I need a little clarification. I have always been of the mind if the property doesn’t cash flow where I want it to before I put a down payment on it then it really isn’t a sound investment. But I have been looking at scores of apartment buildings and most won’t cash flow unless you put something down. So the question is… Is it sometimes necessary to put down cash if you want to buy apartment building? Here is an example in math…
Property Price: $1,000,000
of Units: 50
Rent per unit: $500
Total Income: $25,000 a month
Total Expense: $12,500 a month
Net Income: $12,500 a month
Cash flow (If I want to take home $100 a door): $5000 a month.
Money Left for debt service: $7,500
At a 7% interest rate on a 15 year term the payment is 9000. Which means I’m not cash flowing where I would like to.
But if I were to put 20% down the payment is 7200. That actually makes me a little better off.
wooddell,
If you change the amortization from 15 to 20 years it lowers the payment to $7753 per month. The other thing I noticed is that you were using 100% occupany when calculating the monthly income. Is the property 100% leased?
For comparison purposes, when you see deals analyzed on here we generally use 30 yr amort. at 7%. That will obviously bring your debt service down, but understand you are not very likely to find someone to go out 30 yrs on an apt. complex. Since vacancy is considered part of the normal operating expenses, it’s ok to figure your income the way you did.
Justin,
When we are discussing a deal with commercial financing, it is customary to use a 15 year amortization because that is what is most commonly offered and available.
Woodell,
Chances are slim to none that you will find a commercial lender that will give you a loan with an LTV greater than 80%. Quite a few lenders are requiring 25% - 30% downpayment these days. If seller carryback is allowed, it is limited to 5%.
If you can’t bring a sizable downpayment to the settlement table, then you won’t be able to close the deal.
Thanks everyone for your input. But my question was really more about valuation. Should I treat a property like I will at 100% financing and do my analysis that way or not?
Basically it seems like most commercial deals will only cash flow after you put money down. Should I treat all commercial deals that way or should I think of it as if it doesn’t cash flow before the down payment I shouldn’t make the deal happen.
Yes, analyze the deal as if it’s 100% financed. Even if you use use a downpayment, there is a cost to that money. Also, most of my commercial loans have a 20 year term.
Mike
I must have missed seeing the 15 yr amort. listed on other posts. Thanks.