Looking to make first offer on an apartment - check my numbers?

Question

After 7 years of the single family rental/flipping business I am finally ready to get my feet wet with a small apartment building. I have lots of single family experience but I am hoping for some guidance on my first multi so here are the numbers below.

The building is in very good shape, almost too good for the BRRRR strategy I would like to implement but the apartment cosmetics have lots of room for improvement so I think we can get rents up because the city is desirable.

• 8 unit apartment building with 8 single units - all nearly the same size. She is getting ready to list it at 325K.
• Current rent is 400-525/unit. We believe we can get that to $600-$700 with minimal investment - 7K/unit - maybe less after we see them all.
• Current taxes based on a 255K value is 10,500/year.
• Landlord pays water/trash/sewer tenants are all individually metered for gas and electric.

So I know how to analyze a single family but what would my next steps be to better analyze this property and come up with an offer? Is it acceptable to request financials at this point - rent roll/water bills/ insurance cost/ ect?

I have contacts with commercial lenders and hard money guys. Is it too early to be contacting them to see about how we can finance the deal? I also considered asking the owner if she would consider owner financing the down payment on a short term note.

There seems to be several possibilities on how to structure the deal I just dont know if its too soon to discuss that.

Seems like I need to know NOI and CAP rate before I can make an offer?

Michael Ealy · Answer

Adam,

It's not too early to contact lenders - conventional and hard money. You need to dig the well before you get thirsty so line up the money so you will have it when you get a great deal and you can close.

Send a Letter of Intent to Purchase to the seller. By doing this, the seller will know you're serious and will be willing to share with you the actual financial performance of the property. Once you review the actuals, you can then have a formal Purchase contract with earnest money deposited in escrow.

Oleg Shalumov · Answer

Benefit would be that you do need to put any money down (you CashOnCash return would be very high). The terms could be very similar to the bank (5-6%), and you do not have to wait for lender to approve and provide the loan. Usually seller would go for it when they would like to sell quickly and do not want to wait for lender to process the loan.

Chase Louderback · Answer

Hi @Adam Craig

It's definitely not too early to be asking for financials since you will really need them to get a full picture of how the property is currently and historically operating.  Unless the property is offered at an extreme discount then you will need that information to determine your best offer and structure a more nuanced business plan of what to do when you take over.

As for the seller financing, you can structure that so many different ways and you have the benefit of having less hoops to jump through.  For example, you could structure a seller financed deal with 15% down (or no money down), 35 amortization, 5% fixed rate and a 10 year balloon with 6 months no initial (or interest only) payments while you transition ownership.  The no money down and 6 months no initial payments aren't common but there are people who get them and it works for both parties.  Point is, your options are vast and basically just limited by what you are able to negotiate and think of.

Oleg Shalumov · Answer

1. I do not see a problem with her making an offer.

2. I would like to have 30-45 days for DD. This is smaller property, so you could have less days. I am not sure on finanacing part, but usually like the same 30-45 days for getting loan from lender.

3. You have to come up with the terms that works for you and the seller. I usually start offering the following (and sellers usually love to have choice as they feel in control)

- full asking price with full seller financing (this also does not require much on lending part)

- 20-30% seller financing with 80-90% of asking price.

- 70-80% of full asking price if you can come up with the cash.

You can play with the numbers, but I hope you got the idea.

Oleg Shalumov · Answer

@Adam Craig First of all congrats on moving into MF properties.

Looks like you already have Income on the property (do you have the exact yearly income from 2018 broken by months?) , and you need to get the expense part from the seller as well. Please remember to calculate all the expenses needed and have a missed expenses drive you into the negative cash flow.

Here is the list that I usually calculate:

Real   Estate Taxes

Insurance

Contract Services (pest, grass, snow,etc)

Trash Removal

Electric

Gas

Water and Sewer

Legal

Management Fee

Repairs and Maintenance

General/Admin

CapEx

Other

Also remember to calculate vacancy

You maybe managing some of it (for example Management Fee)  now, but i would still calculate it as if you are hiring someone.

To get an NOI you simply subtract yearly expenses from yearly income. For example, you yealry income on the property maybe be around $49,000 and expenses around $25,000, so your NOI is $24,000

For CAP rate you will need to contact agents in the area.

Let me know if you have any other questions.

Oleg Shalumov · Answer

@Adam Craig correct. Once you have the property for a year or two, raised the rent and increased the income - it will increase the value of your property. You can go to the bank and ask for financing on the property, and pay off the seller. Just note that bank usually give only 70% of the value.

Just make sure that you income is covering  your expenses.

Adam Craig · Answer

Very good information. So if I want to propose this to her showing the numbers on what she can make, I should give her a short term exit strategy (sell or refinance) letting her know she would be paid in full in 2-5 years no?I cannot image many sellers want to hold a long term note on there old building but maybe I am wrong?

Bjorik Mutize · Answer

I think the benefit of seller financing would you being able to negotiation potentially coming in with less money, perhaps even speaking upon an interest only period of payment period. A lot of creativity you can do but you always want to make it a win-win. For example does the seller just want to be cashed out or are they looking for easy cash flow. Some sellers interest aside just don't want to deal with banks

The bank seasoning period for refinance generally starts between 24-36 months.

If you are serious it is a good time to request financials, just make sure you are prepared with proof of funds/LOI

Congrats on the find!

Adam Craig · Answer

What would the benefit be of full seller financing if you can get bank financing at 5-6%?

If the seller were to finance it - how long do most banks want you to hold it before they review numbers for a refinance? Just wondering when I can tell the seller they will be paid back.

Adam Craig · Answer

Very helpful thank you - A few follow up questions if you dont mind saving me a google search :)

• My wife is my real estate agent. Is she able to make offers on apartment buildings?
• What is a reasonable amount of time to close when you write up the contracts understanding buildings are going to take more DD and require more time then my normal 21 day no contingency offers on single family.
• If I were to approach the seller about financing the down payment or part of it what would be reasonable terms in rate and length?

Looking to make first offer on an apartment - check my numbers?

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