How can I make this work?

Question

I am looking at this multifamily listed at 1.6m, but I can make it work with conservative numbers at 1.3m where 1m is seller-financed and the 300k is taken as a loan. I can support more than 300k with my job, but the 20% down on 300k is 60k, which I dont have much to put down. The only money Id have is if I represent myself as an agent (License with state right now) and get 2% which is about 26k of the 60k needed for 20% down on 300k.

How can I make this work. The seller originally wanted 50% carry, so thats why I dont think 100% carry would work and am looking at a loan.

Here are my numbers

Scott E. · Answer

Don't take this the wrong way but there is so much wrong with your analysis that my head is spinning.

Hats off to you for trying to get creative to make this deal work. But you cannot afford this. You can't afford a deal half this size based on the information you've provided. The biggest issues with your analysis:

-You're not going to get a 3% rate.

-No bank will lend you that $300k and go in 2nd position on this deal.

-Your commission might help you get a better price but it wont help with your financing.

The seller wants a 50% carry and wants $1.6M for this property. And you're proposing a 77% carry, at 3% interest, while paying about 20% less than they are asking? You can't have your cake and eat it too...

Randall Alan · Answer

I personally think you are over your head here.  You are making multiple assumptions all in your favor.

First, a 19% price reduction from 1.6 to 1.3MM.

I doubt a lender is going to let you use back-side compensation to qualify for the loan up front. They will want proof of funds up front. I don't know this, but just suspect it having done 25 RE loans of my own.

Your seller is offering 50% carry, but you are assuming you can talk them into more.

Are you really getting a 3% interest rate?  That seems somewhat suspect in todays market as well.  And 6% on you bank financing is probably at least 1.5% low in today's market as well.

Keep in mind that your property taxes will reset to your purchase price... not the buyer's current property taxes.  For instance.  If your buyer paid $400,000 for the property 5 years ago, and you are now paying $1.3MM you can anticipate your property taxes tripling over what they are today when they reset in a year (ballpark).  Our property appraiser explained it that they take the new sales price, give a 15% discount and then the millage is applied to that new number (broadly).  In your case that could be an extra $15-20,000 in taxes per year, so be sure you understand how that works and have it factored into your profitability.

Then there is just the question of profitability.  It looks like your expenses are at $10,800, and your income is at $11, 550.  If that is the case, this is really a horrible return on investment.  You are making $700/ month on a 9 unit property?  That's under $100 / unit.  To put that in perspective, when we first got started we used a $300/unit target for net profit.  Under $100 / unit would be a non-starter for us.  It's just not worth the time or effort in my opinion.

I wish you the best, but suspect you are in over your head!

Randy

@Tyler J.

Zach Wain · Answer

3% rate???

Chris Davidson · Answer

@Tyler J. lots of great advice here in this thread. Without diving into all the numbers it looks like you need a partner. The deal will probably not look anything like you are seeing it now. But you need capital. Also if you did take this down would you have enough capital to operate it?

Like others mentioned you are asking and not giving anything. If you are looking for better terms it helps to give some too either on price or rate. But good luck finding a bank/ private lender take a small 2nd. If you want to make it work talk to the seller and see what they need and how you can help them. Best of luck!

Jeff Copeland · Answer

It's great practice to go through these analyses in order to learn the numbers, and the ins and outs of investment real estate. However, there are a lot of holes in your analysis:

1. What makes you think the seller will (or can) hold a not for $1M? (How much do they owe on the property, that will be a limiting factor). Check out https://www.biggerpockets.com/...

2. The seller is highly unlikely to take $300k below asking, let alone do that and offer $1M in seller financing.

3. You are highly unlikely to find a commercial investment property loan at 20% down and 6% interest. Commercial financing is going to be at least a point or two higher than the prevailing rate for homeowners, and will be much more focused on the debt service coverage ratio (DSCR), which in your analysis is around 1.0. Banks don't lend on "break even" scenarios. They want a DSCR of at least 1.25. Which means with $6k in NOI, you can afford debt service of $4800/mo max. Typically, the only way to get there is to put more money down.

4. Likewise, the seller is not going to want to hold a $1M from a poorly capitalized and overleveraged buyer.

5. The lender (and common sense) will require you to have some cash reserves going in. Even if you could buy it with these numbers, you won't be bringing in any cash flow on this deal, How will you pay for a broken HVAC or other surprise repair or capex in the first year? I realize you have budgeted for maintenance and capex, but if will take time to build up those reserves - What happens if you need a $10k roof repair a week after closing? It happens. And then you'd have to choose between fixing the roof, or paying the mortgage. This is exactly what the lender seeks to avoid when underwriting the deal.

6. Closing costs are likely to be much higher than 1%, and you'd have to fund your insurance and possibly property taxes up front (either direct to the carrier, or through a mortgage escrow), which, again, requires liquid cash. 7. You'd also have a conflict between your lenders on their mortgage position. Neither of them is going to want to take a second position lien. The bank could not, the seller likely would not.

Jake S. · Answer

If you have no funds, youll need to perhaps bring in a partner and see if they can cover it. Itd also help you establish necessary reserves that will be required.Perhaps see if you can get a loan on the 1.3m and see if the seller is willing to credit some of the down payment or if the lender will allow the seller to finance the down payment amount. This does add risk so you need to be dialed in on every detail!I also dont think that interest rate you have is even remotely realistic

Tyler J. · Answer

Very very informative. Thank you!!!

Randall Alan · Answer

Just the new sales price *.85 * millage rate.  But keep in mind, that is just what MY assessor does.  Yours might be different.  You can reach out to them and they can explain it.  Mine was very nice to talk to.

Randy

@Tyler

@Tyler J.

Tyler J. · Answer

Thank you. This is very helpful.For taxes, if I understand, they will take 15% off the sales price then take the taxes of that an add it to last years?

So 1,300,000 * .85 = 1100000. 1100000 * 0.61%(According to Zillow) =  6600. 6600 + 9500(Last years taxes) = 16100 / year taxes. Is that right? Or is it just "New Sales Price" * Mill Levy or similar?

How can I make this work?

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