Is this loco en la cabeza?

Question

Hi all,

I just put a property under contract and I want to know if what you think I'm asking for is crazy...

We'll start with the perks:

1. The apartment is in an up and coming city of North Carolina named Hickory. It's not far from Charlotte and it's in the fastest growing county in the state.

2. The rent is way below value. The average rent on this 10 unit apartment is $475/unit and it could be raised conservatively to $650/unit without any turnover. In the 8 CAP market, that would raise the property value by $262,500.

3. With rents raised to $650, we have a CAP rate of 11.33%, Cash on Cash Return of 26.01%, and a cash flow of $2,302.63/month.

If we used a conventional bank at 75% LTV, the down payment would be $106,250.

Here's the catch. I don't have that money sitting around.

Therefore, here's my question.

If I brought in a money partner to pay the down payment, would splitting profits 50/50 after they've been paid back be crazy? I would probably live in one of the units and oversee rehab. I don't know how to rehab but I would learn or bring in additional partners.

Another strategy would be, I bring in a money partner to put 10% down and we get a hard money loan for the other 90%. Then we refinance in 2 years after rents have been raised.

That would have someone putting down $42,500.

Is it wild for me to be asking 50% on the deal?

Thanks,

Ben

Tyler Watts · Answer

Account Closed Hickory is definitely a solid market. I don't have anything there, but have explored it a few times and in general grew up going to Hickory for various things. I would vote AFTER rehab that rents could be achieved of $650 (assuming a 2/1 in a good neighborhood).

With you just entering the game, I would agree that a 50% expense ratio will likely be more your number. 35% is achievable, but that would be after rehab and you need systems in place to make is smooth. The struggle I often have is finding good subs, not impossible by any means, but you being from Hendoville (I went to school at Blue Ridge Community College (played a little baseball when they had a program), long story but that's what we called it) your going to spend a lot of time finding good subs. If your willing to live there or have the option too, then it would make that easier to accomplish.

We focus on value add complexes like this in Shelby & surrounding areas, but the issue being, it's too small for us (Our primary focus is student housing). We would like to have at least 20+ units to make it worth the while, if the owners have more and are willing to sell, might be some options on the table.

Regarding seller carry, I would recommend working that scenario thru a future partner who has experience in that world. To accomplish this, you often need a track record showing that you know what your doing. Banks and owners have to feel extremely comfortable with you to do this. Also the seller has to understand that are not in first position and on our deals, they are not in second either ( another topic of discussion, but in the end it's really not beneficial for them to take a second). We've taken down owner financing deals, but even with 7 investors and a strong net worth, we've had multiple deals fall apart due to the fact owners & realtors not understanding the structure. It's a cool niche, but often times I wind up educating everyone in the deal to try to get them all on the same page. Usually requires us to meet with them in person and start a relationship.

Your moving in the right direction, but until you get it rehabbed/stabilized, your going to spend a lot more than you bring in, just the nature of the game. Once stabilized, then it's the cash cow you expected it to be.

Caleb Heimsoth · Answer

@Ben Gabin. Your expense ratio is to low.  It’ll be closer to 50 percent not 35 percent.  Also what’s the rehab numbers? Is the water and utilities metered separately?

Yes 50 percent to you for this deal is to much.  I think more of a referral fee or 10 percent equity is probably more appropriate but that’s just me.  Most hard money lenders won’t do 2 year term.  Maybe private lender.

Charles Soper · Answer

Hey Ben, great job getting a multifamily under contract!

I’m not sure I’m following your numbers.  You said 25% down would be 106,250, which equate to a purchase price of 425,000.  With rents at $475/month and assuming 100% occupancy and 50% expenses that gives you $28,500 NOI and a cap rate of 6.7%.

Let’s assume you do nothing but raise the rents and still maintain a 50% expense ratio you get an NOI of 39,000, with the same 6.7% cap you get a valuation of just over $582,000, which is a difference of $157,000, not $262,000.

Where are you getting an 11 cap and 26% cash on cash?  Assume a loan of 318750 (75% LTV) @ 5.5%, 5 year/30 Am your payment is around $1800, which leaves you closer to $1450/month net or $17400 annually, which is more like 16% cash on cash - that also assume you aren’t splitting the profits, if that’s the cash it’s more like 8.2% CoC.

Now as a passive investor one could certainly do worse than 8.2%, but this also assumes no hiccups (like long vacancies).

Given your statement about not knowing how to do rehab, I’d be pretty nervous giving you a check for $100k, and as for the alternative option, you’d be hard pressed as a rookie to find a hard money lender that will give you 90%.

As for other options, will the seller finance the whole thing for a short while while you bring up the NOI?  Or maybe carry the down payment with interest only payments until you can Refi?  They are selling for a reason, if you can find that reason and solve their pain/problem it could work to both of your advantages.

Hate to be a downer but that’s a tough one.

Account Closed · Answer

@Caleb Heimsoth, thanks for speaking your truth. I'll know more about the property once I inspect it.

@Tyler Watts, that's cool you used to play ball in Hendoville. Thanks for the info. Do you know a good real estate attorney in that area? Or someone local that serves Catawba county?

@James Rodgers, do you know of any quality real estate attorneys in the area? Thank you...

Account Closed · Answer

@Thomas S. I meant renovated, not rehabbed.

Account Closed · Answer

Thank you @Charles Soper and

@Thomas S.

Thomas, what kind of whole sale fee do you think I could get from this?

Account Closed · Answer

@Charles Soper, it was through Peter Harris, a commercial investing mentor I learned from.

I love your idea of having the seller carry a first or second mortgage.

If they carried a second, how would that work?

I want to wrap my head around that.

Thanks!

Account Closed · Answer

Hi @Charles Soper

Our numbers are different because I'm assuming 35% expenses.

For a 10 unit complex, isn't 35% more realistic?

Account Closed · Answer

Thank you @James Rodgers. I see you're in Charlotte. I just heard from a mortgage broker there about the growth she sees in Hickory. Do you echo that?

Charles Soper · Answer

Not the expert on seller financing but if they carried the second its all about how you negotiate terms.  Ideally, you are walking away with the down payment financed for as little out of pocket as possible.  That might be interest only for a period, or possibly P&I but at a really low interest rate, or even no payments for x months and interest only after until you can refi.  You are only limited by your creativeness to solve the seller’s problem.

Is this loco en la cabeza?

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