I am looking into investing in some multifamilies. But I keep thinking I am missing some expenses that I need to factor into my calculations below is how I am currently breaking it down and I was hoping I could get a few of you to look over them and give me some advice on whether I am hitting all my areas of expenses.
Mortgage= monthly payment
Taxes= taxes for the year/12
Management fees= (don’t have exact figure yet but I’m figuring 10%)
Insurance=getting quote from insurance agent
Vacancies= 10% of monthly rent
Expenses (cleaning, breaks/fixes)= 10% of monthly rent
What am I missing?
I put advertising, snow removal, lawn mowing, etc expenses under my management fees.
I would really love to be able to email back and forth with an expert that has great experience in this area as I wanna do this the right way.
When talking about investing in a smaller multi-family bldg, you MUST find out which utilities are paid for by the owner and which ones are paid by tenants. That can make or kill a deal. I would not pay for electric or gas for tenants. Understand you may have some common area electric (outdoor lights, hall lights, etc), but don’t pay for electric for the units. Find out how they’re metered.
Also consider 5-units and above falls into commercial financing. Commercial financing has different rules and generally a higher interest rate for loans than residential. You’ll probably have to put more down for a commercial loan too.
When you start making offers on multifamily and requesting documentation, you will find the components you are currently seeking. Start requesting docs and reviewing them…ask lots of questions until you get a good understanding of the property.
One safeguard that I use is to structure owner financing with a ‘performance mortgage.’ This is typically used in financing businesses, but isn’t an apartment building a business? You can structure a performance mortgage as a first or second behind a money purchase 1st, in favor of the seller.
What is this? It is a mortgage in favor of the seller that ties the monthly payment directly to the performance of the property cash flow. So, if the seller shows you some books on the cash flow and you are buying based upon that representation, the seller should have no problem financing a portion of this transaction with payments based upon what he is representing!
So, if the property does not perform, once you take over title and management, then the payments are prorated down based upon the actual performance. If the seller originally agrees to do some financing but objects to a performance mortgage, then he is not telling you the truth about the cash flow numbers he represents.
Thank you for your comment, that is a very interesting idea. Can you give us a realistic example of such performance mortgage deal? I am very interested in this, may try to use this with my next transaction.
yeah Rob thanks for the info. I definitely like the idea of a performance mortgage. I would be interested to see how you would do something like that. Please some us a real life example.
The seller I am talking with now has 4 properties on the same city block that is for same. Three of them right next to each other and the other directly across the street. And I am thinking these will be a good invest and give me a great starting point in RE investing. I am trying to get all the numbers for expenses and such. I already got the tax numbers and everything is looking good so far. Tenants pay for utilities so I don’t really have anything to add into the equation there. There is plenty of great parking on all the properties and could give me some extra income.
My main thing is I need to do some type of owner financing at least for a few years to get my cash reserves up. But I am having trouble finding a good way to purpose a win-win owner financing deal. The seller will do owner financing for sure. Any help would be awesome.
Ok, Fellows…I thought my posting was clear about performance mortgages but I’ll review and make a recommendation.
This is typically used in the acquisition of a business. I have used this in my offers when I buy/sell businesses as it is most difficult to verify the seller’s claims of income, especially when they are receiving cash as a form of payment, which can be the case with apartments and other multifamily properties. Multifamily investments are a real business with property attached.
If the seller is willing to do some financing, you can negotiate that mortgage to have a performance clause. As I am not an attorney and will not give legal advice, you will need to do your own investigating or consult your attorney to obtain a sample or boiler plate for a performance mortgage or a performance clause in a mortgage.
The idea, however, is to base your payments for that seller financed mortgage on the actual cash flow of the property. So here would be a simple example:
Let’s say the seller represented that the property was generating $300,000 net per year of income. Your purchase price and terms are based upon the representation of this property that it actually produces that $300k. In the mortgage given to you by the sell, you include a performance clause based upon that $300k. So, if the property only produced $200,000 ( to make our calculating easy), you would only be required to make 2/3 of the payments on that mortgage because the property did not generate what was represented by the seller. It only produced 2/3 of what the seller represented.
This example is simple and easy to understand. The paperwork needs to be done corrctly and it is adviseable to have legal help with the documents. A few hundred in fees is worth getting this one correct!