what is the most you would offer on this apartment building?

General Real Estate Investing
1

21 units multi residential

Total Expense : 112,825
Total Income: 221,685

Vendor willing to take back $223,000 at 3% interest payment only, only for 1 year
1st mortgage available for assume is $1.26 million at 2.99%
Vacancy rate unknown, currently fully tenanted, building in great condition, all items inspected

After all expenses and mortgage payment to above assumption, the cash flow is $38,000 a year.

What is the maximum you would offer on this building so that it would be plausible to construct a little to no money out of my own pocket??

2

Before even discussing cap rates, there’s something wrong with the math here. If it will generate $38,000 a year, how are you going to pay $223,000 after year 1? Just from a theoretical standpoint, you are $185,000 short and now bankrupt.

You need to structure a deal out of common sense like paying the vendor back $20,000 a year towards principle for 11.15 years or amortizing the payments so that it doesn’t negatively cash flow. Don’t assume you’ll be able to get it refinanced in a year or you’ll be setting yourself up for disaster as your cap rate doesn’t even make sense for a higher refi amount from the lender’s point of view. Not only that, your interest rates may go up in a year if you redo a locked in mortgage and your cashflow will be even less. You have to negotiate this logically where it won’t negatively cashflow or the vendor is just being ridiculous in his demands and it’s time to say, “EXIT, STAGE LEFT”.

Seriously, what’s the value in stressing yourself out over a property that loses money? My properties don’t loose money, so why should yours? Either it puts money in your pocket in year 1 or forget it. You deserve to get paid for owning that building, do you not? I enter deals to make my life easier not harder: I’m not banging my head trying to figure out how to make ridiculous negative cash flow properties work. There has to be logic to everything or it’s not worth buying. You get in life what you negotiate.

3

Only you can answer this question.

This starts out as a 100% leverage play. That’s OK, as long as you’ve got plenty of time to create/force appreciation enough, so that when you have to pay off the seller you can, without having to come out of pocket.

Meantime, 12/mo balloons are just bad business. This is obviously the seller’s opening salvo in the negotiations. He’s got to start someplace. Why not just start by lighting a hot, burning, smoking 12-month fuse? Ha!

You want five, to ten, years of seller financing, not 1. Or you need to come up with cash. A 12/mo seller-financed note is useless to even negotiate. It’s a non-starter.

Here’s my analysis. With 100% financing it still cash flows. This means that we would be happy with this price, and especially the terms.

We would be even happier, if the rents were under market by say $50/mo. per unit. We would jack up the rents by $50/mo, without having to do much, except maybe repaint the front doors of all 20 units…

Multiply that fifty bucks by 12 months, and then by 20 units, and all of the sudden we’ve got an extra $12,000 dropping in our back pocket. And we’ve got nothing invested in the property. Yay.

$1,486,000 Sale Price
$ 226,000 (15.5% of Sale Price)
Seller Carry Back (12/mos @ 3%)
($1,505/mo - $18,060/yr)
$1,260,000 (84.5% of Sale Price)
Balance Owed (30/yrs? @ 2.99%)
($5,305/mo) ($60,660/yr)

$ 221,685 GSI
<$ 112,825> EXP (Includes maintenance, management, 5% vacancy, etc.)
$ 108,160 NOI
<$ 18,060> Less 2nd TD Payment
<$ 60,660> Less 1st TD Payment
$ 29,440 Pre-Tax Cash Flow

7.2% CAP RATE

**13.02% Return on assumed $226,000 Down Payment.

Some other assumptions: The property needs nothing. The vacancy factor is 5%. The owner only pays water, and common lights and gas (if any).

Average Per Door Rent: $879
Average Price Per Door: $70,761
Rent/Price Ratio: 1.2%

If the numbers and assumption made here are accurate here, this is a decent deal, made even better with the high-leverage financing offered by the seller.

The deal-killer is the 12-month balloon. There’s no overcoming that nut, without simply coming up with cash, or SIGNIFICANTLY raising the rents and increasing the value by at least 20%.

You couldn’t even refinance the property in that time without at least 12-months of performance history, once you’ve assumed ownership in the first place.

After 12 months of performance history, then you could start looking for financing. Give yourself another year, and now you’re at two years right there, without thinking much about it.

**The 13% cash on cash return doesn’t include depreciation, and mortgage pay-down.

7.2% CAPS tell me this is not a cash flow play, but an appreciation play. Just saying. The low interest rates actually make this project at all profitable.

For actual cash flow, I like management-intensive properties with rent/price ratios of about 2%, or more. That means if the GSI is $221,000, I want to buy at around $525,000.

If you look, you can find owners of these in downtown areas trying to get out of them all the time. The worse looking (and managed) the more likely you can get in with very little. These are for CASH FLOW only. They don’t appreciate and require strong, consistent management application.

Hope that helps.

4

Thanks, Dave and Jay for the input!

Jay, you are always generous to help. When I buy my first multi-unit building I will send you a cheque for whatever your course’s price, because you never hold back to help. If I can get a no money down deal I will send you double that amount!

This is not an empty promise, because I started at 0 from REIclub, lost a few thousand dollars in my first deal, but now I am doing residential deals. I believe I can get into commercial, may be a bumpy ride but I am determined to get there.

I’ve taken your advice just looking through all deals that’s listed, just to learn to analyze them. It’s so surprising how many terrible terrible apartment buildings are for sale that makes no sense at all. I could dump money down toilet and still make more returns.

contemplating flying to USA for a month to buy an apartment building there.