We currently have $200k saved up and are looking at an 80 unit appartment building that is 100% occupied with a cap of 10.25% and a NOI of $205,068. The purchase price is $2mil. and with $400k down at a 6.50% interest rate, the property “SHOULD” take in around $86k a year in positive cashflow.
My thoughts are to go to one of my friends through networking and borrow the $400k down payment with the $200k we have in order to purchase the property. Then we were going to refinance the property through a loan agency with a 1% interest rate for the first year, 2.5% for the second year progressively advancing until the 5th year in which it would remain 5% for 25 years. Does this seem like a good deal? Am I missing anything? Are there any other questions I should ask. this seems like a feasable plan as my main objective is cashflow and not flipping.
By definition, NOI is Gross Rents minus all expenses except mortgage payment. You say the NOI is $205,068 and that you are putting down $400,000. That leaves a mortgage for $1,600,000. Forgetting the interest on the $400K downpayment for the moment, even at 5% interest and a 30 year term, the loan payments on $1,600,000 are $103,070 per year, which leaves you a NEGATIVE CASH FLOW of $17,069 per year. Moreover, no loan company is going to loan you money at 1%, 2.5%, or 5% on an amortizing basis. Current commercial interest rates are about 8% and therefore your loan isn’t even covering the interest, not to mention any principle. This is a TERRIBLE DEAL - TERRIBLE!
I guess I don’t understand what you are thinking here. Are you talking about a negatively amortizing loan? Are you betting on appreciation? How do you make money with this deal? Where did you come up with the $86K positive cash flow? Maybe I’m having Sunday morning brain fade, but I don’t get it!
I got 86K from the noi ($205,068)minus the annual debt service of $118,836 with the interest rate being 6.50%. Should this not make the pre-tax cash flow $86,232?
These are the answers I am looking for. Just so I don’t jump in a deal too fast. I thought that cashflow was the NOI minus the annual debt service, or the mortgage for 12 months.
I’m sorry - I don’t know what I was thinking when I wrote that post. I guess I’ve forgotten how to subtract. I even had the correct mortgage payment amount, apparently just couldn’t subtract it properly. You are absolutely correct. SO, PLEASE IGNORE MY FIRST POST AS I CLEARLY HAD MY MORON CAP ON WHEN I WROTE IT. Let me give it one more try:
I still think that you’ll find it very difficult to get a commercial loan at 1%, 2.5%, or 5% on an amortizing basis. Personally, I would not do an interest only or negatively amortizing loan. In fact, I think that you’ll find it very difficult to find a 30 year commercial mortgage even at 6.5%. Commercial loans for someone with excellent credit are currently running about 8%.
Can you confirm the gross rents? I’m guessing that they are about $373,000 per year or $31,083 per month. I like to get at least 2% of the purchase price per month in gross rents. which would be $40,000 per month or $480,000 per year. On this basis, the deal is thin. I like to see the positive cash flow be at least 1/2 of the mortgage payment. In this case, you well over that which is good. Finally, I like to get $200 per unit per month, although I’m finding that this is very difficult IF you include all the real world expenses. Using your $86,000 number, your positive cash flow of $7,166 per month is only $90 per unit per month, which is low in my opinion.
So, I still think that this deal is very marginal. However, we need more information to make an informed decision. If you can provide the gross rents and which expenses have been included in the analysis, that would help. Where did you come up with the numbers you have? I am always very suspicious of numbers provided by the seller and have found that they are often quite optimistic.
One of my best friends is a loan officer and I spoke with his boss. Their company does all types of loans and refinancing. I came to him with my proposal, and he said they could refinance the property no problem, even out of state with their 1% the first year…until the 5th year to which they would have it at 5% interest for 25 years. I just wanted to confirm if there was anything I was missing. It seemed a little “2 good 2 be true” so I wanted a second opinion. Now its on to due dilligance to confirm the numbers.
According to the ad,
Gross income $450,636
Total expenses $245,568
Debt service $118,836
Cashflow $86,232
My only concern is cash flow, and I wanted to maximize it through refinancing.
Rates do not dip into the 6’s until the loan amount is above 2 million. You are more than likely going to be looking at rates between 7 and 7.5% on a 10 year arm 30 year amortization.
You may want to consider a 90% LTV loan, but then your looking at rates around 11% on a 7r arm. Your Debt service would be about 205K year, in which case you will just barely meet the DSCR requirement of 1.20…and that’s if your expenses are correct.
If you could get the seller to shave about 100k off the purchase price and pay closing costs I would say go for it.
Anthony91,
I have a question for you. I’m completely new to commercial investing. Do you mind telling if you’re purchasing this property as as corporation, LLC or a partnership and why? Thank you!
I’m new as well. I plan on purchaseing it straight up and then transfereing it into a land trust and then forming an llc. The Nevada staqte corp is doing it for me. www.corpthis.com.