10 unit creative deal in the making

[Angel Dejesus]

Talking to seller of 2 multi units' buildings a 4 and a 6 looking to sell at $1,600,000 haven't done Due Diligence yet as she tells me there's rehab needed. Knob and tube and other TLC needed. Plus, a couple of vacant units. She is asking for 600k to pay off a loan which leave s a million of equity. rents are way below market and vacant so makes it interesting to say the least. As I run my numbers just the the market rents on the 6 unit alone if it were to sell at a 6% cap once stabilized would achieve a price of 1.9million. Will take a look at the property tomorrow and update this post.

[Jaycee Greene]

Quote from @Angel Dejesus:

Quote from @Dennis Bragg:

Angel, this deal has potential, but there are a few big questions I’d dig into before getting too excited about that equity spread. Knob and tube wiring alone can be a major red flag it’s not just an insurance issue but also a potential lender roadblock, depending on the severity and whether it needs a full replacement. I had a buddy who picked up a similar deal with below-market rents, thinking it was a slam dunk.. until he realized stabilizing those units meant extensive electrical work, city inspections, and longer vacancy periods than expected. On the flip side, another investor I know in Boston was able to negotiate seller credits for code compliance, which saved him six figures upfront. If the seller is set on that $600K payout, will they entertain creative financing on the remaining balance? You could structure it as seller financing or a master lease option to avoid a massive cash outlay while you stabilize the property. Also, how far below market are those rents, and what’s your strategy for repositioning the units?

 Hey Dennis

Appreciate the response. The objective was to either raise the $600k or get Bank financing than do Seller financing for her equity at 4% for 5 years. Since these units need rehab will have to raise either more or have a bank do a bridge loan for construction cost. I'm projecting 75k all heating needs to be replaced. Right now, she's only receiving 3k of income per our conversation because theirs only 3 units rented and seller lives in one as her primary home, along with these 10 units there's 3 commercial space and 2 are empty.  All month to month no leases. There is also a buildable lot right next to her primary that she was looking to sell also but not sure at what price. 

Knob and Tube will be remediated seller is also remediating heating systems to apartment furnaces and kitchen cabinets. Lots of these homes are over 100 years old and I'm concerned that the layout's do not coincide with its rehab style but I'm not Martha Stewart Otherwise I've been spoiled in Finding homes with consistent floor plans. 

as it stands She wants

Sale price $1.6million

Income as its stands $3,000 but fully rented out market rent per month comes out too $16,983 A month Gross $203,796 per year 50% rule Net $101,898 sell portfolio at a 6% at $1,698,300.  These are rough number and they do seem rough. Looks like shes selling at its top.

Anyone would like to take a stab and criticize please do so. Don't hold back.

Hey @Angel Dejesus! I know BP preaches the 50% rule, but I generally use an 8% vacancy rate and 35% operating expense margin when I present a proforma to a bank lender for my CFO clients. So using that (and assuming no rehab), I'd estimate the value at a 6% cap rate at $2.03M. At $1.6M, that would equate to around a 7.6% cap rate.