advice needed

[Derek Young]

Help needed please....

I am n negotiations on a building with one small commercial space (approximately 800 Sq ft which rents for $350) and 4 one bedroom apartments (rental incomes of $330, $360, $410, $450). The building is $75000, insurance runs $1200 and taxes run the same amount. 

I have a down payment of $30k but can't find a lender who will cover the other $45k. The seller Is willing to entertain offers of selling on contract with a balloon payment but I am lousy at figuring out terms to present. Can someone help me come up with a mutually beneficial solution for the sellers as well as my situation? 

Backstory: the sellers are retiring from Indiana and moving to Florida.  They are selling their properties here for cash to be used n the new market. My wife and I have decent credit scores, low to mid 70s and the $30k is the extent of the cash that I can get my hands on.

[Giovanni Isaksen]

@Derek Young based on the info you provided expected NOI would look something like this:

Based on the 10.26k NOI the 75k purchase price is a 13.67% cap rate, pretty good provided those numbers are close and there's no major deferred maintenance. Of your 30k cash some will have to go to closing costs and you'll want some reserve for initial repairs or upgrades (there will be something, if for nothing else than a little cushion). Figured 4%/$3k for closing costs and $7k for repairs/cushion which leaves $20k cash for a down payment.

If the seller will carry the 65%LTV balance of 55k on a five or ten year note at 8% interest only, he'd be earning $4,400 a year (Maybe he'd take less). Your end of the purchase would look like this:

Note  that the cap rate shown here is your buyer's cap rate based on the total investment of 85k including acquisition/closing costs and initial repairs/cushion. From there if you can raise rents 2% per year (or bill back for utilities and/or generate other income) and expenses are held in line by year five your cash flow should look like this:

Rents and GOI are up 10%, Taxes and Insurance bumped to show expenses up 11% and NOI up 9%. Debt service is up too because I figured a refi at 75%LTV based on the new 11.1k NOI (which gives a property value of almost 93k) and provides a loan of almost 69k, 55 of which goes to pay off the seller's note and the balance of almost 14k lands in your pocket. I also figured the refi loan rate at 6% with a 30 year amortization and a 10 year term which makes the annual payment just over 5k and looks something like this:

Because your cash in the deal went from 30k to 16 and change your cash on cash went from just less than 20% (pretty darn good) to over 38% (really darn good!) plus of course you have that 14k rattling around in your pocket, rinse and repeat.

These are fairly conservative figures but they depend on a number of important variables:

• The income and expenses are close.
• There's not a ton of deferred maintenance or building components at the end of their life.
• That the seller will accept 8% interest only (it's really pretty good compared to the alternatives today, maybe he'd even take less).
• That you can refi at 75LTV and something close to 6% in five or so years (with three or four years of solid operating history you should be able to refi... or sell at a nice profit).
• And of course that you can operate the property to those numbers.

Good hunting-