16 Unit Opportunity - Looking for Advice

[cchanceus]

I have come across a 16 unit building in Cleveland, Ohio that the owner is willing to finance. He is asking for 50K down and will do an interest only loan for whatever period of time with a balloon payoff of 1.05MM. I have seen his P/L and the property does make money off these term. Not a lot, but its an opportunity I would like to take advantage of. I am looking for pros and cons from the experts here. Also, I am in need of an investor for the downpayment. I can bring 10K, but will need to borrow 40K. Looking forward to your comments!

[TommyOH]

cc,

I'm also in Cleveland! Would you by chance have some more numbers you could share? I'm in the middle of a 279 unit deal for 7.5mm, so I don't want your deal, just to help.

Looking at what you have given so far, your mortgage payment would be
$83,828.16 at 7%. Typical expenses for a multi-unit are 50% of the total rent for the year. In short that means you would need $167,656 in rental income just to cover the mortgage. That means an average of $873/mo per apartment with no vacancies. I don't know where in Cleveland you are, but that's not likely unless you are in the 'burbs.

If you'd like to give some more specific numbers on rents, expenses, NOI, cap rate, what area, etc, I'll walk you through it. Just let me know.

[PMCS]

. . . I'm in the middle of a 279 unit deal for 7.5mm . . .

Makes my head spin.

I have a LONG way to go . . .

[cchanceus]

Thanks Tom!

Below is what was provided to me informally. I will be asking for an actual P/L and tax returns on the property. 1.05MM is a bit high in my opinion too, but we can start negotiating from there I am sure. The property is currently fully rented, no vacancies. Well kept as I have seen it. In your opinion, should I pursue the owner financing or try to get a commercial loan. I am inexperienced in commercial lending and not sure if a lender would be interested in this. Your thoughts are appreciated!

Income:
Rent 154k

Expenses:
RE Taxes 19k
Insurance 6k
Water 5k
Sewer 3k
Electric 1k
Gas / Heat 20k
Maint + Management 5k
Vacancy 3k
Parking Passes 5k

[TommyOH]

Not so far as you would think Phillip. It's just a different mindset, the rules are essentially the same and it's not that difficult if you are good with math ;)

[TommyOH]

ok CC, here's what I see;

159k income (max at the moment)
62k in expenses (not bad but must be verified)
97k NOI (Net Operating Income)
83k Mortgage (commercial mortgage around 7%)
14k/year profit

At the present numbers you are at a 1.16 DCR (debt to credit ratio). Some commercial lenders will go down to a 1.18, but most want to see a 1.2 or better.

Your CAP rate is 9.2% which is good for our area. Most investors shoot for 10% which in your case the purchase price would need to be 970k.

Now keep in mind this is just preliminary numbers. There are many things that can change these numbers. It doesn't look like a bad deal. At 970k, your DCR would be changed to 1.26 and you could definitley get financed with that.

I would concentrate on the expenses and find out how long it has been 100% occupied. Let me know that and I'll plug that in and we'll see what it looks like.

[cchanceus]

Excellent information! I will get the vacancy information and let you know. What terms would a lender be offering for the type of loan (DCR 1.26) you mentioned before (length/LTV)?

[TommyOH]

Well, I don't have a great personal credit score, but by using my new LLC, my guy got me pre-approved for 95% LTV at 6.75% fixed rate for 30 years. I haven't closed it yet, we're awaiting final approval as we speak, but it is a great offer. Commercial is usually 1.5% above residential but can be slightly higher than that. My deal was a 1.24 DCR.

I was thinking about your owner finance option. Did he suggest a payment amount? I'm just asking because even at 95% you would need a little over 77k to close the deal. Maybe you could buy some time and cash by using his offer to raise some more needed cash. Here's what I mean;

A 970k purchase price amoritized over 30 years with the first 5 years interest only would be $5052/ month. That in effect would give you $1,933/ month extra cash flow (the difference between the regular 83k mortgage payment and what he is offering) plus the $1166 regular from above (14k profit per year divided by 12 months), or $3099/month to put towards your down payment and closing costs. That is assuming all the numbers are true and accurate. Could work out for you very well!

[JSAUNDERS]

Buy the #'s Tom was working with it seems like you could get away with 3 yrs intrest only and have 111K to put down. ? NOW would it be better to go the full 5 years or not?
The owner of the property would probably like the 3 yrs rate and then be paid off.
If I got the numbers wrong please let me know.

279 units WOW- But i guess all it is is bigger numbers and a lot more experiance.

[TommyOH]

Yes, I'm sure the owner wants his wait to be as short as possible. Technically he could do it in 2 years (almost 77k) but this is all hypothetical until all the income and expense numbers are verified. There are a ton of things to look at and analyze in a commercial deal. A big factor is if the income and expenses are consistent or if they have recently changed any great amount. Due diligence on commercial property is alot more work than on residential.

You start off running the numbers much in the same manner as I layed out earlier. Once the numbers are verified you proceed to due diligence. Commercial just takes more time and patience. It is quite a change from the quick pace of residential investing.

[TommyOH]

Hey cc, any updates?