All Forum Posts by: Mark A.

Howard-

Thanks for the reply.

1) loan fee 25 basis points (0.25%)

2) Current tax assessment is near the proposed purchase price.

3) I am waiting on the insurance quote from my agent.

4) As far as I can tell, the property has been on the market for a while because the owner didn't want to come down on price. He seems in no rush to sell as it is cash flowing, just less profitable based on his accelerated depreciation. It also is a bit of an "odd" property because it contains many small office spaces rather than several large tenants. The $1M pricetag is also a barrier to entry

4) Rental rates appear to be at market rent. 

5) Most tenants have been stable, in place for years. Several have 2-3 years left on their contract but most are on a 3 month auto renewal (and have been for years)

6) The 15% vacancy appears to be good for the area and the building. The building has been stable around this level. 

Please check my numbers. This is for a nice looking 11,000 sqft multi tenant office building that I drive past every day. It has been for sale for a while and after I saw the price drop I contacted the owner asking if he'd be interested in owner financing my down payment. To my surprise, he was open to the idea. He said he is just hoping to sell because he had accelerated the depreciation on the building and was ready to move on. He will doing a 1031 exchange to a larger property but was agreeable to doing a ~15% carry back. Everything below are my actual numbers, run from the property rent roll, P&L, and discussion with the bank. I had initially assumed the Property Management would be higher than 5% but the current owner is managing it through his property management company and would like to continue managing it so he offered 5%. Roof, windows, and parking lot are all ~10 years old. 

What say you? Do you like the deal? Any concerns or red flags?

Purchase ~$1.1M

Down payment $50k (4.5%)

Seller Carry $170k (15.5%). PRIME + 1.5% (currently = 5%), 25yr am, 5 year balloon.

Bank Finance remaining ~$880k (80%) @ 4.5% fixed, 25yr am, 5 year balloon. 25 points. 2% prepayment penalty.

INCOME: ~$13,500/mo (@85% occupied) = $162k/yr. This vacancy rate & income has been fairly stable x past 5 years.

EXPENSES (including prorata taxes, insurance, utilities, snow removal, regularly scheduled maintenance, and saving for CapEx): $60k/yr

Property Management: 5% gross rent = ~$8000

Operating Expense (w/ Property Management) = 68k / 160k = 42%

→ Debt Service (as above) = $72k

NOI = income - expenses = $162k - 68k = ~$94k

Cash Flow (NOI - Debt Service) = ~$22k

CoC return = $22k / 50k = 44%

Cap Rate (after factoring in property management) 8.5%

Decreasing you AGI only helps until you hit the AMT. I hit the AMT every year (yay) but I'd love to find a way to decrease my actual tax rate lower...

Right now my kids are young so we are just trying to teach them the value of money. As part of this lesson, I'm sure they'll learn that earning money can be hard and that they don't want to work forever. The biggest thing I want to DO (rather than teach) is to help them buy a buy and hold at least one property when they leave the house. When I think back to the years I lived in rental housing during / after college and how easy it was at that stage to move every year, I'd love to have purchased one or more properties and to own several properties on 30 year mortgages now. My "coulda woulda shoulda" items will hopefully be things that they do better.

You should be able to find a longer amortization period (25 or 30 year) with a balloon payment at ~5 years. So still short term to allow a rate reset for the lender but with longer amortization to give you a lower locked in monthly payment.

Is this residential or commercial project? I have used Washa Construction (http://www.washaconstruction.com/) more than once for residential. They came recommended to me and I was not disappointed. They had a competitive price, stuck to their timeline, and the final results were excellent.