All Forum Posts by: Giovanni Isaksen

@Derek Young  Sorry for the delayed response. The key with the bank is to present them with the numbers laid out to value the property based on the income approach. That is how multifamily (5+ units) are valued and lending is based on that same value.

2- Yes but you might start out offering a 10 year term instead of 5 just to give the deal a little extra margin of safety and negotiate. If the seller wants a shorter term you could exchange that for a lower interest rate.

@Derek Young based on the info you provided expected NOI would look something like this:

Based on the 10.26k NOI the 75k purchase price is a 13.67% cap rate, pretty good provided those numbers are close and there's no major deferred maintenance. Of your 30k cash some will have to go to closing costs and you'll want some reserve for initial repairs or upgrades (there will be something, if for nothing else than a little cushion). Figured 4%/$3k for closing costs and $7k for repairs/cushion which leaves $20k cash for a down payment.

If the seller will carry the 65%LTV balance of 55k on a five or ten year note at 8% interest only, he'd be earning $4,400 a year (Maybe he'd take less). Your end of the purchase would look like this:

Note  that the cap rate shown here is your buyer's cap rate based on the total investment of 85k including acquisition/closing costs and initial repairs/cushion. From there if you can raise rents 2% per year (or bill back for utilities and/or generate other income) and expenses are held in line by year five your cash flow should look like this:

Rents and GOI are up 10%, Taxes and Insurance bumped to show expenses up 11% and NOI up 9%. Debt service is up too because I figured a refi at 75%LTV based on the new 11.1k NOI (which gives a property value of almost 93k) and provides a loan of almost 69k, 55 of which goes to pay off the seller's note and the balance of almost 14k lands in your pocket. I also figured the refi loan rate at 6% with a 30 year amortization and a 10 year term which makes the annual payment just over 5k and looks something like this:

Because your cash in the deal went from 30k to 16 and change your cash on cash went from just less than 20% (pretty darn good) to over 38% (really darn good!) plus of course you have that 14k rattling around in your pocket, rinse and repeat.

These are fairly conservative figures but they depend on a number of important variables:

• The income and expenses are close.
• There's not a ton of deferred maintenance or building components at the end of their life.
• That the seller will accept 8% interest only (it's really pretty good compared to the alternatives today, maybe he'd even take less).
• That you can refi at 75LTV and something close to 6% in five or so years (with three or four years of solid operating history you should be able to refi... or sell at a nice profit).
• And of course that you can operate the property to those numbers.

Good hunting-

Here's one interactive page with the numbers on 27 US markets: 

http://www.hsh.com/finance/mortgage/salary-home-bu...

Good hunting-

@Luther Smith 

Just to add on to what @Mike B. said, the $750k proceeds from the refi is 25% down on a $3,000,000 building.

I would go a step even further than @Jerry W. and say don't use the equity in your home to leverage into a deal via a HELOC. People forget that we spent thousands and thousands of years chasing tigers, bears and who knows what out of caves just to secure shelter and now we can buy shelter for little to no money down, but it still is shelter that protects us and our families. The last time people forgot that and started thinking of their home as a cash machine instead of shelter things didn't turn out too well.

Good hunting-

When you're looking at cash on cash returns, make sure you're actually looking at net after everything cash flow. That includes fully reserving for future capital expenses based on what those expenses are realistically going to be. You can bet that the REITs do but I see a lot of supposed cash on cash returns that are more of a bragging number than actual results.

Good hunting-

@Nik S.

I hear you Nik, personally I can't imagine not paying all bills online but clearly that isn't the case with everyone... yet. We did find a service that will let tenants pay with cash at participating convenience stores and that's working well, especially since there's a 7-11 right down the block from that property. It's called Pay Near Me http://www.paynearme.com and there are locations in Warren too, might be worth checking into-

@Nik S.

I'm with you Nik. I reviewed at least a dozen companies who were managing similar properties in the submarket, did a deeper investigation into the best six and selected the top three to come make presentations. They knew the property and knew exactly what our objectives were there. What I didn't realize at the time was how much the tenants preferred to deal in person due to their lack of knowledge or comfort around doing things online (my bias). I assumed (and you know what that does) that the tenants would appreciate how much simpler and less time consuming dealing with these things would be, especially since many are young families. Lessons learned and still learning.

We have the property management company prepare their proposed annual budget and review it in the first part of Jan. every year. Once it's finalized we review their monthly reports comparing actuals to budget and get the manager's action plan for correcting any discrepancies. We also walk each property unannounced at least once a quarter to take the pulse on the ground. Like @Nik S. we prefer working with mgt companies whose platform includes an owner portal so we can look at the numbers directly online.

We're dealing with an 'interesting' situation with one property in a very blue collar market. The majority of tenants do not go online much (if at all) and our managers there are very professional but aren't really set up to handle as much in person business as the tenants are used to doing. We may have to switch to a smaller, more hands on mgt. co. but that usually means I have to budget time to learn then teach the new co. how to use their own prop. mgt. software.

For multifamily (5+ units) expense data check with the local apartment owners or landlords association. Another source could be the local university's business school, especially if they have a real estate focus. Most large markets will have at least one private company collecting and supplying data but you'd have to search around to see if someone is doing that in Columbia. What do local apartment brokers use?

Good hunting-

Here's a recent report on the Charlotte apartment market: 

http://www.propertymanagementinsider.com/charlotte...

Good hunting-