20 unit portfolio - advice /help

[Jason Grimm]

Hey guys. I'm a rookie investor/agent mostly interested in multifamily for cash flow. I came across this 20 unit portfolio on my local MLS, and reached out to the listing agent. They said they would be willing to do seller financing for 24 mo with a down payment probably between 100-150k. Instead of throwing in the towel due to lack of money, I thought I would throw this out to BP and see if somebody can point me in the right direction, whether that's hard money, partner, etc. The numbers look good, I just don't have the resources or experience to come up with such a significant down payment. Any advice or help would be awesome and greatly appreciated.

[Simcha Davidman]

@Jason Grimm that's a great start (not for the deal, but for your analysis).

Banks don't look specifically at the 1% rule. They look to NOI/cap rate. So, if NOI is $90k, the property is worth approximately $1.125m (at an 8% cap) and $1.5m (at a 6% cap).

Now, you wrote that the "Monthly NOI would be appx. $7500" - do you mean currently (based on seller's info) or do you mean after you bring rents to market. I ask because the $7500*12 months = $90k. So,we just have to make sure that you can drive the NOI higher.

Let's work through an example to make this more clear.

We have $90k NOI / $1.25m purchase price = 7.2% cap rate at purchase (obviously, this does not take into account your closing costs and operating/capex reserves that technically bring your returns down, but no biggy). Now, assume that you will refinance at a 7% cap. Assume further that you're down payment is 10% of purchase price, or $125k. That means your seller-financed loan is $1m.

Typically, you will refi at 75% LTV (depending on your market and the property, you may very well be able to get 80% or even 85%, so speak with some lenders/mortgage brokers to a get good idea of what will be available down the road).

In order for you to pull out the $1m to refi, the property would have to be valued at $1.333m ($1m/.75 (75% LTV)).

In order for you to increase the value of the property $84k (the difference between $1.333m and $1.25m (I'm rounding here)) at a 7.2% cap, you have to drive NOI higher by approximately $6k/year, or $500/month.

So two things - does that seem reasonable based on what you know of the property and the market? You stated that rents seem well below market, so this looks easy. But are the expenses they're giving you accounting for real life expenses? A lot of times, sellers will present properties with higher NOIs by removing expenses.

The other thing is - will you really be able to refi at a 7.2% (or lower) cap? If the market is really 8% cap, then in order for you to pull out $1m, you have to drive NOI higher by approx $6700/year. Still not a lot of money.

I guess the last comment I have (for now) is that you won't be able to pay off the loan from cashflow. The only way to do it is a refi, and generally that will require adding value.

This seems like it could really be a great deal - if you can really increase the rents by $170/month. That's 35%! I'd say be really careful looking at the expenses (and if you go to the property, make sure you get a good sense of all the deferred maintenance and required capex).

Let met know if you have any questions or this was not clear! Sorry it's so long winded, I love talking!