Great Opportunity, but short on cash

[Jon R.]

I'd like to pick the brains of everyone on what you'd do in this scenario:

Multi-unit property is up for sale.  Motivated sellers who are no longer in the area, which makes them even more motivated to sell.  Property on the market for over 90 days now and price just reduced to 15% below tax valuation.  4 units total with property, 1 unit rented out.  Other 3 are not rented because they were being renovated just prior to listing and seller was in the process of moving, therefore seller has not posted them.  All units are within 1 mile of a major university and business district.  University housing is short therefore renting is generally successful in the area, especially for units within walking distance of campus (which this is).  Total opportunity if all units were rented, after mortgage and a 15% holdback for maintenance expenses, would be just over $1000 per month profit, or 40% positive.  The problem is, the total asking price, even after the reduction, places the normal 20-25% down out of our range.  I'd like to hear some creative strategies people have used or would use in this type of a scenario.  And simply gritting the teeth and walking away is on the table as well.  Thoughts?

[Roy N.]

@Jon R.

While the student housing angle looks to be viable, check to see if there is transportation.  Most transportation studies I have read indicate your average U.S.A. citizen will walk no more than 5-minutes (400 metres, ~1300 feet) to a service or work (Canadians only average 100 metres more) .. this would put 1-mile beyond the acceptable walking distance for most.

Since you do not disclose which expenses you have incorporated into your analysis, we shall assume you've  not missed any.    My next question would be what is the remaining make-ready costs to get the other three units into service (add this to your acquisition costs).   The other problem you will encounter is if, those three units are not habitable, then many a conventional lender will not subscribe a mortgage on the property.

If the property is really able to produce 40% net cash flow before taxes (after debt service and reserves), then the price you have been presented is extremely advantageous and you should have no problem attracting a either a partner (JV) or private money. [Note: A more probably alternative is that you have missed something and the property is not the rocket you envision, otherwise the current owner would have no problems handing it off to a PM and still pocket a nice cash-flow.]

Another alternative is to seek hard money (expensive) and once you have all units performing, refinance with a conventional lender and pay off the hard money.

Another option would be to determine if the Vendor is willing to carry-back 10% of the purchase as a second mortgage (which you will quickly discharge once up and running).  This should allow you to make a down payment of 15% and still obtain conventional financing (if the vacant / uninhabitable units are not an issue).  You may have to go with a commercial mortgage to achieve this arrangement (I do not know if residential lenders in the great state of Tejas will allow a 10% Vendor carry and a 15% down payment ... perhaps @Hattie Dizmond or @Bill Gulley could lend insight)

A final strategy might be to lease the entire building from the owner - with the right to sublet the individual units (ye olde sandwich lease).  The difference being your income.  You could also execute a purchase option with the owner to acquire the property once it was up and running, stabilized, and you are able to finance it conventionally.   The obvious problem in this scenario will be the capital improvements necessary to get the remaining three units rent ready - if you are a lessee, I don't want you making capital improvements to my property ... unless they are encapsulated as a leasehold improvement under a separate agreement.   Again, not sure how that would play out deep in the heart of Tejas.