If I was the owner I would ask for one half down. Sense you are questing the down payment do you have great credit, reserve account in case something go wrong with any of the units, have you ever manage apartment,.
Okay, very interesting. Right off the top…
$150,000 GSI
<$ 75,000> Less Vacancy and Credit Loss (currently 50% of GSI)
<$ 67,500> Less Expenses (not $30,000, forget that.) 45% of GSI
$ 7,500 NOI (Cash Flow Before Debt Service)
<$ 28,778> Less Annual Debt Service ($400k at 6%, 30/yrs)
-$ 21,278 Annual Pre-Tax Cash Flow
CAP RATE: NOI divided by purchase price equals 1%
Annual Pre-Tax CASH on CASH Return: NOI divided by down payment ($275,000) equals 2.7%
Pro Forma
$150,000 GSI
<$ 7,500> Less Vacancy and Credit Loss (5% of GSI)
<$ 67,500> Less Expenses (45% of GSI)
$ 75,000 NOI
<$ 28,778> Less Annual Debt Service ($400k at 6%, 30/yrs)
$ 46,222 Pre-Tax Cash Flow
Pro Forma CAP RATE: NOI divided by purchase price equals 11.1%
Pre-Tax CASH on CASH Return: Annual Pre-Tax Cash Flow divided by down payment equals 16%.
Tell me what you think. Don’t argue with me over the 45% expense. This isn’t negotiable for our discussion. (Unless the seller can prove with her schedule E that her expenses are less.)
Until you can increase the rents by at least $21,278, you’re sucking drain water on this project. (edited)
This property is not only not performing, it’s got a negative worth on paper. And if it’s actually the economy, and not poor management, that’s driving the occupancy down the drain, you have no business buying this property. You can’t control the economy. You can only control the management. Sometimes you can use management to overcome some economic issues as in lowering rents until you’re competitive. However, how low can you lower the rents, before you can’t afford to maintain the property? There’s a rental rate floor that you can’t go below without undermining the operation. Last I checked I needed $350/unit minimum just to keep the doors open, forget making any money.
This building’s average rent per-unit is only $462. That’s scraping bottom already.
Tell me what you think.
javipa i like the way you break it down for new comers.
I would worry about anything listed as pro forma… they generally make the company look better than they are and in better financial shape than a real balance sheet, over time, will reflect.
Wow, what kind of TI calculator are you using to determine that. Obviously I need to figure out how to do those type of calculations before I even consider buying a commercial property. Guess all things that sparkle aren’t gold when you look at the hard numbers.
Speaking of those hard numbers what exactly does all that mean?
Looking for more deals… thanks for all the analysis Javipa!
Here’s a deal that it looks like I could possibly squeeze into. Although it seems like it needs a lot of money to repair and management issues which you said was what to look out for.
Price 2,800,000
Units 351
Size 303,000 SF
Price/Unit $7,976
Occupancy 20%
Year Built 1971
Lot Size 20AC
95 units rehabbed
246 units require various repair
Asset fell victim to poor management
1Br/1Ba 48 units $385 760sqf
2Br/1Ba 286 units $450 860sqf
2Br/1.5Ba 17 units $550 1,195sft (Townhouse)
10% cash downpayment
Broke, you made me laugh so hard my family wants to know what’s so funny!
You have PLUCK!!!
With just a glance here, this property is probably worth about $1M cash. However, to get more money, they’re willing to finance it for over current retail, because this project not only sucks drain water, but is emptying the septic tank with it current negative cash flow, and offers such little upside at this price, even if you can bring the occupancy to 95% without spending a $1M in repairs.
Your rents are barely over $350/mo which from my perspective barely covers routine operating costs, much less any debt service. And then it’s pushing off practically no spendable cash.
We can do specific numbers later to disprove my opinion. Meantime, plug in the same assumptions on this project as we did with the 27 units and see where we stand. Assume 50% total expenses and subtract a debt service payment based on the terms you said the seller was offering, and see what the numbers tell us.
On the newer 27 units… I was pooh-poohing them if it’s the economy driving down rents. However, let’s say it’s just bad management. We would just offer to trade deeds and call it a day. We (editorially speaking) could move into the manager’s apartment and manage away. It won’t require full time hours (after few months), and we can still hire a retiree to do our routine maintenance and repairs by calling a nearby church and asking for referrals.
We don’t know what the seller owes, but if she owes something less than $200k, this could actually turn out to be a sweat equity builder for us, albeit low leverage. We could also make $200,000 just renting up the vacancies (assuming we have a management solution, and not attempting to overcome a depressed economy).
