financing on 40 unit apt. complex... - Posted by Jen-LA

Posted by Ed Garcia on March 06, 2001 at 23:03:32:

Hold the phone Mr. Alcorn,

This doesn’t mean that you’re going to try and chisel me out of that dinner that I so rightfully deserve does it? I really didn’t make that post. Oh, OK, I did, but the devil made me do it.

Can’t wait to see ya in a few weeks,


Ed Garcia

financing on 40 unit apt. complex… - Posted by Jen-LA

Posted by Jen-LA on March 01, 2001 at 07:48:30:

Hey everyone-

My husband and I have recently renovated some small houses and are making enough cash to realize that we now want to
have some cashflow coming in- monthly. I usually post over on the main discussion group (haven’t in a while though)

At any rate, I need some opinions on other creative ways to make this deal work.

40 unit complex in an area which was a little rough (near an older mall that is now being converted into a high tech computer
and industrial center- located in the middle of town) but is now up and coming. It is a “pocket” of apt. complexes popular in
the 70’s went down in the 80’s and now the city is pouring 37 million into them and an association has been formed with
several property owners to buy dilapidated old complexes and renovate them to bring up property values.

There are 16 2 brs and 24 1 brs, that 2 weeks ago got 375 and 325 respectively. The owner evicted everyone (he had 20
units rented ) 2 weeks ago to get the unit ready for the association to buy but they cannot scrape together the money. The
asking price is 400,000- or 10,000 a unit. The complex is brick and needs approx. 1000 in repairs to each unit. After repairs
they will rent for 400 and 350. The annual costs are approx $40,000 and the note approx- 50-51000. With a net operatin
income of 129,840 that makes the profit around 88,000 a year. The cap rate at the scheduled income (with a 10% vacancy
included) is about 31.29%.

The owner has offered to carry a second since he owns the apts. outright, but with them completely vacant, we cannot get
financing. We only have about 20,000, 30,000 if needed, of our own cash that we can come up with.

So basically, we are trying to work out a deal where he lease options it to us for 8 months at 8% with a 10,000 non
refundable option fee that will not go towards the purchase price and we will put 20,000 into them in the first 1 or 2 months
and that 20,000 will go towards the purchase. Then after 8months after we have them up and running, we get traditional
financing with the bank. We are leery of this 10,000 that doesn’t go towards anything. We haven’t done any lease options before and wonder how normal this is. Obviously we have to make it worth his while to sit on these for another 8 months or so, but there has to be a better way.

I know this is long and rambling, but I need some input on any other ways to structure this- if this is the best way, any advice
on clauses to put into the deal to protect ourselves?? We are putting a clause that states that we have 6 months after the 8 to
buy if unforeseen circumstances prevent us from exercising our option- such as interest rates etc. We will just have to pay him
500 more a month at that point.

Ok- any advice and input would be appreciated (if you’ve gotten this far!) thanks!

Re: financing on 40 unit apt. complex… - Posted by todd

Posted by todd on March 06, 2001 at 14:44:44:

jen, if you don’t mind, how did you come across the proprty? are you advertising for midsize apt bldgs, through a realtor,? we are looking at larger properties as well. thanks

Re: financing on 40 unit apt. complex… - Posted by Ed Garcia

Posted by Ed Garcia on March 01, 2001 at 10:35:17:


I don’t think you were rambling at all. Sometimes when throwing a deal on the board, you’re not quite sure how to present it.

What bothers you is exactly what was bothering me when I was reading your post. I would be clear to make sure that the $10,000 gets applied towards the down payment if I execute my lease/option, or I wouldn’t do the deal. I would also ask for at least a year instead of 8 months. Remember, if you are ready in 4 months you can execute your option, but I would like the added time, especially when I’m going to be in the deal with $30,000 of my own money.

The seller can only benefit if for whatever reason you don’t complete the deal. You’ve put $30,000 into the deal and have hopefully have solved his vacancy problem.

Jen, before I’d do the deal, I would run it by my bank or the lender that I would use, to make sure that there aren’t any caveats that I missed or are not aware of. I would make sure that my numbers are right and that I’m certain of the value based on market rents etc.
Also, many lender who do multiple units, are area conscious. By lay they’re not supposed to redline, but I can assure in a case such as this the lender will just find another reason for not making the loan if they don’t like the area.

Jen, I didn’t go over other ways to do the deal, because I liked the way you’re structuring it. However you mention, “The owner evicted everyone (he had 20 units rented ) 2 weeks ago to get the unit ready for the association to buy but they cannot scrape together the money.” I’m not sure what you mean by “association to buy”. That give me the impression that there is another party involved.

