All Forum Posts by: Deandre P.

In the scenario you presented its not really an assignment as buyer one is closing on the property.  Basically you are doing a double close, where buyer 2 funds the purchase and Buyer 1 spread is paid out over a term with a note.  If the original buyer has 1st lien position and can foreclose on the property in case of default, then I don't see to much of an issue.  With that being said I don't how either of the two buyers benefit from this structure.  Buyer 1 has to possibly wait for the full term of the note to receive full payment.  Buyer 2 is putting down 70k (70%), rather just putting down 20%-25% with a lender.   

I would suggest using a property manager, as they are going to be able to help you maneuver through leasing, screening tenants, collecting rent, etc.  When things are going right, you'll feel as though you don't need one, but when things go sideways (evictions, problem tenants, etc.) you will be glad you have one. Also, your property probably will not cash flow (at first) based on your numbers, especially if the 1,550 mortgage is current, as your taxes are likely to increase because you will be losing your homestead exemption.  Despite this even at a slight loss, over the long run it is still probably worth doing because you have a tenant help building your equity and as the market improves and rent increases, so will your cash flow.  

I would recommend modeling vacancy into your pro-forma (maybe 8%).  Its aggressive and unlikely that the property will be 100% occupied for the entire holding period.  Also, Insurance seems low for the area.  But based on the numbers the deal seems to makes sense as you are getting positive cash flow.

The appraiser is an unbiased 3rd party in the transaction so it shouldn't matter who orders the appraisal (builder, builders lender or another lender), the value reflected in the appraisal should be the market value as of the date in the report.  Typically you would expect the market value to be near the contract price, however in your case the contract was executed a year ago and values have changed since then.  So the appraisal should reflect current market conditions/values rather than the contract price, I.E the appraiser will use recently sold comps, which should reflect a lower value assuming prices have declined.   

Are you sure the builders lender is not getting an appraisal done? I can't imagine the lender not getting an appraisal as the appraisal helps protects the lender.  

If there is a current tenant in there, I am assuming the property is in livable condition and if that is the case I would revisit the idea of performing renovations. Based on your numbers renovation cost are about $126,000, however you are gaining about $110,000 in equity after renovations so the renovations do not seem justified by the market, as you are spending more then you would gain in value. Secondly, have you considered how the refinance will impact your cash flow? Using your estimated rent of $2,200, after the refi your mortgage payment would be around $1,100-$1,200, plus taxes, insurance, etc. It may be more beneficial to ride out the HELOC if possible, making the payments on the HELOC with the current rent payments.

The 3% vacancy seems aggressive, that’s about 1.5 weeks of vacancy out of the year. I typically model around 8% (4 weeks), however 5% is the norm for most markets. Also, there is no expense for utilities. Typically you would capture some utility expense during turnover/lease-up, so 3% vacancy with no utility expense seems overly aggressive. Also, no management fee is modeled. Even if I were to self manage, I would still analyze with a management fee calculated, as it reflect a true market comparison. Also to account for the time spent managing. Assuming the rental rate is accurate, then the deal seems to make sense and there is enough cash flow to likely cover any unexpected expenses. FYI, the bottom table with the 30-year proforma seems to be off, as the property value is twice the sales price.

A portfolio loan may be your best option.  

You should be able to get comparables sold from the MLS. If you do not have access, you may be able to get a local realtor to pull some comparables for you. With that being said, I would still suggest valuing based on income, given the cash flow generated from the property is likely your highest concern. Valuing a 4-plex based on income, most investor would use a GRM(Gross Rent Multiplier) Value/Gross Rental Income= GRM. You can compare the GRM of the property you are looking to buy to the GRM of comparables and based on the property decide if you should be higher/lower. Also, I would look at your rate of return and cash on cash return. So develop an operating proforma to derive your NOI and apply a cap rate that you are comfortable with/rate of return you are expecting. Then deduct your debt service from you NOI and determine your cash on cash return. With the rising interest rates, you want to make sure the deal debt services, also that you are making a return that is worth the effort/risk you are putting in the deal.

Interesting strategy but I do see the benefits for both sides. I would say if you are doing a NNN lease on a residential property I would expect the rental rate to be below comparables. This is because the tenant is covering expenses. On a typical rental the landlord pays taxes/insurance, as well as other expenses so the rental rate needs to be higher to cover those expense items and provide a profit to the landlord. On a NNN lease the tenant is covering those expenses, so the landlord would be making a much higher profit. You should calculate what the Principal and Interest payment would be if you are buying the property and negotiate a rental rate above the Principal and Interest payment but below the market rental rate. Also, I would expect the lease term to be longer than your typical 12 months. I would be wary as the tenant to make any necessary repairs doing the term of the lease, only for the landlord to not extend. I would think a 3-5 year lease term would be appropriate, however this does put more pressure on you so If I were you I would double/triple check my pro-forma and make sure I am confident that I will be able to cash-flow long term.