Am I analyzing this commercial property correctly?

Question

Hey BP!

I have approached a For Sale By Owner commercial zoned property with agreed upon purchase price of $200,000. I am doing a purchase + improvement loan. My lender is requesting 25% down on Finished Value. Finished Value will be $350,000 after Rehab. Down Payment needed will be $87,500 + closing costs, lender and appraisal fees,  which I asked seller for seller financing the Down Payment and fees, totally roughly $100,000. Starting mortgage loan $262,500, 5% interest, 25 year amortization. My Rehab budget is $60,000 coming from LOC and family to make this property into a triplex with monthly rent income of $3000. PITI on this property is $1900 monthly. Cash Flow after cap ex, vacancy, property management, lawn maintenance is $300 monthly.

I wish to REFi Finish Value amount at 80% LTV. I am getting Analysis Paralysis and also getting confused with all the numbers. Does what I am planning to do make financial sense? If not, how can I improve this situation to BRRRR this deal and repeat!

Thanks!

Steve

Oren K. · Answer

Steve,

There are three separate loans (or four if I count your personal LOC / family) and you have to look at them separately even though they relate to the same property.

I would be surprised if any bank is going to lend more then the purchase price. I am guessing that that the bank is lending 75% of the initial purchase price as a short term (1 year?) mortgage of ~$150K.  The seller is lending $55K (down payment + closing fees). So far so good - you bought the property with NO money down.

In addition the bank if giving you a  construction loan based on your personal credit (or other assets as collateral) for construction and release those funds based on hitting various milestones (e.g. permits pulled, inspections passed, etc). IF the rehab is $60K and they do 75% of that, then they are loaning you up to ~45K and you just need ~15K to cover the balance which you plan on taking from your personal LOC and / or family & friends.

If the above is correct, the bank will initially loan you $150K. The seller has a note for  $55K. The bank also has a separate note for $45K. In addition, you owe ~$15K to your LOC, family & friends.

At the end of the renovations and stabilization, you owe the bank $195K ($150 + $45), the seller  ~ $55K and $15K (LOC, etc.) for a total $265K and have a property hopefully worth $350K ( ~13% return).

Now you refinance @ 80% to get a $280K mtg (based on $350K value). This pays off the bank ($195K), the seller ($55K), your LOC ($15K) and still leaves you with ~$15K in hand. It will actually be somewhat less since there will be legal & discharge fees for the original loans and legal & costs for the new loan.

Just make sure you account for all the interest / legal / transaction costs on both ends of the process. As well, be very sure of your rehab budget.

Steven Lalonde · Answer

Hey,

Ill try to explain the numbers better.

Me and the seller agreed on a purchase price of $200,000. To convert the property  from its current state and rehab into a Triplex will cost roughly $100,000. My lender requires 25% down on the "Finished Value" of the property, as it is zoned commercial and not residential. I have not completed the appraisal yet, but my best guess is that the Finished Value of the property or appraisal will come in at $350,000.

I am doing a purchase + improvement loan. So, $200,000 purchase price + $100,000 improvement = $300,000. A residential purchase + improvement loan with these numbers would be 20% on the $300,000 which would be $60,0000 down payment + closing costs and appraisals. Since it is a commercial loan, my down payment for this property would be 25% on the $350,000, which would be $87,500 + closing costs and appraisals.

I need to come up with the down payment and fees, which will be approx. $100,000.

I guess I am confused at my starting mortgage loan amount before REFI. Would my starting loan be the purchase price of $200,000 - $87,500 down payment for starting loan of $112,500? Or would my starting loan be the purchase + improvement amount of $300,000 - the $87,500 down payment for starting loan of $212,500?

After improvement rehab is complete and triplex is rented out and stablized, I am planning on REFI the Finished Value of $350,000 at 80% LTV which is $280,000. What can I pull out of the property to pay off as much of my down payment, closing costs and appraisal fees? Is it $280,000 - $212,500 = $67,500, or $280,000 - $112,500 = $167,500. If the latter, then I could pay off the approx $100,000 and pocket $67,500 to repeat with another property.

What am I missing here?

Thanks,

Steve

Tom S. · Answer

@Steven Lalonde  I'm assuming the property is in Canada?  Here in the U.S., $3k in income from a $300k property is decent but not a home run deal.

Trying to understand your numbers, $100k seller financed, $60k LOC / family, and $102.5k from the bank - is that correct? You state 25 year amortization, but are all three parties agreeing to those terms?  5% interest on a seller financed mortgage (2nd position) is quite low.

- Tom