please help! first 4 plex.

General Real Estate Investing
1

Hey guys. I need a little help. I am meeting with the seller this friday. The 4 plex is in good shape, needs no re-hab, and has all 4 units rented. The lady is an investor who owns about 15 single family homes. She has owned several 4 plexs but is selling them due to "age and not wanting to deal with lower income/apartment tenants. " here’s the numbers as well as I know about this.
Goi 21,600

Tax/insurance. 2000
Vacancy. 2160
Maintenance. 2160
Management. 2160
Total exspenses 8480

Noi. 13120/95000
Cap rate 13.8 percent
I figure worst case is a bank loan for 76k 20% down 6% interest for 30 years. 5460
Noi. 13120. Minus
Mortgage. 5460. Equals
7660 profit year one. 7660/19000 (down payment)
That equals 40 percent roi.
I would attempt seller financing with less or no money down.
I would really appreciate any help with my numbers and if you guys thini this sounds like a good deal. It does to me. Thank you.

2

Here’s my suggestion: one, inquire at city hall and the fire department if there are any outstanding work orders on the property. Two, do a title search to learn a little about the history of the building, what she bought it for, and know what equity the seller has so you can try to negotiate for seller financing. And, third, the expenses look a little low, so ask to see her income taxes for the past 3 years to verify the numbers. Then, based on what you know, put an offer down conditional on home inspection, financing and transferring over insurance. Good luck.

3

Assume 50% overhead, and use that as your working NOI.

Anything else and you’re turning this into a non-profit, if not a gamble.

The seller may actually have a low/no vacancy rate. This is not uncommon for someone who’s owned property for a while. They get lazy about raising rents, because it actually requires attention to keep units at retail, and marketable. Retail-paying tenants want stuff fixed…

All that said, you know the owner wants out, because she’s too old to manage low-end units.

I’m betting she would love to maintain the income, if she didn’t also have to manage…

You might consider offering her the NOI she’s getting now, which for our discussion would hover around $10,800 less current debt service.

Assuming the cash flow was $4000, you would offer her that amount on an annual basis in return for 100% financing.

She won’t do better than that, no matter what other options she’s considering…

Meantime, the upside for you is, no large cash outlays, and significant rent increases. I’m betting her rents are $50-75 under retail per unit.

$50 x 15units = $750/mo new cash flow to you, or $9,000 pre-tax annually.

The issue is, if you take title, the taxes will go up. If you were to offer the seller a Master Lease, coupled with an option to buy, the taxes, insurance, etc. would stay the same.

HOWEVER, a verifiable, increase in the NOI would theoretically add at least $100,000 to the value of the property, depending on what the market cap is for your area.

Now, this valuation doesn’t apply to single family/duplex/triplex structures. Those values are determined by comparable sale prices, not income. However, the four-plexe’s value will be affected by a larger NOI.

So, once you’ve increased the NOI, the value goes up by $100,000 on paper, and perhaps you could borrow enough to pay off the seller, without coming out of pocket at all. (You would have to do some more homework to prove this was true).

If the seller’s original price isn’t much different than your price, a plain, old seller financing option might be the way to go.

If you frame the 100% seller financing option as an “annuity” style payment arrangement, it will appear much more attractive to a retiree. The ‘best’ annuities, are the ones that go the longest, not the shortest.

So, a 30-year annuity-style payment arrangement sounds terrific. That, instead of ‘you’re gonna finance me for thirty years.’

Anyway those are some thoughts that come to mind regarding 100% financing.

4

Thank you for the replies. Its definitely giving me some ideas on where to go from there. I think there may be a little confusion, its a single 4 plex at 95k. There are not 15 units to raise rents on, only 4. Raising rent is certainly a consideration but I am trying not to factor that in on my determination to purchase.
I understand just using the 50 percent rule and will use that from now on.

Goi. 21600/year
Exspenses 10800
Noi. 10800
Noi/purchase price =11.3 % cap rate.
I will research the property some more today. Any more ideas on how to structure the deal?
Thank you

5

Title changes causes property taxes to go up?

6

My uncle taught me to create a portfolio book that contained past deals, testimonials, professional associations, and references to show sellers, along with all the contracts I would need to use.

This portfolio was necessary to building trust and credibility with sellers, so that that there was lower resistance and acceptance of my creative financing offers.

It was most important when I needed to get in with nothing down, and have the seller carry the entire purchase price.

