Unique startup situation

General Real Estate Investing
1

Ok so me and my business partner are first-time real estate investors. We are young and have little net worth. We would like to buy an apartment building in the under $400k range. We found a REO property that is looking pretty attractive deal. Basically since we don’t have any assets and no real estate experience, my partners uncle will be another guarantor on the loan. It will be the 3 of us personally guaranteeing the loan. My partner and I are 50-50% members in the LLC that will own the building. The uncle will not be a member of the LLC and we will also be taking a small loan out from him to add to the capital of the LLC.

Does it sound like something like this could work? Would a bank finance the building as stated above?

2

Hi,

You did not give the number of unit's your looking to purchase? Since I don't know lets address this both ways. (Less than 5 units and 5 units or more.)

If you are looking to purchase a 4 unit or less property? You can get either a 75% or 80% first and a potential 10% second depending on where you live in the country? You may be able to get a 90% first loan with or without PMI.

In this scenerio you would need 10% down and would need 6 to 12 months of reserves in the bank to prove to the lender you can support the property!
Plus closing cost’s.

If you were buying 4 or less unit’s and you were going to live in it you may be able to get FHA purchase money with 3% down and anywhere between showing no reserves to needing 6 months reserves and closing cost’s.

Remember a seller can contribute up to 6% toward down payment and closing cost’s for buyer at escrow. Now with two owners and a co-signer I don’t know if under those guidelines it would even qualify as owner occupied if you were going to live in it for at least 1 to 2 years. (Or whether legally you and your partner would both have to live in it for 1 to 2 years.)

Now if the property is 5 units or more, it is a commercial property and it is common to only have a 75% first! Some lenders will go 80% and others may only loan 70% depending on location, area of country and condition.

A second TD is not common in commercial property although they do exist, you just have to hope your in an area where you might find one offered?
More common for commercial properties is asking the seller to carry back 10 to 15% and putting down 10% or so and closing cost’s.

If your getting a commercial loan you probable need a 680 to 700 mid FICO or better to qualify with the lender to manage the property. Remember a 5 unit or larger property is a loan based on the property, the borrower is assessed on ability to manage and responsible pay the loan.

I would imagion that you will need $55k to $60k minimum to pull off the commercial purchase and between $75k and $95k to pull off a 4 unit or less with the reserve requirement!

These numbers are based on your $400k property purchase price.

Good luck,

              GR
3

It’s a 26 unit apartment building.

4

You have no business considering a 26 unit building. You haven’t a clue how to own & manage that large a complex. Start with 4 or less and learn what you’re doing before you bite-off more than you can chew.

5

How about someone else. I have no room for negativity here. This building is 60% occupied with positive cashflow and it’s horribly mis-managed. It’s bank owned and I know they don’t want it taken off their hands.

6

Hi,

I think Old Guy is not being negative just trying to give you some heartfelt advice so you don't loose your shorts in your first deal.

If I see the price of a multi unit property like this at a little over $15k per unit it tells me there is a bunch of defered maintence and rehab to do!

Buying at less than $30 dollars a square foot is less than half of what it would cost to build this property today.

You have a lot of expenses to run and operate this type of building! If you project a vacancy factor and you then figure 50% of the balance towards expenses that is really what you have to service loans with!

If you buy for $400k and end up putting another $400k into rehab would the property still pay it’s debt service and allow some kind of cash on cash return for your personal out of pocket cash?

What are the unit mixes? Are they rentable in your market?

I think as experienced investors we just don’t want to see you take a loss that ruins your ability to invest in the short term future.

Coming from a bank your going to end up putting 25 to 30% down on this out of your pocket, the lender can’t carry back 15% for you and your capital is very much at risk in this kind of deal.

Your going to need upwards of $140k in cash just to buy the place, then if it needs rehab expect to put more cash in the game to get rehab money and then carry all the expense cost’s out of pocket to remodel over 6 or 8 months.

If you were independantly wealthy that would be one thing but it looks like your dragging an Uncle into this who is risking a lot for nothing? I sure would not want to put my Uncle in this position, especially when he could maybe help me on a bunch of smaller deals with less risk where I can build up money!

You have a great opportunity to do well and have a supportive Uncle, don’t waste it on a chance you might pull this off, because the realistic odds are against you with no personal capital and no experience.

Please don’t take this like were being negative as most of us old timers can admit we have lost money from time to time if we have a long investing history.

And by the way, there are lot’s of banks and lenders with these so called deals, but if they were really deals don’t you think other investors would just jump on them?

Do you think your the only aspiring investor to ever talk to this lender? These lenders and banks know the players in there area, and most investors in multi - unit properties know what’s happening in there area!

The bank already talked to Brokers and Investors in your area about this property! Either it is still over priced or it needs so much work that most investors just pass? Either way it’s probable not practicle for the time and money involved.

Good luck,

              GR
7

I agree with Oldguy you are jumping into a deal that no new commercial investor should get into until you know the basics of owning a large complex.

If it’s 60% occupied what plan do you have in getting those vacancies filled? in fact do you even have a business plan? If not no commercial lender will even consider lending you until you have a solid business plan.

Commercial investing isn’t hard but it’s not for the weak minded investor who doesn’t know how to do it.

8

All 26 units are 1 bedroom apartments and the 17 currently occupied units are rented for $550. This is below market. It’s a C building. Most of the deferred maintenance is in the form of needed paint, trim and gutter repair.

Your opinions are greatly appreciated. It’s really tough for me to give up the fight, though. I know I will eventually walk away from this and stop investigating but what is a bank to do with a property like this? I understand many other investors have passed but will the bank hold it forever or finally break and give someone a deal with tons of seller credit on the loan?

9

We are both freelancers in our current day-jobs and we have flexible schedules and plan to do a lot of the work to turn the units ourselves. We estimated turning 2-5 units per month ourselves and finding tenants through online services such as craigslist and rent.com. If we get a decent enough deal from the bank our cashflow will help us with capital improvements which will bring this building on par with other buildings in the area.

10

Also the current valuation based on the estimated NOI is around $300k. We wouldn’t offer more than that for the building.

11

A 26 unit complex for $400,000 is $15k per door. Is this a good price or not. The answer is you need to look at the books. The value of the complex is determined by taking operation income (OI) and multiplying it by the cap rate. If the complex is 50% occupied and expenses are high the OI will be low multiplied by the cap rate will give you a low value of the property. What you want to do is increase income by increasing occupancy and raising rents and reduce expenses by putting in more efficient plant & equipment, reducing turnover uncollected rents etc. That improves the OI and then you multiply by the cap rate and the value has been raised by your actions. What you will need to know is what fixes need to be done to bring the property to market levels of occupancy rates and get the rents up to market rates. You also need to know how to get the expenses down to market levels.

It is not about painting the walls mauve, putting granite counter tops in all the kitchens or planting lilacs out front.

If you paint the place and resod the front will that enable you to raise the rent by $20/month or will you have to add a basketball court? Will installing a new boiler reduce the expenses by 25% because you reduce repair costs or will you just get the energy savings? I don’t know. Before you buy this property you need to make sure there is somebody on your team that knows the answers to there questions.

12

Boiler was replaces 4 years ago.