6-plex Financing Questions

Real Estate Deal Analysis & Advice
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6-plex Financing Questions

Joseph Lieberman
Albany, OR · Member since 2013 · 23 posts · 3 votes

I've had a rough time finding "great" deals in my area (Corvallis/Salem OR) - but I have found one that is at least on the boards of reasonable. I'm not in a rush, but I had some basic questions. Feel free to get in touch if you have sourced deals in this area of Oregon. Here's the hard facts

6-plex
Asking Price: 330k
Rent: 3750/mo. (~1.13%)
Taxes: 4k
Insurance: (Haven't sourced yet, nothing unreasonable).

I know the area well and already own a property nearby, it's a good area, suburb of a university town, almost no crime, and rents easily. I do expect value appreciation and this is a buy/hold property, but I am not "counting on it" for it to be cash positive and value-additive. It isn't a luxury community by any leap, but I would say its a low risk area that is likely to attract stable, non-destructive, tenants.

Now I know I can't get a conventional loan since its more than a 4-plex, but I basically have two key questions, as well as anyone's thoughts on the general makeup of a deal like this for the area. Assume I can put enough down to meet the LTV qualifications of any loan.

Question 1: Does a 6plex like this potentially qualify for a SBA 504 loan? Is that even worth looking into? Does an SBA loan take into account historic revenue of the building (like it would if you were acquiring an existing business?)

Question 2: I'm not too strong with the key concepts that surround seller financing options. Basically, is there a good resource/place to start/advice for the best options to bring to the table if and when I meet with the seller? The idea of having to get a commercial loan really does make a 4plex or smaller a lot more appealing :(

Lastly, and on a side note. Should I really be focused on finding a much better deal? I can't help but be a little jealous of people posting deals in other cities that look quite a bit juicier. I don't feel comfortable investing in an area I don't know, but I haven't really found anything in Oregon so far that quite hits the "big win" button yet.

Again, I am in no rush, but I figure this real world example is a good place to start finding what questions I will have later.

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  • Scott SewellPro Member
    Investor · Anchorage AK and Hampton, VA · Member since 2012 · 140 posts · 82 votes
    13y

    Hi Joseph,
    I'm not sure I can be any help with your specific questions (I don't know what an SBA504 loan is and have only a little experience with seller financing) but, at that price this doesn't look like much of a deal to me. This is just my opinion and there are a lot of people here smarter than me. However, this may be something to bring to the table for negotiations.
    Just using the 50% rule the Net Operating Income is $1875 per month, and a commercial loan (80% LTV=264,000@6% for 30yrs) payment on this would be $1585, leaving a $290 monthly cash flow. Or $3480 annual, about 5.3%.
    That said, the thing I like about commercial property is that the value is a direct reflection of the NOI. An appraiser will have a multiplier (the Market Cap Rate - specific to the area and condition of the property) he will apply to the NOI to determine a value for the property. This could work in your favor for negotiating the price and it definitely can work in your favor for creating equity! It has for our investments.
    As an example:
    Net Operating Income = 1875 x 12 or $22,500
    Meaning at a 10% Market Cap the value is = 22,500/.10 or $225,000
    If its a good area, in good condition and newer building an 8% Market Cap would look like this: 22,500/.08 = $281,250
    These figures, or something akin to them WILL come into play when this property sells.
    The Market Cap Rate also works in your favor if you can reduce expenses or raise income. When you do the math, every dollar of extra income (or reduced expense) @ a 10% MCR equals $10 in value added, $12.50 @ 8%!
    Check out the podcast with Al Williamson and some of his posts/blogs.

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  • Joseph Lieberman
    OP
    Albany, OR · Member since 2013 · 23 posts · 3 votes
    13y

    Scott Sewell Thanks for the reply.

    Good deal or not seems to come down to financing terms in this case, I agree it isn't stellar, but I haven't even seen anything close to this good yet. Could just be the wrong area at the wrong time or I am just looking in the wrong places :)

    In researching the 504 more it doesn't apply to rental real estate (Boo). But I suppose the better question is if you can use small business loans at ALL for 5+ unit buildings. The difference is an interest rate of ~4.2% vs. commercial loan of 6-9%, which is a pretty huge deal when you consider a 4-plex would fall under a regular mortgage at 4% or less potentially.

    I see where you're driving with this though as to creating equity and utilizing that later.

    If anyone knows about SBA regulations for investment property (especially for Oregon) I'd still love to hear it :)

    -Joe

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