The sellers that could walk away with nothing, needed to know I was reliable, and wouldn’t tear up their house, their credit, and jeopardize their equity, etc. They also wanted to know they would get paid, and as scheduled.

Most investors, negotiators, and sales professionals know this portfolio as a ‘credential book.’

There’s so much to be said, but I would absolutely assemble one of these, and if you don’t have any deals to show off, at least have some testimonials from someone who can attest to your reliability. If you don’t have any friends that you can rely on this way, it’s time to make up a few… Hey, nobody is a better reference of ‘you’ than you? Right. You do what you gotta do.

Later when you’ve got some deals under your belt, you’re gonna ask for testimonials and referral letters, even if you have to write them, and get the clients to sign them, and photographs of the “dog properties” you bought.

I moved into a new farm area, and the houses all looked different than what I had been investing in. I mean nobody had board and batten siding, and basements, much less snow. So, I just presented sellers with pictures of houses that looked like their houses, instead of ones I actually flipped, and informed them that those were houses like I wanted to buy.

It made sellers feel more comfortable, when they perceived that they weren’t the first high-wire act I had performed, so to speak.

Anyway, hope that helps.

Frame your offer in terms that benefit the sellers, as I outlined previously. Always have a reasons for what you ask for, and ask for more than you want, so the seller can “work” to give you all his equity.

7

Using fake references and pictures of houses you’ve never owned saying you did to secure financing is called fraud.

8

I think you should re-read what I wrote, and reconsider.

Meantime, you can shuck and jive, instead of showing sellers how reliable you are, and see how that works out for you.

Meantime also, Officer Fife, I didn’t say to show ‘fake’ houses, and say you owned them.

And just for giggles, what kind of references are you imagining someone using, that could possibly be used to secure bank financing? I’m curious.

9

Let’s go through your previous post. You’re telling someone buying their first four plex that has no previous deals or references to build a fake portfolio: "This portfolio was necessary to building trust and credibility with sellers, so that that there was lower resistance and acceptance of my creative financing offers.

It was most important when I needed to get in with nothing down, and have the seller carry the entire purchase price.

The sellers that could walk away with nothing, needed to know I was reliable, and wouldn’t tear up their house, their credit, and jeopardize their equity, etc. They also wanted to know they would get paid, and as scheduled."

Why else would you suggest to a buyer with no previous experience to make a fake portfolio to secure no money down financing? You’re telling a first time buyer to be dishonest and commit fraud and to jeopardize the seller’s equity. Closing a deal is one thing; running one profitably is something else.

I have a relative who filed for bankruptcy over a four plex after losing a day job. I know another that lost one to foreclosure after having a nervous breakdown. I also met a successful caterer at a commerce convention that lost a lot of money on a four-plex and sold it at a loss because she was clueless on how to screen for bad tenants and she wouldn’t shut up about how the system screwed her after I told her I owned apartment buildings and she wouldn’t stop following me around trying to tell me everything evil that the tenants did to her even though I owned 8 times the apartments she ever did.

She thought that running an apartment building was like selling pastries and she didn’t need any rental education or mentoring. Renting apartments is not like selling pastries to anyone who has cash. It’s not that the system screwed her; it’s that she had no training and was clueless to how to run a building. Rental housing is a different ballgame from catering and it requires some property management education. I’ve seen it all. And to suggest that a buyer passes all those pitfalls of inexperience over to the seller and jeopardize the seller’s equity is fraud, bad karma and plain out wrong. It tells people something about your character as well. I think it’s better to create win-win situations and help sellers out with their problems and sleep well at night, not screw them over.

10

Well Barney, taking my advice, and stretching it to some absurd conclusions, based on some personal anecdotes of yours, is hilarious.

What I didn’t say was, “If you’re an incompetent knucklehead, you you should forge up some history, and fake sellers out, and take advantage of them.”

Frankly, anyone with that intention doesn’t need advice from me, and that wasn’t my intention to advise that here. Otherwise, you would find evidence of that in several years of my posts here.

I’m not responding any more to you on this thread. My post stands on it’s own, and anyone can take it, or leave it.

Out.

11

I’m not stretching anything to absurd conclusions. You’re telling people to commit fraud. You are telling novices to approach sellers without ethics and integrity by suggesting they make up fake portfolios to secure no money down seller financing. Read what you said in the previous posts 10 times. It’s black and white, not grey. And it also goes against your character as to the kind of person you are. What goes around comes around.