Just thought I share a response from my buddy @Mike H. I know these posts are archived forever. Based on his advice and several of yours here I decided not to go with this deal.
No. In my analysis I was counting 8 units at 400 a month for 3200 a month rental income. And the problem I see is that even that is kinda thin. But the real problem I see is that you're coming out of pocket a lot of money on a building that doesn't have 3200 a month income or even close. Bascially only 3 of the 8 are occupied. So the seller is trying to get you to pay for the building's potential. Where is your upside there? You're taking all the risk.
Why not just go buy a building that needs no repairs and is fully occupied. I'd bet you could find an 8 unit for your all in price of 240k. And by doing so, you're out of pocket will be much much less.
i.e. In this current deal, you're putting down 27,500 and having to come out of pocket the 80k in rent. Thats crazy when the total all in is 240k. You're coming out of pocket almost 110k which is about 45%. And then you're only going to have income coming in from 3 units so you'll be losing money in the first 6 to 9 months to boot.
If you bought the same 8 unit that was fully occupied and fixed up for 240k or even 250k, you could put down 25% and only come out of pocket 60k and then be making profit right from the get go given you'd have all 8 units producing rent.
Better still, you find a building rented and in decent shape and get the seller to seller finance say 10% of the purchase. So the bank lends you 75% , the seller lends you 10% and you put up 15%. That, to me, would be the way to do multifamily.
But in this instance, it just seems like the seller is pushing all the risk onto you and there is no upside once you stabilize the property. The cash flow won't be that great. Your out of pocket will be crazy high (110k). You'll lose money for the first 6 to 9 months which adds to your real cost of buying the property.
I just don't see why you'd do this. In terms of walking. The first thing I'd do is go back and tell him this deal isn't going to work because the numbers aren't there. That you need to renegotiate the terms to make this work or you will have to walk. And I would definitely be willing to walk before going into this. There's just no real upside and TONS of risk. Thats not a good combination. And a ton of money out of pocket.
You're putting down 27,500 and the thing is going to be losing money every month until you get it fully rented which likely requires the additional 80k additional in rehab to do just that. Thats just no good.
Just wondering. You don't have any kind of due diligence period to pull out before you lose your EM? If you do, I'd use it before you even ask to renegotiate terms. If not, then ask to renegotiate terms. At the very least, I'd want him to seller finance the entire purchase. Tell him you need your money to do all the rehab in order to get this rented.
Even with that though, I still think this is overpriced. If you could seller finance 80% of a building that needed no repairs and had good occupancy and so so cash flow, then maybe. But this one doesn't have great cash flow even after you stabilize it. Nor does it have a ton of equity capture. And it has a ton of out of pocket.
I am not a multifamily guy. But I've listened to quite a few of these guys go through how they do their deals. And when you're buying a "value play" deal like this (i.e. where occupancy is super low and it needs a lot of rehab relative to the purchase price), you're supposed to be getting a huge upside either on the cash flow or the equity capture - or both.
