All Forum Posts by: Jonathan Bombaci

“Do not take life too seriously. You will never get out of it alive.“ ~ Elbert Hubbard

The to echo some of the other comments my biggest concern would be the mold issue. I'm doing mold remediation on a basement apartment right now. It's a small job in Northern NH but it's still going to cost $6k and take 4-6 weeks to treat the mold and they need to take the kitchen and the bathroom. So the cost of the job is adding up quick and thats on a small 1bed apartment. I'd recommend getting a licensed mold remediation specialist out there during the inspection period and try to get your arms around that issue ASAP. 

That being said pending the mold issue, the numbers seem pretty solid. The 3rd unit is tricky but if that's your bonus on the deal and it makes sense without it then I think you're in good shape. Start thinking about your backup plan, if you can't get it rezoned what else can you do with the basement space? What's the parking situation? I'm not familiar with your area but when rezoning properties near me offstreet parking is always the biggest issue (at least 2 cars per apartment). 

Interesting idea on a bridge loan. I’ve seen the 203k residential product but hadn’t thought of this for myself on a commercial loan. Would I pursue this before of after the bank appraisal? I know my primary lender (local credit union) won’t do this. Would someone do this as a 2nd on the loan or would they want to be the primary? 

A: local cap rate is 8-9% the 12 unit ARV is about $420,000 ($35k per unit).

It’s 35% excluding PM fee, vacancies, and maintenance . Including those over 50% 

I have see the larger annual bills and I do have all the leases. 

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Tyngsboro.

Purchase price: $339,000
Cash invested: $27,000

House-hack - it’s a legal duplex that we live in. Our unit is 3 beds 2 bath. The 2nd unit is a legal in-law apartment, 1 bed 1 bath with separate utilities that we rent for $700. It’s not a ton but it helps offset the $2000 a month our mortgage.

I feel like we’re close to being over extended and looking for some overall advice involving an off market 12 unit multi-family that we have an accepted offer on and just completed the inspection. Larger Multifamilys are tough to find in this particular market and this is within our very narrow target area which is walking distance to the local downtown. Maybe 1 of these comes up per year the last one was a 10 unit / 2 building property that sold for $360k in the first weekend and needed work/evictions.

Background info:

My wife and I have W2 jobs, I’m in finance and she’s in HR we make about $170k combined and are working towards FI. I also do real estate part-time on the side. We’re 30 years old with our first baby on the way. We have a net worth of about $500k

$50k cash

$200k investments (retirement)

$280k real estate equity

-$30k credit card (0% interest for 18 months).

The $280k is made up of 17 units including the duplex in MA that we live in, a 3 family in CT that I house hacked, a 5 unit and 7 unit in NH which we’ve acquired in the last 6 months. The goal is to get to 24 units in a market we like in northern NH. We’ll sell the duplex and 3 family in the next 3-6 months cashing out on ~$160 in equity.

The 12 unit is made up of 2 buildings (8/4) the majority of them are 1 beds, there’s a 2-bed and a 3 bed. All tenants are up to date and units are in good shape/clean. 1 tenants smokes in his unit but that’s the worst of it. It’s an off market deal that we have under contract for $410k the sellers rebating us $60k at closing for a net of $350k. Assuming it appraised at $410k (which it should) we’d put in less than $30k cash. Which based on our cash position currently leaves us pretty cash poor until we sell the 2 properties mentioned previously.

The property brings in $8400 a month ($100,800 per year). Total annual expenses $34,300. PM fee, vacancies, and $10k per year repair budget = $21,088. Debt servicing will run $22,107. Resulting in +$23,305 in annual cash flow ($162 per door) and a 12.1% CAP rate.

+ there is some room to increase the rents ($100 per unit would be market value).

Now for the problem we knew the property needed a roof and a furnace in the next year but since we have our salaries the plan was to just reinvest all the cashflow back into the building over next few years to get it up to snuff. After the inspection we discovered $30k worth of electrical problems, and to do the furnaces the right way will be $35k. In total with the roof, those 2 projects, and a few other surprises it’s going to cost between $80-100k in the next 18 months to get the property squared away.

But if we get this property and sell the 2 smaller ones we’ll have call it $150k in cash to cover us. Then we’d have 24 units in a centralized location which in 5 years could replace one of our salaries and bring us to Lean FI on their own. The risk is without the sale of those 2 properties we realistically cannot afford the repairs needed on the 12 unit. We did ask the seller to reduce the purchase price by $50k but let’s assume they flat out say no. Is it worth the risk?

I may have included to much info or not enough. Let me know if I missed something important.

Thanks in advance for any advice I feel like this could be one of those biggest mistakes or biggest opportunity moments. 

Investment Info:

Large multi-family (5+ units) buy & hold investment in Littleton.

Purchase price: $211,000
Cash invested: $23,818

7 family property walking distance to the downtown/main street area. Property was in rough shape due to neglected maintenance when we took it over.

