually account for cap ex in such a small property; however, I think your repairs expense is a little light so the cap ex expense balances that out. Also, I think the 70% ltv is a little pessimistic...maybe that's common in your market, but I typically get loans at an 80% ltv on properties like this.
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