Considering this deal, please advise

Just recently got a nice residential deal, I will get 10k when it closes.

And of course I am still on the search for my first multi-unit deal. One agent sent me a listing with a 24-page report. I didn’t really like it because it’s all nice, fixed up, and fully tenanted. A 39-unit 3 hours away from where I live. Those buildings usually go for very high price in my area. This building looks very new, maybe 15 to 20 years old.

8 one bedroom
25 two bedroom
6 three bedroom

Asking for 2.1 million, offered 1.8 million.

Gross Operating Income $331,217
Total Annual Expenses ($193,322)

Net Operating Income $137,895
Total Vacancy and Credits ($6,655)

Monthly GOI $27,601
Monthly Expenses ($16,110)

(These numbers are pretty accurate, the information is pretty detailed and contain history of up to 10 years)

i looked at all the comparable that was sold, the price is pretty much right on. Of course I know I would never pay that price. In a moment of weakness, I threw a 1.8 million number back at the agent, didn’t want to insult him with a too low of an offer. I explained I am really after something with a bit more work.

And few hours later, he says he can get me that price. lol…Oh well now I have to seriously take a look at this.
LTV 75% at 3.5%/30 would be 1,350,000 1st mortgage, monthly payment is $6062, per year is $72,744

137895 - 72744 = $65000 roughly
If I magically come up with $450,000 of my own money, I think this is a 14% return per year, which is not bad.
Of course, I would always ask if VTB is available.

What do you think?

Avoid swapping “Gross Operating Income” out for “Gross Scheduled Income.”

These are NOT the same thing.

Always start with the GSI and move down. Otherwise, the GOI infers you’ve deducted the vacancy rate. In this case, we have no idea what the vacancy factor is. Starting with the GOI and calling it the GSI, can skew the analysis by whatever the actual vacancy factor happens to be.

Just saying. :beer

Hi Jay, nice to see even on a Saturday you are working diligently to help noobs like me,

assume the vacancy is as they say, cost 6 to 7k a year, what do you think about this deal though?

Ok i will research the vacancy rate.

Edit again: I read your post 3 times before i understood what you meant, doh! :banghead


What does VTB mean?

Meantime, the stated vacancy rate translates to 2%.

That means the rents are slightly under market (slightly, not greatly).

$1,800,000 Sale Price
<$ 450,000> Down Payment (25%)
$1,350,000 Balance Financed
(75%, 30/yr 3.5% = $72,745yr / $6,061/mo)

$ 337,872 GSI (100%)
$ 331,216 GOI (97% OF GSI)
<$ 193,322> EXP (57% OF GSI)
$ 137,895 NOI (41% OF GSI)
<$ 72,745> DEBT SERVICE

       14.5%  CASH-ON-CASH RETURN
         7.6%  CAP RATE

So, what is the point of investing in these units? Cash flow? Appreciation?

Someone with a half million dollars to invest might find this interesting.

My thinking is that this property is being ‘over-managed’ or the manager’s compensation and personal ‘nest-maintenance’ is huge.

The overhead expenses on a building this new, with this unit mix, and with a vacancy hovering this low, should be around $163,000, including vacancy/credit losses.

Lowering the overhead to 50%, which is standard and acceptable, especially for a building this age, the cash flow should be over $100,000.

The management is out of control. They’re lazy, and spending money like drunken sailors. Probably the owners live too far away, and/or are too preoccupied, or inexperienced to know what the management should be doing, instead of spending money.

A 7.6 CAP is pretty good for a property this new. The play here is to cut the expenses by $40,000, raise the rents until the vacancy factor returns to 5%. This will put the property into optimal operating temperature, and raise the value significantly. $500,000 maybe?

I’m betting the management overhead is 15%, and they’ve been free to blow money on the operation, because the owner doesn’t know any better.

Yup, the owner is 85 years old, retiring, and lives a few hours away! Just as you predicted. He owns several apartment buildings and doesn’t really look at them, just dump them to management company.

I am in this for the cashflow.

I know close family members who have money and don’t know where to invest, the problem is they are not that educated about commercial real estate, so they wouldn’t trust me unless I show them concrete proof. so here is my plan:

1st, check out all the numbers, do all my due diligence.

  1. if everything checks out, the number seem pretty good to me. It yields almost 14% return on cash invested.

