How would you handle this.
I’m trying to close a deal on a 30 unit 2 bedrm apartment bldg by using a master lease option. The asking price is 1.8. I was thinking about submitting an LOI (
Letter of Intent) offering an even 2M, seller finance at 7% with an option to buy and zero down. Its 100% occupied rent estimated at 800.00 per unit
What are your thoughts?
Hi,
You are kidding us? Is this an April fools joke?
30 units x $800 = $24,000 10% vacancy factor = $21,600 per month.
You never ever want to buy an apartment building and not factor vacancy. In fact avoiding recognizing this can cost you a loan approval as it is expected that professional investors who are qualified to manage something this size know vacancies are a fact of life sooner or later and must be factored in.
Now using the 50 / 50 rule you have $21,600 divided in 2 (50/50) $10,800 per month as NOI (Net Operating Income) and $10,800 per month for expenses and reserves.
$2,000,000 @ 7% as a 30 year amortized is $13,306 per month!
$2,000,000 @ 7% interest only is $11,667 per month!
Your cap rate at $2,000,000 is 6.5
Your cap rate at $1,800,000 is 7.2
$66,666 per unit at $2m
$60,000 per unit at $1.8m
This property produces a very low cash flow.
For a master lease option you should be looking for a property with a 12 to 14 cap rate producing good to great cash flow, class C needing some work but not trashed and producing some positive cash flow (Cash returns).
This is an albatross for a master lease option and at this price should be a class A property! (Less than 10 years old with zero deferred maintenance, in great modern condition with all the upscale upgrades discerning upscale renters expect!
I would look at your strategy because this one will head you toward failure as financially this is not due able for your strategy!
GR
GR,
I GREATLY appreciate your advice! This is the very reason why I made this post. Looking at the things you said makes a lot of sense to me. It would of been a financial disaster.
I'm just trying to get started in the apartment side of investing and really don't know what exactly to do. Once again thank you!
:beer