Need Help on First Muti Property Deal

There is an ad locally for 2- 4plex’s for sale. They are asking $415,000 for the pair(8 total units) with these terms available if needed. 15-20% down, 20yrs amortized with 8yrs balloon, 6% interest. I think I can get bank money cheaper though. All brick 2bed 2 ba built in '94. rent for $600 ea. 6 of 8 are rented and 2 having some work done currently.
I have $100K liquid to use. I have 2 low end SFH rentals that are nearly paid for that bring in 600 and 800 mo. I have good income and great credit. I’m thinking 3-5 years to retire. I am 54 now and thinking this could be my retirement income from 75 on after I get it paid for. Advice?

First off, this is the seller’s opening salvo. You negotiate to get the deal you want, because great deals are negotiated, and don’t just fall off trees.

Meantime…

FINANCING

$415,000 PRICE
<$ 83,000> DOWN PAYMENT (20%)
$332,000 BALANCE OWED (80%)
$ 28,542 DEBT SERVICE (Annual; 6%, 20/yrs, Due in 8/yrs)

OPERATING DATA

GSI: 8 units x $600/u = $4,800 x 12/mos. = $57,600
RPR (Rent/Price Ratio): 1.1%
UNIT PRICE: $415,000 / 8 = $51,875
GRM (Gross Rent Multiplier): 7.2

$ 57,600 GSI (Gross Scheduled Income)
<$ 2,880> VACANCY / CREDIT LOSS (5% of GSI)
$ 54,720 GOE (Gross Operating Income, assuming no additional income from laundry/vending, etc.)
<$ 25,920> EXP (Expenses) (45% of GSI, including 10% Management)
$ 28,800 NOI (6.9% CAP RATE)
<$ 28,542> DEBT SERVICE
<$ 542> CASH FLOW

ANALYSIS

This appears to be a terrible cash flow deal, with a 1.1% rent/price ratio, but may make a great appreciation play, if the market and demand is stable.

Only you know what the upside is here. I don’t see any unless you can show me.

Notwithstanding, somehow you need to save $542, just to break even. Otherwise, it only pays for itself, but hardly gives you a respectable return.

This is not going to be a deal that pays off anytime soon, unless the rents are significantly under market, or there is some hidden upside potential not visible from these numbers.

Is this project going to have enough appreciation over eight years, to overcome the tiny cash flow?

Is there going to be enough principal reduction, in the event that there is hardly any appreciation?

In eight years, is this project gonna need some severe upgrades and replacements, that will claw back a lot of that appreciation, and/or cash flow?

I could think of a lot faster ways to make money than burying $83,000 in this project, knowing nothing more.

But again, if you know the rents are “way” below market, or maybe the land can be rezoned to a higher and more profitable use, or Donald Trump wants it for a parking lot, and will pay $1,000,000, then why not? Otherwise, you need to chop the interest rate down to 2%, amortize the loan over 40 years, with no down, and offer a 15/yr balloon, if you even agree to an early payoff.

This way the seller gets his price, you get your terms, you get your cash flow during retirement, and everybody wins.

BTW, you annual debt service would drop to $15,080, and your cash flow would climb to $13,720 a year; up from negative $542, and go up every year after that. So, the seller gets a little more per year than you do, but he gets his price. Everyone wins.

In my humble opinion, and I could be wrong, but this seller is gonna be waiting a while to sell at this price and terms. The seller financing offer is a great starting point, but he wants the rest of the cake, and eat it, too.

So, it’s your job to re-bake the cake, and make it tasty enough for both of you to eat.

FWIW

You’ve got to find out what the seller actually wants …his price …or his terms. He doesn’t get both, if he wants to sell anytime soon, much less to you.

*** Perhaps, you want to find some units that start off with better rent/price ratios, if you’re looking for cash flow. Just saying.

Hi,

 Basically cap rate, gross rents multiplier and rent / price ratio is all predicated by purchase price and income. If you could buy this property for say $300k your cap rate would be a 9.6 cap rate and would be a 5.2 gross rents multiplier with a 1.6% rent to price ratio. Everything improves as purchase price is lower and / or rents become higher. 

Since you said this property was built in 1994 it would be a class b property and should sell in the 7 to 9 cap rate range. I have given you examples here as hopefully you understand.

Condition of the property and age constitutes the class and where in the cap rate range the property could fall, a poorly managed 20 year old property with a lot of deferred maintenance and un kept / un updated condition could be a class C cap rate even though initially age says it’s a class B.

Basically you want your purchase price to be in line with income, condition and age.

                  GR