  2. Advertise for investment opportunities, create a corporation, offer $50000 for 9% share of cash flow on this building, once I gather $500,000 investment (for 90% share of cashflow) I can buy this building. For their money they get 11.7% of return per year in monthly cashflow, which is not bad.

  3. I have the right to buy out their shares invested within 3 to 5 years. The reason is once I can show my investors the cashflow, and that I actually acquired title under company name, i can get their financing.

haha, so what do you think, am i being naive? I am actually doing this as we speak. It’s true i won’t really earn anything the first few years, but at least it’s a no-money-down plan, and I can get this commercial unit under my belt.

Avoid interchanging “commercial” with “multifamily residential” like the amateurs do.

‘Commercial’ is generally understood as office buildings, strip malls, and even parking lots, etc. Then there’s “industrial,” which generally includes manufacturing, warehousing, industrial parks (manufacturing), etc.

“Multifamily” is specific to apartments, and applies to five or more units.

Different animals. Lots of ignorant people fail to make distinctions, or just don’t know better, but YOU should. :beer

ok, multi residential, I will remember never to use “commercial” again,

but but but, what do you think of my plan?

p.s. VTB as vendor take back? I saw people use it on listings and forums.
am I getting that wrong?

I love the plan. I would pitch it this way: “Split a half-milllion dollar profit with me.” Rather than offering 90% of the cash flow. This way, you’ve inferred that you’re getting half of everything, including the cash flow.

Sure the COC return drops to 7%, but you’re listing the overall return as 14.5% and ‘splitting that’ amount …and the back-end profits are what you’re after anyway.

Invite as few partners as possible. Invite the guy with $500k not the mom and pops with 100K. Just saying. Give him what he wants, and take the rest. You just make sure you get 50% of the back-end profits. That’s where the meat is.

I remember you saying you’re from Toronto. CMHC mortgage insurance won’t let you put a VTB on the building you’re buying, so you’re f’d.

I just refinanced an apartment building through CMHC. This is a building I’ve owned for the past 5 years. The original mortgage was at 7%. I went the CMHC route for the refi. The building appraises at $580K, which a regular bank would accept as an appraisal. BUT, CHMC used their own formula and gave me $400K and said it was 85% LTV. The CMHC mortgage insurance fees, the mortgage broker, and the legal fees were about $45K. The lender’s lawyer charged me over $6K and mine charged about $900 and did most of the work, but you have to pay the lender’s lawyer. And to top it off, CMHC is now requiring capital expenditure holdbacks of $400 a month (as a percentage of the loan) plus an advance deposit of the property taxes for half a year. I was blatantly raped by their requirements, but I got my interest rate reduced from 7% to just under 3.5%, so I get those fees back in three years. If I refinanced without mortgage insurance through another institution, i’d still be paying 7%.

Just to let you know what you’re dealing with when you’re trying to finance through mortgage insurance (legally banks cannot finance more than 75% LTV conventionally without mortgage insurance in Canada). JAVIPA left out about $200K in closing costs and cash due from his calculation. You have land transfer taxes as well, plus if the building was assessed at $30K a unit by MPAC and you pay $43K a unit, your property taxes will go up as a percentage of the purchase price, not what MPAC assessed the building at the previous year. If the multi-res property tax rate is 4%, that’s $48,000/yr for a $1.2m assessment vs. $72,000/yr for a $1.8m (purchase price)–and your cap rate goes down even more.

I’ve been in the apartment building business for 20 years. You can’t do what you just said through the Canadian banking system. Private money lenders are a different story because they’re not regulated like financial institutions that way, but no private money lenders will lend you at 3.5%. Try around 9% to start.

Dave, that’s good advice, and you’re quite right.

However, $200k in closing costs, on $1.8M ? Really? That’s not my experience. However, I’ll go with it, since I focus on seller financing nearly exclusively. Meantime, these costs just add negotiating ammunition to Daniel’s deals.

It’s very profitable to have the financing costs outlined and ready to use against a seller in one’s negotiations.

I would ‘hammer’ the seller with those costs.

That’s another reason why seller carry backs are so important to these deals. It makes the COC return dance on its head, despite the high financing costs, and charges.

Good post.

