Investor · Cincinnati, OH · Member since 2008 · 118 posts · 22 votes
I'm looking at a property right now that is multi family and has a significant value add potential. However, the current numbers show it's a dog.
I'm fairly confident I can get the seller to let me manage it for a few months and be flexible with the purchase situation. If I can manage it for a few months, I can fill the vacancies, and maybe increase rent a bit, or turn over a couple units at increased rents. I just need to buy some time.
My question is about financing it. Is there a way with multi family financing to get a carryback from a seller to eliminate my need for a down payment? OR if I got short term financing for 6 months to increase income/decrease expenses and get a better value which makes a refinance possible. I wouldn't need a down payment if the purchase price is less than the 75% LTV because it's a refinance. How can I make this work? What is your experience?
Here are the numbers.
List Price 250k (Not paying close to that)
Current NOI 3,000
Potential NOI after some management changes 20,000
8 units current rent 400 (3 vacant)
market rent 450-550
Empty basement with space for 2 or 3 more units after much construction.
@Paul Gwilliam So let's play this out a bit. They are currently getting $2k/month from the 5 rented units. So what would you offer them as a master lease payment $1k/month ? Why would this be attractive to them? Because you're going to also sign an option to buy the building in a year for $250k? Ok, I can almost see that but the main problem I see is you're almost certainly going to have to spend a lot of money on those down units $5-$10k/unit to get them rented. Where is that money coming from?
What you're looking for is a Master Lease Agreement. It will allow you to do what you're wanting, which is to control the property so you can increase rents, etc, and then you can buy it after that.
Commercial lenders will allow for a seller carried second. For example, if the purchase price was $200K, you'd borrow $150K from the bank and the owner would finance the remaining $50K in second position.
The lenders will still want to see some sort of skin in the game. Forcing equity through a master lease might be a good way of doing it.
You should get in front of some local banks as soon as possible to see what they think of a deal like this....
I 2nd @Michael Le 's suggestion. It's sounds like Master Lease is the way to go. I am working on taking down a large mixed use property with a Master Lease with Option (to buy). Basically you take over the property and become the "master tenant" for the current owner. You agree to pay him "x" per month. Rents get paid to you and then you pay the owner. As rents increase you still just pay the owner the same "x" amount. Then you have something in the agreement that you have the option to buy by a specific date for a specific price.
Oh and the other thing I would definitely look into before getting into any agreement is whether or not you can actually add those two or three units to the area you mentioned. The township might not allow it and if all of your calculations are based on adding those units... better to find that out now before moving forward (or you could make the offer contingent on that approval).
@Michael Le, and @Salvatore Lentini, That is exactly the idea I was trying to explain, I just didn't know it was called a Master Lease.
@William Hochstedler Okay, so if I find this 1.5 million property, take over management, fix it up, make the property worth 2.5 million, and then execute the option, How do I work with the lender to convince them that I don't need to pay a down payment because of the work I did? I've heard stories where the lender sees the payoff of the existing loan, and the new appraisal, and doesn't believe the reason for the discrepancy, and then will only fund 75% of the purchase price, regardless of the appraisal.
How do you deal with the lender to make this work?
I don't think you mentioned the actual price you would pay? It is not that important for me to know that but if you work to improve the property under a master lease you should be the benefactor of the work and not do it just so you can pay the sellers asking price
@Bernie HuckesteinThe premise I'm using is to pay the owner what they want for it now, knowing full well that I can increase the value of it with good management over time.
Then I can give them what they want (Especially when they are stubbornly attached to the listing price) and get what I want. Cash flow with nothing down.
@Paul Gwilliam So let's play this out a bit. They are currently getting $2k/month from the 5 rented units. So what would you offer them as a master lease payment $1k/month ? Why would this be attractive to them? Because you're going to also sign an option to buy the building in a year for $250k? Ok, I can almost see that but the main problem I see is you're almost certainly going to have to spend a lot of money on those down units $5-$10k/unit to get them rented. Where is that money coming from?
A large part of this deal was being able to raise the rents to $600/month. I tried to verify that with a property manager today and he said I'm likely to max out at 500/month.
I also met with the sellers last night and they want 250k. I asked them why, and they said it seems like a good price. I also asked what they would do if it stayed on the market for another year. They said "we'll just keep making money".
They're not motivated. It's a bad deal as is. I need to move on from this one. But I like the strategy with the master lease.