We just need 20 lease ups to turn this baby into a potential cash cow. What’s more, if the original loan is more than 10 years old and it’s long term financing, too, we will have a fast loan payoff. Then that $200,000 we took over disappears and by then our net worth is hovering around $1M. Not a bad move taking over a significantly under performing property, especially if this project can be turned around simply through better management.
javipa you were laughing so loud we though a hurricane was coming through.
Can’t say I like being the joke that maintains your happiness in life.
Obviously you are being lazy for thinking your prior accomplishments give you a license lack taste.
But I’m not here to insult you more than once Javipa just expressing my response reaction.
You like the first deal better but it’s in the middle of nowhere off a highway so the chances of maintaining a marriage at that location are simple to hell no.
So another deal must be sought.
In the meantime I’m studying up on notes.
Structured properly the right note is a very liquid asset which I can still use to get into multifamily.
Thanks for the advice though.
Wow. I had no intention of insulting you whatsoever…
If I wanted to insult you I can do much, much better than that. I apologize for hurting your feelings.
Obviously I didn’t express myself very clearly. The fact is, I’m enormously impressed by your ambition. “That” is what made me laugh. I wasn’t laughing, because I thought you’re a fool.
The fact of the matter it’s easier, to guide someone who wants to move forward (even if too quickly), than attempting to direct a parked car. It’s much easier to slow someone down, than speed them up, and you have no problem maintaining speed, evidently.
Even so, you cannot allow yourself to be this sensitive and make it in this business; one that depends so much on relationships and communication skills (never mind mine, evidently). Moreover, negotiations are the core of this business, and allowing oneself to go off half cocked, is the instant recipe for failure. Many of us in this business have had to eat S–t sandwiches more than a few times, in order to move forward and accomplish our goals. We tell everyone it’s chocolate on our lips.
That all said, we shouldn’t waste time with fat heads. I won’t. Meantime, I’ve been quite eager to spend time discussing your ambitions, however, if I’ve got to walk on egg shells…to go further. Forget that.
Do I have to walk on egg shells? Or am I over?
Again, I do apologize for hurting your feelings. If you look over my history of postings I think you’ll find that I’m mostly respectful.
The 27 units being in the middle of nowhere, is most likely the reason the project isn’t full, not the economy, per se. It’s the lack of people. Another bad location is in the middle of a block of apartments, all competing for the same zero-sum number of available tenants.
Javipa,
Sorry for being such a downer. I’m just not in the best shape financially.
My wife is going on a 50 day vacation to visit her parents in a month and needs 5k for me save face in her parents eyes.
She hasn’t worked a single day since we’ve been married. :banghead
I spent the day doing interviews at car dealerships today… (Having to take your original advice)
Posted my F-150 for sale on craigslist :crying2
If things weren’t so bad for me I wouldn’t have taken such offense so I apologize.
What do you think about this potential deal?
10units total 2 buildings
The property consists of 2 beautiful buildings
Clean and well maintained building
The first building consists of 7 apartments
The other building consists of 3 apartments
It has a high rent roll with positive cash flow
Quiet block
Close to transportation and shopping
Sellers are motivated
Gross rent roll - $118,380.00 per year approx.
The Price is $1,050,000.
Yowch! They’re asking 105k per unit for units that rent for approx 1k per month each. That’s really expensive IMO. Payments on 1.05MM for 30 yrs at 5.5% (a reasonable rate in today’s market from my experience) would be $5961.78. That only leaves 4k/mo for taxes, insurance, and all of your other expenses. Oh and there’s supposed to be profit in there somewhere too. I know it looks like you could put a substantial amount of money down for this deal, but don’t think you can make this a good deal by just putting more down. A dog is a dog…period.
Because this is a beautiful property in good condition, they’re asking a huge premium price. I would stay away from it. Not enough room there if things go wrong.
Broke,
Forget the $5K vacation. I don’t know how old you are, but that seems like a really short-sighted, if not emotionally immature way to handle money. Forget THAT!!! It’s time to be adult about this situation. You’re outta cash… and your wife’s $5,000, face-saving, vacation is on “ON HOLD” until further notice.
I can understand the strain here very clearly. I’m not sure there’s anything harder on a marriage than a lack of money.
As investors, we’ll be under a financial strain again somewhere down the road. How we handle this challenge today will directly impact how we handle future challenges. We depend on, and build on previous experiences.
