Do We Have a Deal?

Question

I also posted this in Multifamily discussion because I wasn't sure where to go with it, sorry if someone is getting it twice.

Hey gang,

So I'll try to make this post as detailed as possible with what I'm currently going on, and I thank you in advance for your help and guidance.

I've had my eye on this property for a while, and it has actually just been removed from the market (but this doesn't mean I can't make an offer). It is a six unit on one lot, a four family and a duplex behind. Here are the size and rents for the units:

4 family:

1 3 bd @ $695 p/m

1 2 bd @ $645 p/m

2 1 bd @ $525 p/m = $1,050 p/m

Now the deal becomes interesting, because the duplex is not finished. I'll get to that shortly, but once renovated:

2 studios @ $425 p/m = $850 (but just call it $425, because I'll live in one of these).

Asking price: $79,900

What I want to offer and how I want to propose it:

Offer: 70k, 3k earnest money, seller carries 12k for 3 year term at 3%.

Renovation (this is fairly crude until I walk through with a good friend of mine who has been at this a while): 40k - I would also hope to save on some of this by doing much of that myself. This money I can borrow privately at 2%, undetermined term but I would hope to refinance once the property was up to par and rented out.

All in: 110k

So that I'm not misleading, I'll say here that the area is probably C-, right on the east edge of Washington Park for you Milwaukee natives, and that this could pose difficulties (or perhaps scare off many investors?).

Crude analysis:

50/50

Monthly rents $3,340

50% to expenses, 50% available for debt service: $1,670

Debt service $611 (An estimate of trulia of 83.2k @ 4.125 amortized over 30)

Cash flow: $1,059 ~ Annual, $12,708

1% Rule:

Purchase price (all in) 104k, monthly rents, $3,300 = 3.1%

And now, sorry this will get a bit longer, a slightly more detailed form (the best I can do at this point):

Gross monthly income: $3,340

Monthly Expenses:

Vacancy @ 8.3% (local property manager though this was accurate) = 277.22

Water & Sewer = $102

Management @ 10% (although I'll do it for the foreseeable future) = $334

Garbage? @ $15

Taxes: $197

Insurance (I have no idea how to get crude quotes) so, $75

CapEx @ 10% = 334

Total Monthly Expenses = $1,334.22 (of which I'd be currently paying myself the $334).

Available for Debt Service: $2,006

Estimated Debt Service: $700 p/m (rounding up a little bit - I know, still quite crude).

Cash flow: $1,306 @ $217 per unit.

In short, it looks to me like a difficult but good deal. Partly I'm wondering what I'm missing (because I have a hunch there's something), and I'm also a bit sketchy on the details of estimating various debt payments. The number I want the seller to carry, for example, and how that is 'typically' structured.

It also looks like an education in investing, so I'm torn. Talking to a commercial lender about possibilities later this week. I'd appreciate anyone chiming in, particularly Milwaukee natives who might not like the area (but guys, keep in mind you have Washington Heights just to the west and the lovely Martin Dr. neighborhood just south ;).

Again, thanks in advance.

Best,

JTM

Wade Sikkink · Answer

One other note on the commercial loan, you will probably not be offered a 30 year term.  Most likely a 20 year amortization with a 5 year balloon.  Figure on 20 year when running your numbers.

Good luck.

Svetlana Foley · Answer

since it is two properties it has to be commercial loan with 25% downpayment requirement.  The seller will absolutely not carry you at 3% they can get way better return and less risk on their money elsewhere.  Expect to pay the going rate of 10% on seller financing.  The only feasible way of structuring this transaction is to ask the seller to carry 25% of the purchase price minus 3k or however much you can afford to put down at 10% interest 3 year term.  You also need to make absolutely sure that your rehab costs are correct and there are no zoning ordinances issues or code violations all of which would need to be factored in. Im also assuming  that 2% rate is on the loan from family and friends since its the only way you will get that rate. Rerun your figures with this assumptions and see if it still makes sense and if you are in a position to pull it off finamcially. Any questions feel free to pm me

Account Closed · Answer

If your numbers are right, this seems like a hell of a deal. If I had a deal like that, I'd probably snap it up at asking price on day one. I wonder why it didn't sell when listed? Is it in Milwaukee or some smaller town? If you can cashflow that well on it, it's a no-brainer.

