If I were to pursue this property what should my offer be?

My background. I have a primary SFH, invest SFH, and invest condo. My invest SFH is breaking even and my invest condo is neg cashflow by $1k that I cannot sell in the Fl market at this time. My goal is to buy a multifamily unit that will net $1500 mthly and use some of the money to break even on my condo until I can sell it and put some cash reserves in the bank. Will this property meet my goal? If not, what can I do to reach my goal. I tried using the cashflow formula listed in other postings on REI but the asking price produced was extremely low to even approach a seller with or did I make a mistake on the figures.

Please help!

11 unit Apt Complex (FL)
Asking Price $639K
Gross $110736
Net $71211

Well, look at the numbers:

$639K Purchase Price

Assume 0% Down

30-year loan @ 8% = $4688.76 loan service AT your listed NOI that is a positive cash flow of $1245.49.

Assume 10% down = finance $575.1k

30-year loan @ 8% = $4219.88 loan service AT your listed NOI that is a positive cash flow of $1714.37/mo

Assume 20% down = finance $511.2k

30-year loan@ 8% - $3751.00 loan service AT your listed NOI that is positive cash flow of $1283.27/mo.

The thing I would be very careful of is your expense ratios. You are assuming about a 35% expense ratio - which will include all taxes, owner paid utilities and other expenses, management, and most importantly, vacancies and short and long term maintenance programs. Many people end up getting lower expense ratios like this because they don’t fail to take into account long term maintenance requirements - you have to replace the roof every 7-15 years - replace the carpet every 3-7 years, repaint every 2-4 years, replace the furnace/AC every 7-15 years, restripe the parking areas every 1-2 years and resurface the parking areas every 3-5 years, etc, etc,etc,etc. So what happens is your budget is enough to handle the odd clogged sink or broken window, but then you have to replace all of the rotting stairs and it busts your budget.

Generally, the newer a property is (or it has had a recent, 100% rehab) then it is possible to shrink the preferred $50% assumed budget - but again you still must budget monies for those high ticket maintenance items some time in the future. It is better to start budgeting them now so when they start coming up in a couple of years you have a cash balance to help pay for them.

If it is an older property and several years past new, realize that many high ticket long term maintenance requirements are likely to be right over the horizon. Where will the money come from - a new loan that kills your positive cash flow anyway?

Make sure your vacancy, management and maintenance budgets are using realistic numbers.

Thank you for your insight and guidance, I will ask the ages of all these things before proceding!

Sorry to be picky the 20% down example but it does show a little typo, it is not 1283.25 it is more like 2183.25 which is the only example i see working seeing how most of your lenders are going to want you to have at least 20% minimum in the game maybe more if the Debt Coverage Ratio isnt over about 1.15%… now taking a look at your example i would approach it this way.

$639000 - Purchase Price
$127800 - Down Payment (20%)

$511200 - New Loan (6.5%) I wouldnt pay 8% for commercial.
$41419 - Annual Debt Service (25yr) Real tough to get 30 in commercial.(No closing costs factored)

$110736 - Gross Scheduled Income
$39525 - Expenses (35.7%)
Thats low that thing better be brand new.
$71211 - Net Operating Income

1.72% - Debt Coverage Ratio Thats pretty high.
11.15% - Cap Rate Thats seems high to me just from loopnet.
$29792 - Pre-Tax Cash Flow Pretty high considering down payment.
23.3% - Annual Cash on Cash Return That seems aweful high.

Theres some issues with these numbers… The High Debt Coverage Ratio, Cash on Cash, and Cap Rate, also the Low Purchase Price all would point directly to the Net Income… The first place i would look is those Expenses i would bet 100 to 1 something is fudged up and the NOI isnt truly that high, a lower NOI would greatly afftect all of those numbers and make the deal look a little more realistic to me. Be careful getting involved in this one man, make sure you do a ton of due diligence and make sure nobodys trying to dump one off on you.

Good Luck,

Thanks for catching my typo CalREguy - sometimes my fingers are so stupid. :banghead2

It is also right that 30 year loans are very optimistic - although I’ve gotten them several times on seller financing. However - where are you getting commercial loans for 6%? That is 1.5% under Prime Rate. Wow.

As fars as the Cap Rate - if you look on Loopnet - almost everything is listed at 6-8%. However 0- just like SFRs, there are also a lot of properties that can be had for anything from 12-18% Cap Rate. My record was picking up a 7-unit apartment house at a 24.3% Cap Rate. Serious don’t wanter owner who had managed the place into the ground. Evicted the druggies, made repairs, improved security, raised rents and had a 180% FMV increase in 9 months. Good times. :dance

If you use the same principals to buy commercial properties as you do to buy SFRs - distressed properties and motivated sellers - there are wonderful deals possible. it isn’t just an 8% Cap Rate world

I 100% agree when it comes to seller financing anything is possible i once got a 30 yr loan on seller financing amortized over 40 yrs with a balloon at 30 for the remainder at 5.75% The cashflow was so good it should of been illegal. :police

I was also just offered a 6.75% rate on a medical office building through WAMU but im also putting down 25% and i have a 25 yr NNN lease with 3% annual escalation and corporate guarantees on the lease. I was a little stunned by the rate as well but with a lease like that what bank would say no. I always check at least 10 different banks/brokers rates and products before making a decision. Then play them against eachother and tell every other lender what the other has offered me. That always ensures that i get the best rate available and i make them fight for my business. It also ensures that my GFE doesnt get played with too much before the end of closing because i will be working with multiple lenders simulataneously so if one wants to mess around ill switch to the other.

As for this deal alot of the other numbers just dont make sense to me and personally i would do a great deal of due diligence on those expenses the net just doesnt look right to me but then again you just never know it could be one of those drivin to the ground properties like your talking about.