Apartment Purchase: Partial Seller Financing?

Question

Hi everyone,

I originally posted this is in the General section, but this is a more suitable place...

I’m looking to purchase my first commercial property, a 7 unit apt, priced at $3.5M. My plan/strategy is to owner occupy, buy and hold.

I can put down up to $1M, but the biggest concerns with lenders is not being able to meet the 1.2 DSCR and debt yield requirements.

Here’s more information:

Loan Amount=$2.5M

NOI=~$159k

DSCR=~1.08 (assuming 4.25%, 30 yr amort)

Cap=4.54

Is partial seller financing a viable option? Let me know if more info is needed.

Thanks!

Nick

Nick A. · Answer

@Todd Dexheimer  Thanks for the words of wisdom! I'm going to stay patient. What's the best way to stay current on states that are good for investing?

@Juan Vargas I agree, it seems that CA is close to, or at the top. I just need to be more informed about investing out of state to get out of my comfort zone. It's such a novel concept for me.

@Ron Flatt What are some of the markets with an 8+ cap?

@Gino Barbaro You nailed it on the head! I'm not too far from being very unhappy with the 9-5. Thanks for the book suggestion!

@Bryan Zuetel Yes, I'm open to a 2-4 unit in northern Pasadena or Altadena. You're right, some parts have actually become more gentrified over the past few years. It's been a slow process, but you can definitely notice the changes.

Bryan Zuetel · Answer

@Nick A., you got some really great advice here.  I'm a California attorney, broker, and investor and grew up in the Pasadena area.  I understand the attraction to it and am not surprised by a 7 unit for that price.  However, have you considered a 2-4 unit in the northern part of Pasadena or Altadena?  They might not be as nice as the Old Pas area or east Pasadena, but you can still find some great deals in that part of Pasadena.  If you're not interested in north Pasadena, I would suggest looking for a palatable area in and around Pasadena, where you can buy a 2-4 unit property, live in one and rent out the others.

Gino Barbaro · Answer

@Nick A.

I totally understand. You are just comfortable enough to not be extremely unhappy. I was there several years ago, then 2008 happened and my business changed, was earning less, and I wanted a change. Until you desire a change, it would be hard to take the leap.  Once the 9-5 moves from decent to unbearable, then the thought doesn't sound crazy.

Read the book from MJ DeMarco, Millionaire Fastlane, I think you will enjoy it

Gino

Ron Flatt · Answer

Listen to the wisdom in the  post above.  When you let emotions talk instead of the numbers you will get bit in the backside.

There are plenty of markets that you can put down $1 mil, and still get a 8+ cap.  It will cash flow that you can rent what you want and make money on your investment also.

I will admit I would live in almost any of my units, but my wife would not.  So I have a home that she is comfortable with and I have my investments that are securing her future when I am dead and gone or vise/verse.  Real Estate is a business, look at the Numbers, be realistic when it comes to appreciation (and sometimes depreciation).

I admit I am not familiar with the CA market, but when your talking of 1/2 mil per door, it just does not make sense.

As in the earlier post, almost anyone on here would make sure you got more than a 4 1/2 cap.  I just offered a man 6%, with quarterly interest payments and balloon at end of 10 years of 110% of his investment, With him having 1st and only position on assets he is investing in.

You can do much better than the 7 unit, IMO

Juan Vargas · Answer

@Nick A. I agree with the posts above. California is a big up and down state and right now you may be near or at the top. Combine that with a low DSCR and you have a high risk, low reward type of investment. You should target cash flow vs appreciation and you won't get much cash flow with this particular property. Your best bet is to invest out of state or like @Gino Barbaro mentioned, get out of your comfort zone and move to a more investor friendly state where your capital will go much further.

Todd Dexheimer · Answer

I can promise you that the appreciation in your area will end and that values will go down considerably. California is an up-and-down state and right now it is on the upswing, I'm not predicting a crash tomorrow, but being patient or investing out of state may be your best choice. The building you are looking at buying with a 1.08 DSCR is more scary than buying out of state. What happens if you need to evict, rents go down slightly, more repairs happen than planned, etc?

You don't need to go full time to go out of state with your investments, you just need to put the right teams and systems in place. I am investing out of state and spend very little time in the states my properties are in.

Nick A. · Answer

@Gino Barbaro

Admittedly, that would be a scary jump for me. I have a decent 9-5 where I'm living now. Also, I'm not sure if I have enough capital, at this point, to be a full time investor. If I decided to quit or got laid off, then I might give it more thought.

Gino Barbaro · Answer

@Nick A.

Have you ever reconsidered moving to another city/state?  I know it's a difficult decision, but I just moved toST Augustine from NY 6 months ago with 6 kids.

Really happy I did it, especially with 5 degrees and snow in NY. Don't be afraid to consider the change. It is scary, but it is also uncomfortable and will lead to growth

Nick A. · Answer

@Todd Dexheimer @Gino Barbaro Thank you both for your input. It's a challenge to be patient because I've been apartment living and would like to owner occupy a commercial multi-family, but it's tough sledding in my area where the market is hot. I definitely don't want to force the issue and overpay, but at the same time, I don't see any end to the appreciation. I may open up my options a bit and start looking at 4-plexes in my area.

Gino Barbaro · Answer

@Nick A.

Hi Nick

The DSCR is a 1.08 with some pretty aggressive financing terms. Rates are around 4.5 right now. If you seller finance, you're still adding debt.

You are putting down over 30% , and I would look elsewhere.  Lot of risk for only a 4.5 cap rate.

Happy New Year

Gino