8 Unit Apartment Building Seller Finance Value-Add Deal- Houston

[Jared Schaefer]

Alright. Grab yourself a fresh cup of coffee for this one. In this post, I tried to give the necessary info while trying to make everything as simple as possible, but this is longer than your average post. Read til the end and let me know what your thoughts are. Hope you have your coffee ready and thanks in advance!

I had an 8-unit apartment building brought to me that is off market in the Northside/Northline area (77022 area code) that I am wanting to make sure my analysis is correct on. This is a mom and pop run building where the owner did the management and repairs himself over the course of ownership in the last 8 years. The property is in decent shape with no major issues, and the owner also has not increased rent in several years where each is getting $600/month. Market rent is $700/month with doing little to no work to the property, and can get around $800+/mo per unit with $75,000 in rehab costs. This is the first of several of his properties that he wants to unload so that he can retire. He is willing to Owner-Finance the deal in order to save on capital gains taxes. This is a wholesale deal where the seller was asking $510,000 but I've talked them down to $485k. Here are the numbers based on actual expenses:

8 unit building (77022) 100% occupied

Purchase Price: $485,000

Seller Finance terms: 7% interest rate amortized over 30 years w/ balloon payment at the end of 5 years with $190,000 down

              --$295,000 owner financed at 7%= $1,721/mo or $20,652/yr

              --$190,000+$75,000 Rehab= $265,000 in Hard Money/Private Money/JV    

Current Rent: $600/mo [$57,600 annually]

Market Rent: $700/mo (w/ less than $5,000 in repairs) [$67,200 annually]

After Rehab Rent: $800+/mo (w/ $75,000 in rehab costs) [$76,800 annually]

Expenses: $26,388 annually (includes 10% property management, insurance, repairs & maintenance, utilities, and taxes)

      Reserves: $2,400 annually ($300 per unit)

NOI after Reserves at Current Rent ($600): $33,590

NOI after Reserves at Market Rent ($700): $39,010

NOI after Reserves after Rehab ($800): $49,644

Cashflow after debt at Current Rent (not including Hard Money/Private money) = $12,938 annually or $1,078/month

Cashflow after debt at Market Rent (not including HM/PM) = $18,358 annually or $1,529/month

Cashflow after debt after Rehab- 2 Phases

                     Rehab Phase (1st 6 months): (including Hard Money + OF at 6 mos= $15,768+$10,326)= -$1500 to -$2500/month or -$9,000 to                           -$15,000 total for estimated first 6 mos. ( OR worst case scenario-- -$26,094 or -$4,349/mo for a total of 6 months with no rent                          at all)

                     After Rehab Phase (last 6 mos. with $800/month rent): $38,400-[$10,326 (6 mo. of OF payments) + $13,194 (6 mos of expenses)                       = $14,880 for 6 mos. or $2,480/mo. 

                    Refinanced at $2697/month- $2,480/month (cashflow from line above) = -$217/month for the remaining 6 mos. of the 1st yr                            after rehab

                          Refinance Details: NOI of $49,644 (from above line of rent @ $800/mo) at a 7.4% cap = $670,865; 75% Bank Refinance of                                    $670,000 = $502,500

                           $502,500 - $265,000 (Hard Money Loan) = $237,500 (this can pay the seller-owed amount of $284,674 down to $47,174 which                              equals ~2 years of payments of $1721/month)                           

                             **Refinance is based conservatively at a 5% interest rate and at a 7.4% cap rate which is typical for the area

Year 2 Cashflow after Rehab and Refinance + Owner Finance Payments: -$217/month or -$2,604 annually (eat into Reserves to break even?)

Year 3 Cashflow after Rehab and Refinance + Owner Finance Payments: -$217/month or -$2,604 annually

Year 4 Cashflow (Seller is Paid Off early from Refi plus 21 months more of payments): $17,280 or $1,440/month

Year 5+ Cashflow assumed to increase incrementally with market

So, as I typed this summary of an analysis up I realized that going the route of using a Hard Money Lender and doing a full rehab of $75k at these rates is all but a deal killer because of putting me in a situation of getting through the first year of negative cashflow and the next two years of just about hopefully breaking even on cashflow. It appears that I can immediately increase rent with little to no (maybe $5,000-$10,000) of repairs. This is why I went back and italicized all HML calculations as you can see above to deem them as optional. This summary of my analysis has made me realize that I most likely will have to have a partner (or two or more) with the down payment amount to make this deal work. This of course being without a major $75,000 rehab up front.

What are your thoughts on this deal? Would you go the Hard Money route with a major rehab up front or would you do a partner up with an equity partner with all or most of the down payment to make sense of this deal? Would you change the terms and lower the asking price or is everything good as-is?