Posted by BobJ (Md) on August 13, 2003 at 11:09:12:
The first question is whether you (a) want to be a landlord, or (b) would hire a management company. Assuming that you want to own such a property, here are some rough rules of thumb. If the average monthly rent per unit is $500, 20 units would be $120,000 per year in Gross Rents. You can figure that a commercial lender would say that this property would be worth somewhere around $840k, assuming 30% in operating expenses and a 10% capitalization rate (these can vary according to locality). A commercial bank would probably loan up to 75% of the value, giving you a lendable value of $630k. If you use the $122,346 income and $45,613 annual expense figure, the net operating income (NOI) would be $76,733 and the value would be less - only $767,330 - unless they’re willing to work with a cap rate lower than 10%. Try to get the lender to agree to use an an estimated 30% annual expense value instead of the stated yearly expenses.
Given the fact that you have 9 vacancies, the bank is going to have a problem with setting the value based on rents. The lender will want to see your track record managing rentals, and they’ll want to see that you have some liquid assets to cover vacancies, emergency repairs, etc. I think you’d need to find another $100k or so ($65k, plus closing, plus repairs, plus insurance, minus first month’s rents). They will want to see signed leases on the units that are rented. Find out why those 9 units are empty - that’s a real high rate. Many lenders will either ignore month-to-month rentals, or will only consider 70-75% of the income from them. Find out why the annual expenses are so high. Sometimes owners inflate the expenses on their Schedule E for tax purposes. If so, you can use this as a bargaining chip to lower the price.
You can get this done with little or no money if you can convince the bank that you’re a good risk and the business case makes sense to them. Here’s how I’d structure the deal:
Get a first mortgage at a commercial bank for $630k. Ask the seller to give you $30k in closing assistance and repair allowances, and ask the seller to carry a second mortgage on the property for $95k. The offer price would be $725k. ($695k, plus the $30k they’re going to contribute to closing and repairs). The seller would get $600k at closing ($630k minus $30k), from which they would pay their closing costs, and would carry a second mortgage for $95k. You’ll get about $36k at closing ($30k + current month’s rent on 11 units), from which you’ll pay your own closing costs (again, around $10k), leaving around $25-26k operating capital to get the property working. Remember, you’ll get rental income the first month, but you’ll also have to pay insurance, repairs, and other miscellaneous costs after you buy the place.
Your first priority will be to fix and rent the vacant apartments. That lack of cash flow will kill you. I think there is a deal here, but you’re going to have to sell the lender (probably the commercial lines loan officer at a local or regional bank) on the business case and your ability to manage the property and turn a profit.
Bob Johnson
I am breaking into real estate rather quickly and have adopted the following idealology. To maximize cash flow while minimizing my time. I am acquiring apartment complexes. In order to get the most profit they need to be free and clear. To do this I rehab and rent , pulling out cash against the ARV.