CMHC insured mortgage

$1,800,000.00 = Purchase Price

$ 25,475.00 = Land transfer tax

$ 76,500.00 = CMHC insurance fee ($1.8M x 85%LTV x 5%fee)
$ 7,800.00 = CMHC non refundable application fee ($200 x # of units).
$ 1,000.00 = mortgage broker non-refundable application fee
$ 30,600.00 = 2 point fee from mortgage broker
$ ?20,000.00 = scumbag lender’s lawyers fees
$ ?2,000.00 = your own lawyer’s legal fees and disbursements
$ 2,260.00 = Phase I Environmental Report (maybe up to $30K if property near PCB storage site or next to gas station).
$ 400.00 = CANRISK insurance review
$ 500.00 = property inspection by lender
$ 36,000.00 = lender advance on property taxes for half the year

$ 202,535.00 Give or take (plus I might have missed something or there may be CMHC holdbacks).

There may be a last month’s rent deposit adjustment, but often motivated seller’s haven’t collected last month’s rent which is why they are anxious to get rid of the building.

CMHC mortgage insurance fees are expensive, but you get it back in a few years with a much lower interest rate like around 3.5% instead of 7% conventional.

Hi Dave thanks for the input, I’ve done my reading on the subject and I have no problem with it, nor do i see where I can be “fked”

  • VTB is an nice option, and I can choose to take it or not if it’s available
  • I don’t need more than 75% of 1st mortgage financing, so in fact CMHC is an option. Of course having it as you said can reduce my mortgage payment, however I can choose to do so if it suits my purpose
    -who said I will take a private lender for the first mortgage? that’s crazy
  • $200k closing cost? doesn’t that sound even right to you? I would never have let me self be an subject of a “$20k” scumbag lawyer fee as you say, nor would i agree about the 30k lender points fee. I don’t know who you are dealing with, but you need to search for more contacts.

Regardless I have no intention to argue how much the closing cost is going to be, Dave for the years of experience you have in real estate, I don’t know why you can’t think of ways to eliminating fees. For example you mentioned land transfer tax, but instead of buying the property why don’t I just buy the corporation it is listed under? Oops i just saved 25k in transfer tax.

anyways, the point is I see opportunity where you see trouble. And just as Javipa says, wutever cost comes my way I can use it to my benefit to negotiate the deal down.

Like I said, this is how CMHC treats risk. You mentioned 3.5%. That’s CMHC insured. You must pay those fees if you want that interest rate through CMHC. You must pay those lawyer fees because of the way mortgage laws were written in Ontario(if you don’t like them, run for Parliament and change the law as my lawyer so bluntly told me). You can’t do a share transfer under CMHC because CMHC requires a 50%+ personal guarantee of personal assets for apartment buildings in a corporation, so what’s the benefit of putting an apartment building in a corporation if you have to personally guarantee it with personal assets that’s in your own name? If you can convince the seller to personally guarantee a CMHC loan with his personal assets, I raise my hat to you.

NOW, if you’re not going the traditional CMHC route and you’re fine with a higher rate of interest through other lending sources, you can do your corporate share transfer. Hey if the property is free and clear of a mortgage and the seller will give 95% financing at 3.5%, even better. I’m just saying this is how CMHC will treat you.

Where does it say cmhc won’t allow VTB? Just curious

As long as I meet their net worth requirement, and they take the 1st position, why would they care?

Yes, I am aware of those two private companies that do it. My mortgage broker is in the GTA and did $200m in apartment building financing deals last year from the lender I used. I’ve used the same guy for the past 9 years and tried others that couldn’t do what he did. He even faxed it to me in writing stating he disclosed to me how many apartment building deals he did in the past year.

How many deals did your mortgage broker do in the past year and is he willing to put it in writing and sign it? If a mortgage broker is claiming he can do these deals, have him explain what he can do in writing and sign it. There are a lot of bs’er brokers out there delivering empty sales pitches to get clients, but have no substance. If you can get them to put it writing what they can do, how many deals they’ve done in the past year and sign it, I’ll gladly take your referrals; otherwise, I’ll pass as I’m tired of having my time wasted.

Yeah as for the mortgage broker, I will test him out when it comes time. Btw, I’ve heard of one that only charge 0.85%. Go read multi residential expert website, that guy explained it.

Also, can you answer me about the cmhc and VTB question?

Since they even insure 2nd, why care about VTB as long as net worth is proven

I don’t know what website that is.

CMHC won’t let you put a VTB 2nd on top of their first mortgage when they redo the mortgage. You could put a private second on down the road with the lender’s approval and another fee, but not at closing or refi.