First deal here in kansas potentially. 1.1million Help Please

[James Chambers]

So I'm new to the multi-family arena.  I spoke to a few agents and brokers and let them know my interests and what a had for a down-payment and  this off market deal was presented to me:

24 units selling for 1.1 million.

seller is carrying 300K @5%  with 30yr am and a 5 yr bubble payment

100k from me

700k for bank @5.24 with a 25yr am

$600 a month with a 92% vacancy rate annually. Its near a college so the summers it usually has a few vacancies. currently 100% occupied since school is in session. when I first got the info it had four vacancies in July. rent hasn't been raised in 9 years. 

the Current NOI is 113K

built in 1976 buy the guy selling. Currently 80 something and is willing to stick around to help since he lives on block. Property is in need of mild repairs. The gutters, landscaping, and sign fell down a few years ago and he never put it up.  parking lot is the same since inception s its all spider cracked and the cement sidewalks are cracking also. The HVACs are the same since it was built. that have been well taken care of but.... Inspection said they were in good shape. roof was replaced 3 years ago on both buildings. 

Any advice? Questions? I'm a firm believer in you don't know what you don't know so I'm looking for outside analysis. If you need more info let me know.

Thanks James C.

[Andrew Johnson]

@James Chambers You should have annual leases so I'd be surprised if there were vacancies in the summer.  Unless they are just walking away, surrendering their security deposit, etc.  If the timing is a little "off" then you can always leave the units vacant until the "normal" leasing period around the school.  I'm using "normal" in quotes intentionally as different schools have different cycles on when leases get signed for the subsequent year.  And for what it's worth, I'm guessing the rents have stayed the same because (from what your saying) the owner hasn't kept the property up.  If you can't put a sign back up what does that say about the harder (more expensive) maintenance items?

So I think here is where the rubber meets the road for you, how are you going to pay off the seller in 5 years? You're not going to get $300K in cash-flow by that time. So your plan is likely contingent upon the bank refinancing the property in 5 years as well. That would make sense as a lot of commercial departments do the same 5-7 year fixed rate with a balloon payment structure. However, what you haven't said is how you're going to get a 75%/25% LTV ratio in 5 years.

But let's do some quick numbers for fun:

Gross rents @ 100% occupancy today are: $172,800, take out 8% for vacancy, and you'll probably pay another 10% in property management that the current owner isn't paying now, guess:  $15,900

Assuming the current NOI is accurate (a little bit of an eyeroll there) you have $113K - $15,900 in PM and you get $97,100 in NOI or $8,092 per month.

$8,092 NOI

- $1,610 seller debt

- $4,191 bank debt

-------------------------------

$2,261 left over

So let's go crazy and assume that renovations cost zero dollars and all of the income is tax free due to depreciation and mortgage interest.  You'll accumulate about $135K to pay off the remaining principal on a $300K debt.  Okay, so that doesn't pencil out.  

Let's say the property appreciates on it's own to $1,200,000 and you got to the bank and ask for a 75% LTV loan. That should get you $900,000 out which can then pay off the old balance and with the $135K cash-flow you can pay off the current owner.

So the net of it is for me is that you really have to anticipate and plan not to take a nickel out of the property for 5 years.  All of the cash-flow will have to go to debt service in some way, shape, or form.  It might not be immediate debt service but you'll need it when the loan(s) reset.  Any improvements you make to the property will have to be recapturable in 5 years in the form of rent increases.  That's really, really, hard to do when you talk about things like spider cracks.  From how you describing the property there's going to be a good chunk of money spent just to 'keep it marginal' as opposed to doing things that justify rent increases. 

This all isn't to say that the deal itself is good or bad, but you only have $100K to put down does make it tricky.  And, as of yet, I don't know if you've talked through how you'll get the money to do the improvements.  Raising rents $50/month on a few units as they turn over isn't going to pay for concrete work.  

Anyway, all just food for thought.