All Forum Posts by: Marc C.

I've been approached by an Albuquerque investor who is willing to offer interest-only financing for long-term, buy-and-hold, projects in New Mexico and surrounding states. What is your opinion of it? Would it make sense for any of your deals? I'm not sure it would help me if I'm comparing it to 4.25%, 25-year bank financing that I've been quoted recently for an apartment building. But it has some other attractive features: 

Details:

• Minimum loan: $100,000; Maximum loan: $2M
• Maximum LTV: 80% of purchase price (seller can carry 2nd position for up to 20%, so zero-down loan is possible)
• 2+ unit or commercial properties only; no owner-occupied
• 4% interest-only for 12 mos., followed by 8% interest-only for up to 9 additional years.
• 2% origination fee
• 3% pre-payment penalty if paid off in years 0-5; no prepayment penalty in years 6-10.

When I do the math, the required monthly payment at 8% interest-only is about the same as 5.25% financing amortized for 20 years...sort of a typical local bank rate for commercial property. Of course, during Year 1, the monthly payment would be half that, and that is pretty much unbeatable. The zero-down option and low origination fee are also attractive.

Feedback?

The 50% rule includes vacancy rate; typically 5%. But ACTUAL vacancy is almost always higher than that. I use 10% in my calculations, especially if I am raising rents. 

You should be able to get management done in the 4-6% range, depending on how many choices of management companies you have. (A factor in smaller towns.) For a property 30 min. from me, I'd probably want to figure on the payroll expense of having an on-site "helper" for management...eyes and ears that report to YOU, not the management company. The cost? Maybe one-half month's rent or so. 

For repairs, 5% is usually my minimum budget...if you're not spending that, the building has deferred maintenance. Add another 5% for cap-ex (which, by definition, isn't an expense, so shouldn't be included in the 50%, but should be included in your cash flow analysis). 

Other figures depend on your unique situation: Local property taxes (which WILL go up the year after you buy it) and insurance being prime examples. Water and sewer are significant but localized as well. Is dumpster service included in your water bill, or do you have to use a 3rd party for trash? Landscaping, janitorial and snow removal are often overlooked expenses; "because the owner does those" is often the reason the seller doesn't list them. Your expense to drive to the property once a week at $.55/mi. should be included as travel expenses (and maybe even your time). So should $500/year for tax return prep. Advertising is no longer a significant expense, since Craigs List is free, but I add a budget of 3% of the vacancy rate so that I can cover extra advertising like social media and for-rent web sites. 

If you add it all up, it's really hard to be under 40% total for an older building unless it's been fully renovated and therefore has near-zero repair expenses. If it's master-metered for heat/lights/water/sewer, 50% (plus vacancy) is more realistic. 

The point is to ALWAYS be conservative. Everything costs more than you think it well, and certainly more than the seller shows. 

You can't "really" know what it will cost until 1.) You've seen the seller's tax returns and profit/loss statements, and 2.) You have run the property yourself for 2-3 years. 

As for consulting with someone about the property, you can try a non-compete and non-disclosure agreement. But be willing to PAY for consulting. 

It's great you have a lead. You are in personal contact with the seller? You've met? You've figured out why he wants to sell and what his needs are? Estimate your expenses and what you need to see for cash flow and offer accordingly. He wants $825,000? 

GET ON IT. If you don't, someone else will. Don't wait to get his numbers. If his "actual" numbers vary greatly from your projections, you will have to "retrade" (reprice/re-negotiate) with the seller. But that comes later. For now, I'd offer in an LOI a couple of options: Full price with small down, lower price with more down. Closing 60 days after you receive all of the Seller's Documents. But GET IT UNDER CONTRACT this week. Don't over-analzye...move.

14255 x 12 = $171,000. Since it's older, let's use 50% expenses. So your NOI is $85,500. $825,000 purchase price, so we're at a 10.3% cap rate. On the face of it, with seller financing, it seems like something to pursue further. A lot of questions to ask: How far of a drive is it from you? From major employers? What's happening with the economy there? Can you get the opinion of the #1 apt. Appraiser in the area about expenses and cap rates?

