Multifamily using down payment assistance

[Account Closed]

There are a number of seasoned investors on this thread, so I'd like to take advantage of that and post a deal I'm working on--in fact, using Charles Best's "Down Payment Assistance" strategy.

The property is 70% occupied and current rents are slightly below market. As such, this is a "value added" buy.

Let's say the appraised value is $3,350,000.

I purchase the property for $3,350,000, for which I need 20% down.

New loan amount is 3350000 x .80 = 2680000.

From 2680000 new loan proceeds, the seller is paid his asking price of 2475000, leaving 205000.

I pay my Down Payment Assistance equity partner 15% of the required down payment (670000 x .15) = 100500 up front.

I keep the remainder for reserves (205000 - 100500) = 104500.

The monthly payment is 2680000 x 6.5 = 16939 (fully amortized).

Plus monthly interest only payment on borrowed down payment (670000 x .8 = 4467).

Total debt service = 16939 (1st) + 4467 (2nd) = 21406

Total monthly actual rents = 39340. A rough estimate of monthly Net Operating Income would be 50% of monthly actual rents = 19670

Net Operating Income (19670) minus total debt service (21406) = 1736 (negative; use reserves for this)

Once the building is optimized (95% occupancy), break even is achieved and valuators (cap rate, NOI) improve. Then I cash out refinance at 12 months with new 80% loan and repay my equity partner his 670000. I must make sure that the new appraised value will be enough to repay the 670000.

Does this make sense or do I need more discount to fair market value so that I at least break even before I add value by maximizing occupancy? The building has recently been fully rehabbed, so there will be no start-up costs for me.

[Rich Weese]

MikeOH- I'm going to have to just continue to disagree with you on the cash flow and downpayment scenario. I'm ALWAYS going to be concerned about the downpayment. I want to see a return on my investment( my down) over time and cash flow to me is just not what I'm after. I've been too successful on "playing monopoly" and that means control as much as you can.
I already own lots of long term rentals, derive large income and have no desire to share it with the IRS.
My strategy is very simple.
1. Keep the properties I currently own until depr. is not adaquate for the equity and then refi(if possible) or 1031 a bunch together for another bunch to increase the basis.
2. Continue to purchase properties or build homes to help offset income tax consequences from other f&c properties I own.
3. Some homes I buy for cash and some I find owner financing and mortgage to the hilt. Cash down DOES matter to me
since that does determine my return on $ invested.

I try to keep a balance of income and writeoff. I don't want my investment pool to be reduced from payment of taxes.I have more than adaquate to live my lifestyle, and continue to build a nice estate for future generations. After having done this for so long, the properties turn into cash cows after owning them for awhile and then I use the funds to purchase more and more. I do sell some flippers that I buy at foreclosure sales and that income also needs to be covered from taxes.
Most experienced investors will agree there are 4 main obstacles to obtaining wealth.
1. Procrastination
2. Personal spending habits
3. inflation
4. Taxes.
We can do something about 3 of these and if we own a lot of real estate, # 3 works for us instead of against us.

Again, I enjoy our exchanges, but we'll never agree on the cash flow being "the one size that fits all." It just would compound the situation for me. I'm already having to do GOZONE to offset my income from ordinary income. I don't need more!!

Again, I always enjoy but we'll never agree on this. Your way works for you and I assure you, my way has worked for me.