For example, we might discover one day that we’ve got seven vacancies erupting all at once, and we’re down seven thousand dollars against a now-overdue, ten thousand dollar mortgage payment. It’s at this point that we either keep our heads and focus on a solution; fill up some vacancies; or we go on vacation. :anon
I’ve been told that it’s better to keep a day job until you can replace your income from real estate. However, would say that you want twice your current income coming in, before you quit your day job, so that you’ve got money to play with. FWIW
On the prospective units:
No. Units: 10, $ Per Door: $105,000
Price: $1,050,000
Down: $300,000 (equity trade)
Balance: 750,000 (30/yr, 6%)
Payment: $53,959 (annual)
Operating Numbers:
$118,380 GSI
<$ 59,190> Less All Expenses
$ 59,190 NOI
<$ 53,959> Less Debt Service (annual)
$ 5,231 Annual Cash Flow
CAP: 5.6%
COC: 1.7%
So, the seller is ‘motivated’ huh? I’ll bet.
This may be too creative by half, but we don’t care what the price is. We care about the terms. So, we offer them the full $1,050,000, no down, no payment and no interest for 5 years. Hey, at least it cash flows!
Of course there’s gonna be some middle ground reached before this thing ever sells. An 8% cap would work with a $300k trade. The price would be $627,375 (rounded to $630,000) and you would still owe $327,375 with a payment of $23,553/yr with roughly $26,637 in pre-tax cash flow. That’s nearly a 9% annual pre-tax return on your equity. Of course at a 10% CAP the numbers just get better.
The problem with small, attractive, pride-of-ownership buildings like this, is that the market CAPs can actually be in the 5’s or 6’s.
It won’t hurt to make a profitable offer. They can say, “Yes.” If not, you’ve lost nothing. I’m betting they have terrible financing on this property and that’s why they’re motivated. Otherwise, “motivation” means they’re looking for someone dumber than they were to buy this pretty, and yet non-cash flowing little “flower.”
Remember, we’re looking for an upside. This doesn’t appear to have one.
PM me for a worksheet that will help you streamline your analysis. This post and analyze method’s gonna get wearisome for you, before we ever get good at analyzing numbers. I recommend to every newbie that they analyze 100 data sheets before getting serous about making offers.
This is normally a slow process, especially when analyzing numbers is not second-nature yet. So, relieve yourself of financial misery by getting the job; continue to analyze operating data and very soon, you’ll recognize deals every week, and know in your head where you need to be in the the deal to make it work for you. Then you’ll be on your way to paying for your wife’s $5,000 vacations without thinking about it.
Your wife’s probably not on board with this strategy, I’m betting. You need to make her your partner in this adventure. Help her internalize the benefits of having $150,000 of passive income just to pay for any vacation she can imagine. Be sure she benefits from what’s happening. Right now, the benefits include staying home and helping you.
Hi,
Javipa, I think your doing great helping "Broke Owner" but I just answered his post in Commercial, and I believe he has litterally been thinking he is going to actually give the deed over to an apartment property owner. I cautioned him as any apartment owner will take his property for 70 cents on the dollar in good move in condition however he loses 30% of his equity and home value doing this.
I posted to him he needs to list and sell his current property (Be in escrow with contract) before chasing down an apartment property because if it takes 6 months to sell his home most all the properties he currently see’s will be gone, sold, off the market!
There is no way I would take as an investor dollar for dollar his home and there is still closing cost’s, etc.
If he also wants to create a $50k reserve fund the only way to have this is sell his $320k home, net $300k and set up a $50k reserve with a $250k purchase fund!
GR
Broke Owner, I know a company looking for independant sales associates if you have any sales experience or desire. Let me know your phone number and I will pass it on if your interested? This company could probable put your wife to work making sales too!
GR,
I sometimes forget the chasm between my level of experience and the experience of those I discuss creative options.
In 1995 I traded a free and clear house I owned in South Kansas City (Ruskin Heights), for an 18-unit building near Independence Ave. in downtown Kansas City. We just traded deeds. In this case the realtor was working for free simply to help his friend unload the property.
The seller credited me with about $500 in security deposits. The $500 should give you a clue about his management experience. Anyway the units were fully occupied, but with only about half paying anything. He rented to drug addicts and what not. It was a mess.
I say all this to say, I traded my house for the loan balance on his building. I moved in a new manager, immediately distributed new ‘ultimatum-style’ lease offers that basically read, “Pay and Sign, or Quit”
Meantime, the transaction closing cost me recording fees. The recording fee money effectively came from the “security” deposit (singular) I inherited. I didn’t have to fund insurance and tax impounds, loan fees/costs, or title insurance, and as I said earlier the agent was working for free.
Also the huge advantage of using Sub2 financing, which made this deal possible for me, was that the seller and I just verified each others titles (actually the seller just looked at the outside of my house…without ever going in side, before we closed…!). So, once we were satisfied that the equity was in my house, and there were no surprises, it was brain dead easy and cheap to close.