What made you interested in investing in this type of deal?

I had a 3 family and 5 family in the area and wanted to add on a bigger property. This one was priced right and I new with some sweat equity it could be a great property.

How did you find this deal and how did you negotiate it?

Found on MLS - it was listed at $250,000 I offered $210,000 in the first week. They said no they had other interested buyers I told them to call me in a few weeks if they wanted to reconsidered. we ended up agreeing on a net purchase price of $215,000.

How did you finance this deal?

Commercial loan through a local credit union. They're loans are 80% LTV I structured the offer as $235,000 with $20,000 coming back to me at closing. Then with inspection negotiated another $4,000 to update the fire alarm system for a new price of $211,000 and I was able to use the $24,000 credit to offset my downpayment and closing costs. so only ended up with $23,000 into the property.

How did you add value to the deal?

Biggest problem was the heat situation. current owner was spending $12,000 a year on heat and rents were low. first thing we did was install 4 gas monitor heaters, 3 units already had them, separated the propane tanks and turned off the old undersized oil furnace. The We didn't raise rents $1 and increased the annual cashflow by $12,000 instantly. The total cost of the 4 gas furnaces with installation and service to the existing units was $7,900.

What was the outcome?

Still waiting to see but so far things are going well. We still have a couple of years of increased maintance costs to get the property back in shape but once it is caught up it should cashflow $250 - $300 per unit after debt servicing

Lessons learned? Challenges?

Have an electrician come to the home inspection. My property manager and I missed some electrical code things which is going to end up costing me $10,000 to update and does not make the property worth more or able to rent for more. Due to this I brought an Electrician to my last inspection (a 12 unit) and he found some major electrical issues which would have cost us $25-30k to correct. We were able to use that to negotiate the purchase price down.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Yes the property was on MLS so we worked with the listing agent. since I'm a licensed real estate agent I was able to represent ourselves in the transaction. Our Local Credit Union, Jeanne D'Arc, was great and I'm continually impressed with their commercial product. If you're a member of a local Credit Union they're definitely worth checking out.

I found myself in a similar situation but it was more in my late 20's when I found FI that I experienced what you're referring to. What i found was if I started or forced the conversation about FI or real estate on my friends or family it alienated them pretty quickly. It's hard to believe but some people just don't get real estate. Even less get Financial Independence, it is a mindset shift that challenges the norm and the life most college students parents have planned for them. Some people will never be willing/able to make that mental shift and that is okay.

I found when I started off the conversation on Real Estate investment and/or FI it had a very high potential to come off as judgmental or crazy risky. That might work for you but not for me for blah blah blah. It turns people off so I just stopped talking about it and focused on what I needed to do. Now that it "appears to be working out for me", which it is, I find people are asking me about it. If they bring it up I find it is a much different conversation and pieces of it sink in.

So my suggestion is just focus on you, still hangout with your friends when you can and when it makes sense but don't bring up the FI or real estate stuff unless asked about it. When they see it working for you and when they're ready for it they'll ask about it and by then you'll be well on your journey.

Investment Info:

Large multi-family (5+ units) buy & hold investment in Bethlehem.

Purchase price: $220,500
Cash invested: $30,833

Off-Market deal that I found by e-mailing people with open apartments on Craigslist. negotiated cash back at closing to reduce my downpayment. 5 family near the town center. Vinly sided, in pretty good shape other than some neglected routine maintance from previous owner. Biggest issue with property is that the heat and hot water are included in rents..

What made you interested in investing in this type of deal?

Was looking for something larger than a 4 unit to try to build some scale

How did you find this deal and how did you negotiate it?

Found this on Craigslist when the owner posted an open apartment. I negotiated it as $220,500 with $12,000 back at closing to deal with some routine maintenance then during diligence and inspection found some other thing and was able to increase that to $20,500 back at closing.

How did you finance this deal?

Financed through my local credit unit on a commercial loan which was set at 80% LTV (Loan to Value). Since the appraisal came in at $225,000 and it was a commercial loan through my local credit unit I was able to use the $20,500 negotiated above towards the downpayment and reduce the cash i had to put into the property. Now I can use the cashflow to make the needed repairs before the winter months.

How did you add value to the deal?

Rents were undervalued so immediately increased rents by $50- $100 per unit. I had the heating system cleaned and serviced and will be replacing the single heating system before the winter with a system that can be separately metered so Tenants will be paying their own heat in the near future.

What was the outcome?

So far so good but only a few months into ownership and dealing with turnover in 1 of the 5 units.

Lessons learned? Challenges?

When dealing with problem tenants make sure paperwork is perfect and involve a lawyer when needed. I probably over used/overpaid my lawyer in this case but better safe than sorry when it comes to tenant law.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I am a real estate agent and we did this deal off Market. If looking at commercial loans I'd recommend calling some local credit unions. I called 3 and 2 of the 3 were more than willing to underwrite the properties I was looking at.