Hello, I am new to investing in commercial properties. Have done 3 or 4 family houses till now and want to graduate to bigger multi family homes (10 Unit). I am staring at a current deal with some numbers and figures that I am unable to understand, wanted to get everyone’s take before I sound stupid in front of my banker who is giving me the first lien there by torpedoing the deal.
Purchase Price -$230K
NOI - $23K
1st Lien 80% LTV → Prime + 3 → 6.25% with 3 pts.
2nd Lien 20% LTV (Hard Money or Bridge Loan) ->15% with 8 Pts with 18-24 month terms.
Exit Strategy - Raise the rents by $25 and refinance after 1 year to pay off the 2nd lien and reduce my basis.
I am trying to understand what’s the closing cost involved in sealing this deal (money out of my pocket) and does this deal make sense.
Again, I am used to taking personal mortages on my name to get the deal done. But since this is a 10 unit property it’s classified as commercial deal.
Any help is greatly appreciated to help graduate this brother to the next level.
Hi SteelCity
I am new to the forum but have background in commercial lending and commercial real estate.
On a preliminary basis I see that the property has an all in cap rate of 10%, but if you look at the equity (bridge or hard dollars) you will need to bring in its based on the NOI after the 1st DOT loan, assuming a 20 year amortization ($16.5K annual 1st debt service), your are looking at return of approximately 14% (23K-16.5k / $46K); and if you are borrowing at 15% for that short term you are loosing money on your money. That would tell me that you need to either find a lower rate for the 2nd or use your own funds; other wise that would be a deal killer up front. Also, the points you quote 3% for the1st loan and 8% for the second loan seem excessively high; all in about $9k.
I did some quick back of the envelope figures and it looks like your gross rents (assuming the 50% rule ) are $46K a year (and I don’t know if your NOI includes any vacancy and capital reserves); the result is monthly rents of $383.33. If you were to increase the rents on your tenants $25 a month, though it doesn’t sound like much is a 6.5% increase, can they really absorb that level of increase? Based on the potential rental pool, what does that do for tenant retention and getting replacement tenants? Not knowing the property, the location, etc., how competitive is that pricing for the rent?
Plus you say you want to take out the 2nd about a year when you raise your rates, etc. Assuming that you go through the whole underwriting again (yes you have to start over and pay all the costs (again)) your NOI needs to increase to $28.8K based on a 10% cap rate which is an additional $5.8K a year or $48 per month per unit (net); so I don’t see how your $25 (gross) increase will even help; you would really need to get rents up to $480 a month (versus the $383.33) to hit that, which a 25% increase in rents; you would likely see renters non-renew.
Getting to your real question, regarding general costs for closing this will really vary from lender to lender. However, based on discussion with some of my colleagues in CRE and lending these are a good estimate for what you might see, though not to any scale.
Appraisal (and review) $4K-$7K
Environmental (and review; unless you can get the lender to waive this) $2K-$3.5K
Title Insurance $1.5K-$3K
Flood Insurance $0.5K-$1K
Associated Legal fees (depending on the deal structure) $1.5K-$4K
Good Luck.
JZN
Honestly, in my professional opinion, you do not have enough information here to make a good analysis. 100% Financing is going to put you in a tight position and could effectively eliminate your ability to cash flow this property. I do not see how you will be able to pay off a $46k hard money loan in 24 months at 18% interest.
First, see if the property really cash flows. The NOI seems too “perfect” to be true. What are market rents? Can you really raise the rents? If there are lease agreements, you will be locked in.
You should factor 50% of the gross rents toward expenses (not including the mortgage payments). Add another 10% if you are hiring a property manager. If the owner will not give you a P & L sheet and/or receipts to prove expenses - walk away. Do not take their word for it.
After removing all expenses, now subtract your mortgage payments. A good investment should leave you $100 per unit cash in pocket. If you cannot reasonably see this property doing this, simply walk away.