All Forum Posts by: Stanci March

Was thinking of posting the same question when I found this thread by keyword search. Not very many posts considering 600,000 users, most of whom I would assume have business cards. 

Anyone else have a business cc they like? 

@Marc C., always good to meet another Lawrencian! Strong possibility we have more than a few mutual friends or acquaintances.  

Thanks for the reply...you left me a lot to cover so here goes. I don't think the DSCR is too hard to figure out with the numbers I provided. It's ~1-2 depending the various scenarios I laid out, and that is on the entire amount borrowed. There is no problem making my private lender an equity partner on paper, and just treating her as a lender....or possibly even offering to pay her as lender but give her the option for equity at the time the balloon is due.

I met with a good friend of mine yesterday who owns a local bank and he thought the deal, based on the numbers provided him looked good. He thought it would be very possible to get fully bank financed at an LTV of 75-80% in 5 years and that I should be very close to there even based on my "worst case" numbers. If it ends up being close in 5 years I have enough personal cash that I could add to the deal to get me there, and I respectfully disagree that using that cash on the front of the deal makes it any less risky (at least if I'm understanding you correctly). My banker buddy suggested countering the owner's financing offer with a 10 year balloon, if she doesn't accept, negotiating a 5 year at 5% with an increase to 7% for years 6-10, and then 9% for 11-15 with no prepayment penalty, or something to this effect.

RE: your last paragraph; You seem to be making the assumption that none of this research has been done yet. Why? 

If you want to discuss market specific details or a possible partnership, feel free to message me.  

RCJH! 

@Ralph R. you have many of the same concerns as I do, and thank you for commenting. I'm meeting with a friend of mine this afternoon, who owns a local bank to discuss these very issues. The private lender I plan to use for the downpayment is a close family member so maybe we could formalize a partnership for this deal and that way the money "we" put in the deal could be considered differently? 

Hard to say about the seller's motivations. I have a few theories.     

@Marc C., I'm still gathering documents from the seller, so far it looks like it could come very close to break even (-$12.80/month) at 75% occupancy, assuming normal expenses and nothing catastrophic. I may make an offer contingent on the owner discounting rent for the three vacancies and getting those filled. Even at a deep temporary (month-to-month) discount on those, that should help cash flows until the rental season starts up again.   

I could use my own money for the downpayment but I would rather not. I'd be curious to hear more about your thoughts on how using more of your own money makes deals less risky. My strategy is to keep as much cash on hand as possible for emergencies since these are big commercial properties. I would prefer the drip-drip of pulling from cash reserves (if that ends up being necessary), versus writing a big check up front, and not having access to that cash for repairs or to do more deals. I can still use my reserve fund to add equity when the balloon is due, which is ultimately what I plan to do.       

@Ellis San Jose, that is exactly the creativity I was hoping to find here! Are there any specific conditions you'd want to see in such an option? 

Of the top; I think I'd want something conditional on being able to secure financing by the balloon date, at rates and terms that provide for positive monthly cash flow (based on the previous 5 year's rental income minus expenses). Is that what you had in mind?   

@Bryan C. $10,839 when fully rented. $9,800 at its current vacancy level. 

Thanks @Michael Seeker! The area is desirable but the rental market is very seasonal and specific to certain tenants, much like college towns. It's actually near a military college...so if you happen to lose a tenant mid-cycle, you can very easily be stuck with vacancies until the beginning of the next cycle.

@Bryan C., I have accounted for expenses already in my cash flow models, since I have quite a bit of experience doing these for residential properties. Are there any expenses specific to commercial that you're referring to or that you'd like broken down?  

I'm looking at a package of 3 "class A" mixed-use properties with 14 doors total (13 apartments, 1 retail). The properties are downtown historical residential loft buildings with street-level retail (two of which have been converted to only residential). The properties looks to be in immaculate condition with very solid mechanicals, and the majority of tenants are military officers, who take very good care of their units and are easier than most populations to manage. Turnover generally happens annually, but is at regular and expected intervals and the properties rent quickly.   

On the surface the numbers look great to me but I've only bought SFHs before, so wondering if there is anything I may not be considering that is more unique to commercial deals. Here it is by the numbers:

Sales price for all three - $650,000

Current monthly gross - $9,866 - historical gross over the past 10 years has averaged $13,000 monthly.

I'm told that 3 tenants who were contractors, all had their contracts cancelled unexpectedly which is the reason for the drop in gross this year, but that is the first time anything like that has happened since the seller bought and rehabbed the buildings in 2005. 

The current and historical numbers meet most if not all of the metrics I use for SFH investments (1% rule, 50% rule, desirable tenants, historically appreciating area), so from that standpoint I'm itching to pull the trigger.

The kicker may be the financing. Seller is offering to owner finance with as little as $40,000 down (which I will use a private lender for @5%), at 5% on a 20 yr amort schedule, with a 5 year balloon. I will need to find another source of financing at that point. At the time the balloon is due, I will have $104,000 in equity assuming 0% appreciation. At current vacancy rates ($9,866 monthly gross) I will not likely have additional cash flow built up to add equity, so my equity of $104k would be short of the $130k (20% of $650k) needed to refinance with a traditional lender. At the historically 0% vacancy rates ($13,000 monthly gross) I would have an additional $104,000 in cash flow built up in five years, that when combined with the equity acquired through mortgage payments would equal $208,000, putting me well over the $130k/20% traditional lender mark.

Am I thinking about this the right way? What sort of terms should I expect from a traditional lender after the balloon comes due? I'm concerned that they may want more than 20% equity, or that they may not assess the value of the properties as high as I would need, or burn me on the interest and leave me scrambling for cash or a buyer.  

Sorry for the long post...thought it better to lay it all out in one place. Any thoughts, advice, or ideas would be greatly appreciated. Thanks in advance BP Community!