All Forum Posts by: Adrian Fajardo

A key metric for commercial lenders is the DSCR - debt service coverage ratio. This can also go by various other similar names. This is the net operating income divided by the P&I payment.

To carry on with your example, if you buy a million dollar property with 25% down and get a 6% 20 year loan, your monthly payments will be $5,373.23. A lender might want to see a DSCR of 1.3. That means the NOI must be $5,373.23 * 1.3 = $6,985.20. If its a well run building that is stabilized (i.e, vacancies are about what you would expect them to be in the area) that would translate into gross scheduled rents of about $14000 a month.

If the rents were less, which would make the NOI less, lenders would lend less. If the price is fixed, that means a larger down payment.

That's not to say that would be a good deal. With those number you would have cash flow of $1,611.97 a month or $19,343.64 a year. And you have $250,000 invested. That's only a 7.7% cash on cash return.

The property you already have isn't a very good deal, either. By a $1400 mortgage payment I assume that includes taxes and insurance. When you apply for another loan, the lender will take your 75% of your rent, less the mortgage payment. In your case, 75% of the rent is $1200. Subtract the mortgage payment and you're in the hole $200 a month. That's 6% of your gross monthly income. That makes it harder for you to qualify for a new loan.

Your personal income may not be too big a deal for a commercial loan, but the lender will want to see a good DSCR, a good down payment, and experience.

This maybe 8 years old but I find the information still really valuable. I appreciate you taking the time providing quantifiable facts. It paints a better a picture and makes it easier to understand. Your last sentence is uplifting coz it says it's not impossible 👍

0 Votes

Originally posted by @Pete Harper:

@Adrian Fajardo I saw your post on the 52 unit. I saw this property too on LoopNet. This may be a great learning vehicle for you. See if you can get ahold of the financial records from the seller. Tell the agent you are interested in buying. They should be able to provide a three year P&L history. You will be able to see the rent roll pre and post renovation. This will give you a good idea of their ROI. I've done this on several MF properties in central Texas. You will be surprised how many of these properties are loosing money year after year.

My other comment is on trusting your gut when it comes to selecting an area to invest. I don’t invest in an area I would not live myself.

Pete

Hello Pete! Good to hear from you. I still haven't heard anything back from the letters I've sent. I'll send another batch soon. I'm glad you said that because I was planning on doing that. Although, I'll probably ask my broker for financials on a property where it is in my buying range. I wouldn't want to waste their time.

Thank you for that Pete. My gut tells me not to consider buying it but all the MF are congregated in the areas in Killeen where the are crime rates are higher. I'll be more patient!

0 Votes

Originally posted by @Steve Vaughan:

Originally posted by @Adrian Fajardo:

Originally posted by @Steve Vaughan:

Originally posted by @Adrian Fajardo:

@Steve Vaughan Thank you for your insight sir. So essentially, it really is investor dependent and how much an investor can stomach. I know it's a commitment once I jump in and I have a full-time job. That is why I ask, to avoid taking in more than what I thought I could handle.

When you said "I'm too old to mess with crud for less than a 9 cap", is a 9 cap one of your buying criteria? Among others of course.

You're welcome. I'd say yes, having the stomach for c class tenants is personal. I don't settle for less than a 9 to deal with that but my tolerance for b.s. and indigestion is low.

I don't always need a 9 though. Cap rates are a reflection of asset risk, so I'm ok with a 5 cap, as long as I buy it at a 6. Don't pay retail or clean up a sellers mess for free👍

That is exactly the point where I'm at. I've followed the BP podcasts religiously and read quite a number of books and everyone is saying along the lines of "don't buy retail" or "you make fortunes as a value-add investor". Although looking around my area, the apartment complexes that have the potential for value add are in the areas where I myself would not want to live in.

Can I ask your opinion about this train of thought? On loopnet.com, I found this 52-unit building in the area that I mentioned. It's already been fixed up and stabilized. I looked at the sellers and they're this big group based in Dallas. They probably are more experienced than I plus they have more stringent criteria because they probably syndicated the funds. Since they jumped-in and bought one, would it be a fair assumption that this area isn't as bad I thought? Oh, I based the crime rates off of realtor.com and I've driven around the area. I pass it every day going to work.