To sum up, the seller couldn’t manage an apartment building out of a wet paper bag and was willing to accept my offer to protect his credit and recover half of his down payment.
So, if Broke were to find a buyer willing to trade deeds, subject to the existing loans, he could practically use the security deposits to pay for the closing fees, since in this case title insurance is not mandatory, because there is no new 3rd party financing involved.
Yes, there’s lots of moving parts here, but the fact is Sub2 financing eliminates 99% of the conventional overhead costs.
I’m not going to weigh in on the advice you’re offering Broke. I just wanted to clarify that Broke doesn’t need to list and sell his house, in order to trade it to an apartment seller. He just needs a clear title and enough money to record his own deed. The seller can pay for his own.
BTW, earlier I did the same thing on two other income properties, but it did involve a wad of cash and paying realtors. I learned later to stay away from listed properties for this reason.
Hi,
I have no idea whether Kansas City is your home but I was there in Kansas City during 1995 - 1998, in fact we could have driven right by each other.
At one time I owned 35 to 40 single family homes and close to 300 unit’s of apartments there, I enjoyed going down to the plaza for dinner and drinks as it was one of my favorite places to eat. My construction company rehabed about 25 to 30 apartment complexes during 95, 96 and 97.
I had my construction yard and offices out on old highway 40 between Kansas City and Independance.
I believe that Broke Owner needs to sell his home and then buy something with his net proceeds, if his wife can not take a vacation to mom and dads then they don’t have the cash to move and absolutely zero prudent reserve. He needs to have $50k as a minimum reserve if he’s going to try to own and operate an apartment building for preservation of wealth and a way to create cash flow!
You and I could trade a property for a property and have the cash for a reserve, Broke Owner does not even have $5k to his name! If someone approached me to trade me a home for one of my apartment buildings I have for sale I sure would not take the property for retail value because I would be looking for cash and would have cost’s to sell, hold, etc.
Javipa ask yourself if you had one of your apartment buildings for sale, your sure not going to take his house in trade for retail value, maybe wholesale but not retail!
I would bet you have not considered a retail purchase in 25 or 30 years!
Even with no cost to own and control he needs a cash reserve for unknowns and unplanned vacancies, unit clean up’s, etc.
GR
That’s an amazing coincidence. I loved Kansas City.
I think you’re right on all counts here, except that we’re not talking about sellers with options. I was capturing a discount price on the apartments when I traded my house. The seller was capturing a solid asset that was rented and actually producing cash flow.
This deal would absolutely not have happened if the seller knew how to manage property. At the point of our deal, he was just happy to get out, without screwing his credit, and losing all his equity.
I was happy to get into it, because of the potential cash flow I could achieve, which was about six times per month what I was getting on that old rental house. So, it was win/win.
Not everyone wants the same thing. The seller wanted to limit his losses. In the meantime, I not only solved that problem, but I offered him a producing asset that was simple to handle. If he had waited for a conventional buyer, he would have been in foreclosure by then. I wasn’t willing to make back payments, so his proactive efforts enabled me to solve his problem(s).
Regarding reserves… it’s a must if you want to secure conventional financing. However, with Sub2 transactions, nobody tells me how much money I have to have in the bank to close.
When I traded for that 18-unit deal downtown, I didn’t have much of a cash reserve. That made it all the more necessary to put the cap on the no-pays, and immediately apply my management skills to the project. I had no margin. Management skills included how to negotiate most of the deadbeats out of my building without going to court.
Now, I don’t recommend this, but emptying a unit onto the sidewalk and letting everyone think you’re a psycho really helps get the troops in order. Never mind the unit I scraped clean was actually empty. But it looked like I just did a “ad hoc” eviction of a tenant. Coffee tables, couches, clothes and a toaster for good measure all made a nice impression on my tenants. I had several immediate skips as a result.
Before that, I threw one deadbeat’s crap out a 3rd floor balcony, onto the street, while they were out. The police stopped and asked me and my maintenance guy what was going on. We told them, and they appeared to get a kick out of it, especially when they learned the name of the tenant we were “helping move.”
That said…I discovered a few days later, it was “MY” furniture I threw over the balcony…! It was a furnished apartment…! Oh, well. It still made a nice object lesson for my customers as to what they could expect from me, if they tried to screw with me.
Of course that doesn’t include me towing the out-going manager’s dead car from the parking lot. The tenants staring out the windows while the tow truck yanked that '82 Buick across the pavement, while making the most hellish screeching sound, was just the best! :beer :evil
Try not to sell your home. you need to live in your home. I know you probably want to sell your home because you need the money to live on, but I think a better option would be to rent out the rooms in your home and at least you’d get some money to live on. Of course it’s not easy living with strangers, but it is still better than selling your home.