So, as an educational experiment, I’m looking into a property to see I could make it work. I’m working on rehabing a home now to flip but think I’d be better off through rentals as this rehab thing doesn’t seem to suit me as I have a real job and rehabs take too long. I’m doubtful I could complete this deal because of my inexperience but I’d like to at least find out if it would be possible or not, with experience…
So I’m looking at a 20 unit complex, asking 1.45M, takes in 13K/m in rent. I’d need to finance it all in one way or another… using some basic calculators, guessing 6% financing and adding estimated taxes and insurance (I used 5K/year insurance which is a total guess) gives a price of 11K/mo. If I use a property manager, which I’d likely want to do for 20 units… it basically is a break even deal, which is no good!
Does anyone have any advice on how a deal that looks like a no-go like this might be turned into a winner? Maybe partnering with someone who can put some money down? Maybe it just needs to be cheaper? If it went for 1.25M the monthly is 10.1K. Thanks in advance for any input.
Your way off from being ready to invest in a 20unit building. You do not even know if you will like being a landlord yet and have no clue on figuring out expenses yet or even the PITI. First off, you can not guess what insurance will be. You can ask the current owner his cost and this will give you an idea of the min. but if he owned it for awhile his cost will be less, however sometimes if you goto the same ins. company, they may give you a break. (BTW, ins in my area for a SFH that cost 500K will run you over 10K a yr)
Taxes…you need to find out what the tax rate is. many states run from 1% to over 4% of the sale price. Again longer you own it the cheaper the tax can be.
Payments. You will need at least 5% down, but more conservative downpayment is 10-20% with most lenders. The Interest rate of 6% (well that is below the national avg and a SFH has the best rates) is way off. Try the 8’s to 9’s most likely.
Commerical financing and what the building should cost will be based on cashflow. You need to figure out what the CAP RATE is. If its under 9% in my opinion then walk. (you can do a search for the formula to figure out CAP RATES) As for cashflow. With 20units you want to cashflow at least $4,000 a month. Many investors look for $100 per door, while others want 200-400 per door.
Now if your using mgmt co, your looking at 10% at least based on the monthly Gross Rents. 13K in rents equals $1300 a month fee but can be more based on services…
Who pays electric, water, trash, sewer, gas, etc. Does it snow by you, snow removal fees in winter…Cutting the grass (you need a regular landscaper) basic maintance, does the units need updating and rehabs. How about vacanies. We love to be 100% all the time, but you need to know the last 5yrs occuppancy percentages. You need to calculate this in the PITI since you will not always collect rent on each unit and have to account for this…
Many investors will want the gross rent to equal twice there mortgage payment. This means you will have cashflow. Also need to look into the roof, how old is it???
Plus much more…read some books, read some boards and go and buy a duplex…
The main thing that will kill this deal is the cashflow. There isn’t any at that price and it would probably have to sell for half that in order to cashflow.
Also for a commercial deal, some lenders want as high as a 25% downpayment. When you’re doing just 10-20%, you’re looking at rates like 10-11%. Let me just check a rate sheet… Yep, 10% down on a 3 year fixed rate loan with a 30 year amortization gets you around 10% per year and that assumes you have A credit. Get a 35% down payment and the rates get better, around 8.25-8.75 and that doesn’t include any of the fees/points you’ll get wacked with, don’t expect any kind of no points no closing in a commercial deal.
This should pretty much kill any thoughts of a commercial deal rendering other questions a moot point unless you can get the purchase price way down. You really need to get a good finance guy in your corner before you go any further with these types of deals.
You have to learn how to walk before you can run and commercial deals involve lots of running. Stick with residential first.
I agree with YRush and HenryinMA.
Here is how I would evaluate this “deal”.
Gross rents: $13,000
Operating Expenses: $6,500
Mortagage payment: (20 year, 8%, $1,160) $9,700 per month
NEGATIVE MONTHLY CASH FLOW: $3,200 per month OUCH!
I would suggest studying the rental business, joining your local REIA, learning about cash flow and how to calculate maximum purchase price BEFORE buying anything. Then, start with a SFH to learn the ropes.
Thanks for all the input… I’m learning a lot just from listening to you guys. I’ve read some books but some are just not believeable. I’ve learned more in reading posts here in the last week then I’ve learned from books.
Books are get put they can’t answer questions. That is what makes these forums great.