Hi, Ryan, 

There are plenty of good folks to network with, in spite of our small market. As Dave Torres (who is a wholesaler) said, we have two active REIAs, plus we have a Mastermind group for experienced investors and TWO new groups dedicated to multifamily. If you are interested in investing with others, there are plenty of active projects going on. 

But remember, Albuquerque is different than about anywhere. Our economy is not strong, so our rents are "capped" by low job growth and low wages. We have houses for under $100,000. This is competition for rentals if the buyer has credit....but so many don't, and with a $12/hr call center job, one could be an apartment renter for a LONG time. Which means all of those Class C buildings and trailer parks south of Central have a key purpose: To house working poor people. The problem is that so many of them are neglected by their slumlords, which is also an opportunity for us investors. Learning how to serve that market (by far, our largest) better than your competition can make one rich...and you can feel good because you are providing QUALITY housing to those who need it.  

Let me know if I can be of assistance. I am in Albuquerque about 3X a week (live in Santa Fe). I'm sure we'll meet at one of the Meetups mentioned above. 

Try to separate negotiations for the homes from the park. You can negotiate the park value using cap rates, cash flow, and rates of return that are acceptable to you. 

Idea: Put the homes in a separate LLC and give them to the tenants if they pay 34 of their 36 next home rental payments on time. (Watch compliance with Dodd-Frank, i.e., make sure there are no doubts about the tenants being able to afford the home rent, lot rent, and utilities. Ideally, these shouldn't total more than about 1/3 of the tenant's incomes.) Regardless of what the Seller says, the MAX value of these homes is no more than 36 mos. x home rent, and that's if the tenants agree to pay for maintenance and repair. (And I'm being very generous here.)

Home rentals are a BUSINESS; they are not "real estate." They have large expense ratios and high maintenance costs. Get out of that business as soon as possible and stay in the MHP ownership/management business.  

Some random thoughts to consider:

I always try to separate the park from the homes and negotiate them separately. 

Your goal is ALWAYS to turn rental homes into tenant-owned homes, through rent-to-own arrangements or selling them on contracts. (Must meet Dodd-Frank and CFPB rules!) 

I think that, on the quality of homes you are talking about, if I can get 36 mos. of home rent from folks, and make them responsible for repairs and maintenance, I'd just give them the trailer at the end. Their value right now is 36 x rent, at the most. 

I would want to put the homes in their own LLC and value them at no more than rent x 36 mos...and that's if I'm being really negotiable with the seller. I wouldn't try to value them based on cash flow or cap rate; that's what the Seller wants, though. (They are a LIABILITY, not an asset, because they cost money to remove.)

What's the park worth if you removed every rental home, based on, say, a 10% cap rate? Negotiate from there. 

Personally, this project sounds like a HUGE headache, and I would need some phenomenal rate of return to make it worth my while. 

Amazon, dude! There are TONS of books there on how to do it. 

Why pick America's most expensive market to get started in? Why do it when that market is showing great signs of stress right now (especially at the upper end of rents)? What happens if you drive 1.5 hrs. from Manhattan? Cap rates go up, competition goes down. 

You can learn EVERYTHING you need to know to get started in MF investing (i.e., being able to sound like you know what you are talking about) through the many excellent books on Amazon, as well as videos on Youtube. Lance Edwards, Dave Lindahl, and many others have inexpensive books on apartments you can start with. 

Hi, Luis, 

Are you asking if this would be a good candidate for development into 15-unit? Or are you wondering if the current $96,000/year Net Operating Income makes this a "deal?" 

$96,000 / $2.95M = 3% cap rate. Might as well keep your money in the bank. 

So I will assume you are more interested in developing the land. If we put 15 2BR units at 750 sq. ft. each, we will have a building of 11,250/sq. ft. What are the building costs in your area? It being Carlsbad, let's use $125/sq. ft. (PLUS tear-down costs), or $1.406M + $2.95M land cost =$4.36M / 15 units = $290,000 per unit. If you hope to get a reasonable 1.3%/mo. for each unit, then the rents need to be $3770/mo. per unit. I know your area is expensive and all, but are rents for 2BR A-Class units really going for $3770? I doubt it. 

Maybe I'm missing something here, but this doesn't sound like any kind of deal that it would be easy to raise money from investors and banks for.