Seller financing a 20 unit- good deal or no?

Question

To sum it up, I found a seller that is willing to carry the financing on his properties. It is a portfolio of some single family, duplexes, and 1 3 plex. All relatively close to one another. Anyways after running the calculations, my cash flow would only be a little less than $1,000/month. I am using a 50% OER and 15% vacancy. The rents could be pushed a little but not that much. Yes, thats conservative but with the terms and interest rate the seller is asking for, I do not see much cash flow in this deal. I would be worried about the repairs if something went wrong with one of the properties, but some properties have been updated more than others. Thanks everyone.

Account Closed · Answer

What's the cash on cash? If it was o down id buy it. If I was putting down 30k I would not. Personal pref

Greg Dickerson · Answer

A lot depends on the type, condition, location and values of the properties. If your projections for 20 units only creates $1000 per month you will likely lose money as one bad tenant or one big repair cost like roof or HVAC can wipe out most or all you cashflow.

Ryan Daigle · Answer

Hey @John James, with commercial multifamily (which is what 20+ units is) you should be underwriting to more than just cash flow. If you've underwritten good capex reserves as part of your expenses, and are conservative in most other areas, then $1k/mo cash flow might be fine if you're getting returns elsewhere. Also, if you're seriously looking, you should go into your expenses on a line by line basis vs. just using the 50% rule of thumb.

$1k/mo does seem a little low, and with no forced appreciation opportunity doesn't sound like there's much opportunity for returns outside of cashflow. But always good to go one level deeper to see how it all shakes out.

Charles Seaman · Answer

@John James It's hard for anybody to say whether or not it's a good deal because it's really a matter of personal preference.  What one person might deem acceptable, another might deem totally unacceptable.  I often find that a 50% OER is realistic for larger multifamily properties that have payroll expense.  You can likely run this portfolio at less than that, so 50% should keep you safe.  The 15% vacancy rate is also high under normal circumstances if the properties are well located.  However, normal circumstances don't apply to the current market conditions, so budgeting for a higher vacancy rate is good because nobody knows exactly how long these conditions will last.  Then if you budget for a 15% vacancy rate and wind up with 10%, that additional money is an added bonus.

My best suggestion would be to negotiate better terms with the seller until the return makes you happy.  What rate is he asking for?

Josh Rowley · Answer

@John James are you saying that it's $1k/mth cash flow with 100% seller financing?  That doesn't sound so bad.  Or did you have to put a big dp up and then it's only the $1k/mth?

John James · Answer

Commercial multifamily is anything above 5 units. The terms are pretty basic 7% interest and 30 year AM. The cash flow doesnt seem enough when I could just buy a duplex or 2 single family houses and make close to 1k a month in cash flow.

Brandon Vukelich · Answer

Agree with most...at first glance it is hard PASS. $1000 positive cf for 20 "doors" wouldn't fly with most investors unless you are ZERO into it.  Even so, no forced appreciation and not a fan (personally) of that many SFRs at only $50/unit.  Best wishes on your investment journey!

Jonathan R McLaughlin · Answer

@John James impossible to say without knowin how much you are putting down and general repair smells to me like a good deal....for him

John James · Answer

@josh

@Josh Rowley yes with 100% seller financing.

What kind of closing fees will I be associated with for this transaction. It is through a broker. Will I be paying the brokers commission and any contract fees out of pocket??

Evan Polaski · Answer

@John James From a strictly financing perspective, commercial is 5+ units.  But from a practical standpoint, commercial is not as easily defined.  Most 5-20 unit owners are still mom and pop operations.

Is your 50% OER include property management and leasing commissions?  For 20 units of SF and duplex, I would imagine management fee being around 9% and leasing commission of 1 mo rent, and 1/2 mo rent for renewals.

For me, I get about 3yrs out of a tenant, so that means about 2.8% physical vacancy, but add another 5.55% cost to release.

So, as you mentioned, if that return is worth it for you, then great.  If not, don't.  I would not be a buyer unless it is 100% seller financing, non recourse, and I was collecting free money.

Seller financing a 20 unit- good deal or no?

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