Investment Info:
Large multi-family (5+ units) buy & hold investment.
Purchase price: $525,000
Cash invested: $10,500
This is a seller financed 6-plex in downtown Ogden. Property has very little deferred maintenance. I met the seller at a Northern Utah Real Estate Investors Association (NUREIA) luncheon. I learned that he and his wife were leaving on an LDS mission in March 2019 and that he was looking to step away from a few of properties, but wanted to maintain cashflow. Talk about right place right time. Seller financing was a fantastic option for the seller. The seller told me that he would like to sell for $525,000 with $50k down. I submitted two offers. My first offer was with $50k down. At that price, the highest offer I could write was $425,000. My second offer was at full asking price with 2% down ($10.5k). When I was deciding how to write my offers I based my first offer ($50k down) on a 6% CoCROI because I would have to raise that money and needed to guarantee my investors a minimum return. I wrote my second offer based on me breaking even. I justified this because I could tackle this down payment on my own (no investors) and I wasn't relying on the cash-flow to get into the deal. The comps on this property came back around $600,000, so I knew that right away, I would have equity in the property. Therefore, breaking even made sense for me. In using these two methods for my analysis, I arrived at an interest rate of 4.99% interest only. That is where I had to be in order for my numbers to work (break even). I sent in my offer, and he accepted the 2nd offer! He didn't really need the $50k, and the $2140/month was very appealing to him. We were under contract!
These were my numbers:
Purchase Price: $525,000
Down payment: $10,500
Interest rate: 4.99%
Monthly Payment: $2,139.46
Term: 60 months, with a $5,000 option to extend another 5 years.
Earnest Money: $500
Gross Rents: $3,450 (this is what the seller told me)
Vacancy: 4%
Property Management: 8%
Repairs/Maintenance, Cap Ex: 8%
Utilities: $200/month
Cash-flow: $0/month
Due diligence brought out some interesting things. A boiler unit and 4 water heaters are on their last leg. The sewer main is 80 years old. 4 out of 6 units tested positive for meth (0.88 ug/100cm^3, or below the maximum allowed by the health department). All in all, it was looking like we may have $30k-$40k of repairs that might need to be done in the next few years. Yikes!!
We countered with the seller. I wanted to negotiate my monthly payment down to $1800/month (equivalent to a 4.19% rate). I thought I was being totally reasonable. The seller wouldn't budge. I think he knew that he was giving me a deal on the purchase price, rents are low, and those expenses aren't guaranteed (except for maybe the meth clean-up ~$3000). I was super frustrated, and nervous, and ready to wholesale the deal. After looking at my numbers, again I realized that this property may cost me $400/month if those repairs all hit at once. That number seemed really scary to me at first, in fact, I'm still not super comfortable with it.... but we decided to close anyway. We had already spent a bunch of money during due diligence, and just by closing we would have $75k equity in the property.
My W2 job and my credit limit (fingers crossed I don't have to use it) are acting as security for me to keep this property alive. We closed and this is what we have done since then:
Rents are low. Units are made up of (3) 1bed/1bath units (rents between $450-$525), (2) 3bed/1.5bath units (rents between $595 and $650), and (1) 2bed/1bath unit (rent at $550). We immediately raised rents to $3800/month. Here is what I am planning for the deal:
Debt Service: $25,673.55
Gross Operating Income (4% vacancy): $43,776
Total Operating Expenses (Property Taxes, Insurance, 8% PM, 20% Repairs/Maintenance/CapEx): $17,716.44
Annual Cashflow: $386.01
In the next 5 years, my goal is to get rents up to $5k/month. With the interest rate we are getting from the seller, I don't know that I'm too excited to refinance, but if we can get the rents up to $5k/month, we ought to be able to sell for $750k-$800k. If things are going smoothly, and we want to renegotiate terms with the seller, we may exercise our option and keep this in place for another 5 years. We will have to see where things are at in 5 years.
All-in-all. Not a cash cow right away, but I think we will be able to turn this property around pretty quickly. Rents are still low. Rental comparison suggest we should be closer to $4800/month gross rents, so there is room to grow. Since we are saving pretty much every dollar that comes in, we hope to be able to take care of those expenses as they come along. I don't plan to take a paycheck until there is $12k Capital Reserves in an account, so it may be slow going.
#1stMulti #1stSellerFinance
What made you interested in investing in this type of deal?
I have been looking for a multi-family seller finance deal in Utah, and this one fit the bill.
How did you find this deal and how did you negotiate it?
I met the seller at a NUREIA Luncheon. Right place right time. I determined the sellers needs and then gave him the best that I could do. It worked. Negotiations while under contract were not good.
How did you finance this deal?
I borrowed the down payment $10.5k. The seller carried back the rest.
How did you add value to the deal?
Immediately raised rents.
What was the outcome?
A property that I will be able to hold on to for a long time, with lots of exit strategies in the future.
Lessons learned? Challenges?
Negotiating is hard. Meth isn't necessarily a deal killer. Sometimes it is worth not cash-flowing immediately.
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
I had a ton of people that I talked to about this deal. I couldn't have done it without them and their advice!
Alan Walker
Jacob Howell
Cody Reeder
Dominik Delgado
Mike Lloyd