If you can't do the deal because of financing, you should look to partner with a local investor that can do the deal

Joshua Martin · Answer

Thanks again everyone. I'll keep you posted.

Account Closed Maybe you're right. I do want to be taken seriously, so I shouldn't lowball. Thanks for the tip.

Svetlana Foley · Answer

@Brie Schmidt and others - I work with a small commercial lender based here in Milwaukee, and occasionally he is able to put together deals with seller financing the downpayment.  Excellent credit and skin in the game are required.  Pm if you would like info on the lender.

Wade Sikkink · Answer

@Joshua Martin Any mortgage calculator will show what the payment is, just put in a 20 year term rather than a 30 year term.  So the payment occurs like it's a 20 year loan.  However, at year 5, the balance is due (hence the term balloon payment).  Generally what you have to do is arrange to refinance the loan prior to the balloon payment coming due.

For example, we have a commercial loan on a 14 unit property.  The loan has a 20 year amortization and a 5 year balloon.  The balloon comes up in 2 years, but I'm planning to refinance the building into a straight 10 or 15 year commercial loan next year.

You can probably avoid the balloon setup if you can go with a 10 or 15 year loan out of the gate, but that's going to make the payments a lot higher and most people don't have the cash flow to support that (including me when we bought this building).

Joshua Martin · Answer

@Wade Skink

Thanks for the input Wade. Do you have any good tools for estimating what the monthly payment might actually be on a property when using a commercial loan? Or how balloon payments are handled?

Thanks. And thanks to everyone else too. I'll run the numbers again as soon as I've updated them.

JTM

Brie Schmidt · Answer

@Joshua Martin

Seasoning is the time period before you can refi based on the ARV.  Otherwise you can get a loan based on what you spent

Yes, reserves is 3 months of PITI payments

I have a 4 unit and duplex on the same lot and that is my average water bill.

I have yet to meet any commercial bank that allows the downpayment to not be personal funds.  If you find one, let me know

Joshua Martin · Answer

Thanks for both of the replies.

@Brie Schmidt

I wonder if you could fill me in just a little more on a detail or two. What does the 'seasoning period' signify? Or does that just mean the amount of time before you could refi in some way? Also, when you say commercial lenders typically require 20% cash and 3 months reserves, 'reserves' amounts to what? Sufficient cash to pay down the debt service for 3 months?

The ridiculous interest rate for the seller finance is just a proposal - I do think the seller wants to move on from the property, so who knows what he'd actually be willing to take.

Water is accurate for the 4 family, that's the quarterly average from the city for the 4 unit. It would certainly jump once the studios were finished.

Lastly, do the commercial lenders typically not allow a seller to finance any of the deal? I'll be meeting with one soon just to start a relationship, but good to know in advance.

Thanks Brie, as always, good and valuable insights.

JTM

Brie Schmidt · Answer

@Joshua Martin

Before we even get started with the numbers, in the commercial world I have never seen a seller carry allowed.  You will need 20% in cash plus 3 months reserves to do the deal.  If you look the property up on the county tax assessor website and it doesn't give the specs but instead says "merch apartment" then you have to do a commercial loan on it.

Even if they did, like the previous poster said the interest rate would be in the 6-10% range

Note that the seasoning period is usually 2 years in commercial, so if you did a rehab you would be able to refi at 80% of your cost (purchase plus rehab) and not on the new appraisal

As far as your numbers, I have a property just like this so I am using those numbers

• vacancy is good
• water is low with that size unit.  You will be more around $210-$250 a month
• management is good
• garbage is included in your taxes
• Taxes you know
• Insurance is about $90/mo for us
• We use 10% repairs and 5% capex just to be on the safe side

Do We Have a Deal?

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