This is the listing I reference. Obviously, I'm not buying it because it is in retail status lol. But they did a pretty good job at making it look clean and up to date.
https://www.loopnet.com/Listing/1403-N-2nd-St-Killeen-TX/19104844/

I've never purchased someone else's rehab. I also don't buy flips. Too many shortcuts.

Mine were all off-market. Bank REO and tired landlords. Really bad PMs in my area are a great source of leads. Maybe start with clients of your worst PM.

What a great tip! I've heard of asking for PM for properties that might hit the market but it never occurred to me asking the worst ones. Lol. @Pete Harper recommended the same thing to buy off-market. I'll look into that. Thanks for all your help!

1 Vote

Originally posted by @Taylor L.:

Originally posted by @Adrian Fajardo:

Originally posted by @Steve Vaughan:

Originally posted by @Adrian Fajardo:

When you said "I'm too old to mess with crud for less than a 9 cap", is a 9 cap one of your buying criteria? Among others of course.

You're welcome. I'd say yes, having the stomach for c class tenants is personal. I don't settle for less than a 9 to deal with that but my tolerance for b.s. and indigestion is low.

I don't always need a 9 though. Cap rates are a reflection of asset risk, so I'm ok with a 5 cap, as long as I buy it at a 6. Don't pay retail or clean up a sellers mess for free👍

A few comments:

Just because the broker says it's stabilized, doesn't necessarily mean it is. You need to look at the numbers and see if you agree with that. They might be giving out some crazy move in concession to get people to move in. Such a special may not be sustainable.

This ownership group bought in Killeen, but that doesn't necessarily mean you should buy in Killeen. Look into the market fundamentals and see if they match your goals. Maybe something changed, and Fort Hood is going to be downsized. Or perhaps Covid has hit Killeen particularly hard and businesses have closed left and right. Who knows? Research the local economy and housing market yourself and see if it makes sense for you.

Great point! Thank you for your opinion Taylor. Will do! All I'm doing right now are assumptions. I'll get more concrete information. I probably used the wrong term when I used "stabilized". I didn't ask a broker but I just looked at the pictures and noticed it's already fixed up or the units have been updated. This is the kind of end product I would like to create myself. Again, thank you for your advice. I'll investigate a little bit more on this 🧐

0 Votes

Originally posted by @Steve Vaughan:

Originally posted by @Adrian Fajardo:

When you said "I'm too old to mess with crud for less than a 9 cap", is a 9 cap one of your buying criteria? Among others of course.

You're welcome. I'd say yes, having the stomach for c class tenants is personal. I don't settle for less than a 9 to deal with that but my tolerance for b.s. and indigestion is low.

I don't always need a 9 though. Cap rates are a reflection of asset risk, so I'm ok with a 5 cap, as long as I buy it at a 6. Don't pay retail or clean up a sellers mess for free👍

1 Vote

Originally posted by @Ben Leybovich:

Originally posted by @Adrian Fajardo:

Originally posted by @Ben Leybovich:

Originally posted by @Adrian Fajardo:

@Ben Leybovich Hello! I can't wrap my head around how you came to the conclusion that you can't make money with just $500 in rents with an 8 CAP? Would you please elaborate a little bit?

This is my understanding:

$500 x 8units = $4000/mo

$4000 x 12 = $48,000/yr (Let's assume 50% will be expenses)

$24,000 = NOI

$24,000 / .08(CAP) = $300,000

Are you saying that with the NOI, it won't be enough to cover the financing for $300k?

Sure, it will be enough to cover the financing - just not enough for you to make money...lol

For an 8-plex you will need a portfolio loan. It's been ages since I did one, but UI can't imagine anything less than 4.5% with a 20-year AM. With a 30% downpayment, this would be about $15,000 per annum of debt service. More if you find a lender willing to do 25% down.

This means there'd be $9,000 left to cover 2 things: CapEx and your cash flow.

