Can this be done? Do the numbers look ok? - Posted by john

Posted by Penny on May 23, 2007 at 12:24:24:

Others on this forum may have additional ideas and suggestions for you.

The offering price needs to reflect what the property is worth to you. See Ray’s article below:

There’s a couple of other numbers that are helpful to understand. My calculations are based on assuming that the numbers are valid. If the actual income is actually lower or expenses higher, then you would adjust your offering price accordingly.

Capitalization Rate or Cap rate. This is the Net Operating Income divided by the purchase price and expressed as a percentage. It represents the rate of return an investor would receive if the property were purchased with 100% cash outright.

So for this property, the asking cap is $60,015 / $799,000 = 7.5%

Your offering price gives a cap of $60,015 / $720,000 = 8.33%

Gross Rent Multiplier or GRM. If you divide the purchase price by the gross income, you get a real number as follows. It is an indicator of price to total revenue. That said, the expenses could be high, resulting in a lower NOI and lower Cap.

Asking GRM: $ 799k / $82.5k = 9.68
Offering GRM $ 720k / 82.5k = 8.73

To me, the asking GRM is marginal, I look for those 9 or less, so your offering price isn’t out of line.

These aren’t bad numbers. To me, they reflect reasonable returns on a stable property assuming there is no significant deferred maintenance. Stable properties with no major problems do not deliver the big returns, but also have less risk. A stable property delivering reasonable returns is less likely to be discounted significantly on price unless the seller has other motivations for selling.

But this may be very acceptable returns, particularly if you are able to take advantage of the restaurant upside and generate additional income through another business. The property could be stable with positive cash flow and provide reduced start up costs for a restaurant venture. I would suggest looking at the combination and lay out a multi-year operating plan to determine what your returns would be.

Your 10% discount is in the ballpark. You can offer less and they can say no. You never know until you make the offer.

But on commercial properties, it is pretty common to put down 20-25%, so the 25% I calculated for your asking price doesn’t seem out of line. That said, the challenge is in coming up with the 25% or $180k.

So I don’t think the property is necessarily overpriced, I think that the expectations of putting only 10% may be unrealistic for this property and that is what will make financing this deal a challenge.

I would recommend searching the archives both here and on the lenders forum for seller carryback terms and other down payment sources to see what others have done, then run the numbers.

Whether the deal is workable depends on what you desire for a return on your money and the resources you can come up with for the down payment.

I am also going to point you to another of Ray’s articles to provide additional insight on high LTV financing:

Hope this helps.

Can this be done? Do the numbers look ok? - Posted by john

Posted by john on May 20, 2007 at 12:39:42:

Mike,

I’m looking at a 7 unit, mixed use: 6 residential, 1 commercial, 9 garage spaces rented seperately. Asking $799,000. Gross income is $82,500 which includes $1500 month for the restaurant which I would use. Total expenses are $22,485 (taxes, oil, elec, water, trash, insurance, taxes). The cool thing is that it includes a restaurant with a bar, furniture, plates, glasses, tablecloths, ovens and everything else. I’m not sure of the value of those items but it creates a unique situation where I could generate a considerable amount of money from that space as a business. I could also sell and lease it to someone: you pay $50k for all the equipment and take over the space and pay $2000/mo. If I had to do a build-out in someone elses building to build a restaurant it would cost me $200-400k. I know…i’ve been looking for a while.

I have a guy who is a licensed broker and will split his portion of the commision with me 25/75. Say I offer $720k, assuming 6% commision, I get 75% $16,200 back. Of course all he is doing is sending a fax or two and signing his name. I have to do all the work.

So if I can get 90% LTV I put down 55,800 plus the $16,200 that I get from the broker. $648,000 at 7%. is $4311. The income after expenses assuming that the restaurant generates $1500 is $5000/mo, or about $700/mo cashflow.

Rents might be a little low. Building is brick with new roof and windows. So is it worth it to me to cough up $55,800 and come up with $800 a month out of my pocket to break even and have a restaurant which might net me $8-10k a month?

BTW, i’ve run restaurants for 18 years and know what i’m doing. This town is very up and coming and I could clean up with a restaurant in this location.

Can I get 90%LTV? Feel free to contact me if you can swing it. I have a partner and if it matters my FICO is 730, his is 831. We both own homes to collateralize the loan.

Any thought or help would be greatly appreciated.

Contact me - Posted by Jim B

Posted by Jim B on June 03, 2007 at 16:20:57:

We have a great program for mixed use buildings. If you are still interested in financing, please contact me at JimBurton1@wlgdirect.com

Jim B

Re: Can this be done? Do the numbers look ok? - Posted by Penny

Posted by Penny on May 21, 2007 at 15:52:52:

The Net Operating Income = 82,500 - 22,485 = 60,015

Commercial lenders will typically allow you to use 80% of the NOI for the total of all loan payments. It is called the debt service coverage ratio (DSCR) and represents the amount of annual debt payments versus NOI. It is often represented as 1 to 1.25 but is the same math.

So I get the following - 80% x 60,015 = 48,012 annual or $4001 monthly payment total that lenders like to see.

You will not typically get a commercial lender to loan you 90% LTV. They will loan 75-80% max LTV and expect investors to put down 20-25%, depending on the lender. At a minimum, you need to put down 10% and the other 10-15% can come from somewhere else. The somewhere else is very frequently seller carryback. But you still have to have the 2nd loan payments to the seller plus the 1st loan payments to the lender less than the $4001 total monthly payment I calculated earlier.

Your $4311 monthly payment assumes a 30 yr amort and commercials don’t usually offer more than 25 year amortizations. Commercial interest rates are usually higher than residential. You have good credit, so that definitely helps. I currently use 7.5% amort over 25 years for my quick analysis - if you can get lower than 7.5, great! But hope for the best, plan for the worst. If not, the monthly payment is $4530.91, which is going the wrong way.

By my calculations, you’d need to put down closer to 21% to meet the DSCR requirements to get your financing. This would be for a cash offer without seller carry. If you use seller carry, the selling price is typically higher than a cash offer.

Before you do that, you also need to look at the upside of this property to improve your return on investment versus the work/financial resources you’d be tying up as well as the cash flow to see if it meets your investment criteria.

Upside consists of increasing the property value by a) raising rents, b) additional revenue streams, e.g. coin laundry, garages, c) new uses, etc.

Sounds like there is some upside. For you, there is also upside in your being able to start another business in which you are experienced for reduced start-up costs. So what it is worth to you could be very different from an investor without the restaurant experience. But the real estate investment should stand on its own for providing a return.

Hope this helps.

Re: Can this be done? Do the numbers look ok? - Posted by john

Posted by john on May 23, 2007 at 08:22:42:

Thanks. That helps a lot. So, can we say here that the building is slightly overpriced? Would the numbers here dictate that the price should be a little lower?