All I'm saying is that to replace flooring in one unit you'll spend $700. To replace hot water tank $850. To re-paint one unit $550+. I'm not talking about central HVAC, windows, roofs, or any big stuff. How much of that $9,000 would be left for you to pocket?

Thank you for responding and for a detailed explanation too! :)

I see. Using your financing rates, it is only $750/mo of cashflow. That is bad.

You said it's been a while since you used a portfolio loan, so how did you arrive at a conclusion with just the rent and asking price as an input? Am I looking at the scenario wrong or is it because you've analyzed so many and you can tell a good and bad deal? I'm saying that's some amazing filtering right there! Lol.

I am sorry, I am not sure what you're asking. It's just math. You are the one who used 50% ratio, and I didn't argue, although depending on location that could be low or high. Further, Fannie and Freddie don't finance above 4 with residential and 8 is not large enough for GSE commercial. This leaves portfolio lenders/community banks. Can't see them lending at under 4.5%. The replacement costs are not a secret to anyone. The rest is just math.

I don't think there is anything amazing about this. It's just common sense. The amazing piece in all of this is that when you figure out how to think, this is truly very simple :)

Good luck!

No, no need to apologize. I actually got a valuable lesson instead of just figuring out how you came up with a conclusion with minimal information. So thank you for that! I don't know what I don't know.

That is the point where I'm working to get. Things are difficult before they get easy but as you said in show 152 "Listeners don't have to go through the struggle when there's someone like a Ben Leybovich". That statement is true today as it was then. Thank you for all your help Ben!

1 Vote

Originally posted by @Ben Leybovich:

Originally posted by @Adrian Fajardo:

@Ben Leybovich Hello! I can't wrap my head around how you came to the conclusion that you can't make money with just $500 in rents with an 8 CAP? Would you please elaborate a little bit?

This is my understanding:

$500 x 8units = $4000/mo

$4000 x 12 = $48,000/yr (Let's assume 50% will be expenses)

$24,000 = NOI

$24,000 / .08(CAP) = $300,000

Are you saying that with the NOI, it won't be enough to cover the financing for $300k?

Sure, it will be enough to cover the financing - just not enough for you to make money...lol

This means there'd be $9,000 left to cover 2 things: CapEx and your cash flow.

Thank you for responding and for a detailed explanation too! :)

I see. Using your financing rates, it is only $750/mo of cashflow. That is bad.

0 Votes

@Ben Leybovich Hello! I can't wrap my head around how you came to the conclusion that you can't make money with just $500 in rents with an 8 CAP? Would you please elaborate a little bit?

This is my understanding:

$500 x 8units = $4000/mo

$4000 x 12 = $48,000/yr (Let's assume 50% will be expenses)

$24,000 = NOI

$24,000 / .08(CAP) = $300,000

Are you saying that with the NOI, it won't be enough to cover the financing for $300k?

0 Votes

@Macori Walker I agree with @Andres I. Cepeda. The US is like the police of the world. The only way Ft. Hood will shut down, unlikely in our lifetime or in the time you own properties, is if there will be no more need for military (world peace). Yeah, the army might downsize but it will shut down smaller bases first before closing down one of the biggest and oldest bases. Not to mention, it is the HQ of a Corps. That's no excuse though to not be conservative and do your due diligence before buying. Still buy undervalue which will help you when downturns occur.

I wish you the best in your investing journey!

0 Votes

When you said "I'm too old to mess with crud for less than a 9 cap", is a 9 cap one of your buying criteria? Among others of course.

0 Votes

All Forum Posts by: Adrian Fajardo

Adrian Fajardo has started 8 posts and replied 273 times.

Post: Commercial Lending

Post: Besides financials, what else should i look into for multi-family

Post: Besides financials, what else should i look into for multi-family

Post: Besides financials, what else should i look into for multi-family

Post: Besides financials, what else should i look into for multi-family

Post: Evaluate 8 unit complex

Post: Evaluate 8 unit complex

Post: Evaluate 8 unit complex

Post: Real Estate Investing in Killeen

Post: Besides financials, what else should i look into for multi-family