Also I don’t agree with your numbers. Using a generic formula, I figured your NOI (net operating income) at approximately $91,080. It’s still almost a 23% Cap rate and there is nothing wrong with that.

Ed Garcia

Ed, Ed, Ed… what am I gonna do with you? - Posted by ray@lcorn

Posted by ray@lcorn on March 02, 2001 at 18:11:47:

Ed old buddy… can’t let you slide with deriving a cap rate based on projected numbers, especially on a 100% vacant turnaround deal. You know better! Without figuring in the costs of lease-up and rehab, the cap rate is meaningless as a measure of return. Was that a “senior moment”? (smile)

Your buddy and general pain in the neck,

ray :wink:

p.s. you may enjoy reading my answer to this same post on the commercial newsgroup.

I think we agree on the deal, except I like my structure better!

Re: Today’s your day… - Posted by Ed Garcia

Posted by Ed Garcia on March 02, 2001 at 21:47:02:

Brother Ray,

If it makes you feel better, I like your answer better than mine also. Some days we do good, and some days we don’t.

Just be glad you got me and didn’t have to deal with my evil twin brother.


Ed Garcia

Thank you my friend… - Posted by ray@lcorn

Posted by ray@lcorn on March 03, 2001 at 20:16:43:


Thank goodness you took pity on my wretched soul! I laid in the bed last night cussing myself for that post. I almost got up and removed it. I didn’t out of pure exhaustion, and just hoped you would take it as I intended it. My intent was to poke some lighthearted fun, but as I recalled it later in my mind I realized it may not come across that way, and I will apologize anyway for the tone. You took it well, and I needed to make amends before this day is out.

I originally stopped by because it had been so long since I’ve had a chance to visit any board but my own, and haven’t really been minding that one as I should. And to tell you the truth, you do such a great job with all these different types of finance questions, about all I can usually add here is “Great Post Ed!(nt)”. Ladies and gentlemen, I am here to tell you that Ed Garcia is a dealmaker extraodinaire. He knows of what he speaks. Pay no attention to my sideline carping!

I know exactly what you mean about some days we get 'em, and some days we don’t. Lately I’ve had a lot more of the latter than is equitable. I am very grateful that you chose the high road on this one. I had the opportunity, and blew it. (smile)

I’ll buy the first night in Atlanta!


Re: How sweet it is… - Posted by Ed Garcia

Posted by Ed Garcia on March 03, 2001 at 20:54:35:

I said to myself he nailed you go get him. Then I thought about it and said no, he’ll feel bad, he’ll feel guilty and he’ll buy the first night.

Thank you brother Ray,


Ed Garcia

well I think you’re both ok… - Posted by Jen-LA

Posted by Jen-LA on March 05, 2001 at 07:41:14:

I asked for all opinions on this for a reason! This is exactly why i don’t ask my friends for advice, I ask pros who actually know what they are talking about- and parts of each of your posts helped us.

Ray, you were right, the cap rate was meaningless, esp. without a mortgage payment figured in. I know we are educating ourselves quickly for this, but I think after meeting with our backup banker today we’ll be ready to go!

Wish us luck in this big step!

Re: well I think you’re both ok… - Posted by Ed Garcia

Posted by Ed Garcia on March 05, 2001 at 09:20:03:


Hold the fort, Ray is not right. I let Ray slide because he is a friend. I don’t care what Ray says, “Cap Rate” is a market indicator. Most investor’s buy based on it, and sell as well.

Jen, Ray and I got into a shoot out a while back on the Cap Rate subject. Ray says that he likes to buy based on cash on cash return. Well that’s fine, in most cases I agree with Ray, but the less cash you put into a deal, usually the bigger the return, so that can be misleading as well. I call that a “leveraged deal”. One night at last year’s convention, Ray had mentioned that it would be hard to turn down a deal with 12% Cap Rate. I ask Ray, if the Cap Rates being enjoyed in an area were 14% how would he feel about purchasing at a 12% Cap then. Ray stopped in his tracks. He didn’t like paying over market, but if the Cap Rates really don’t mean anything then why would you care. I’ll tell you why, because they do. Lenders pay particular attention to Cap Rates, and GRM, (Gross Rent Multiplier). To my knowledge the majority of them acknowledge Cap Rate over GRM on the larger deals.

Jen, the day you posted your post, to tell you the truth, my brain was fried. I had a long day, I really didn’t want to think about your post because it was one that required really thinking about. When Ray fired on me, I let it go out of respect for a friend. His answer over all on his board was a good one, although I felt that Ray ad lives, and assumes a bit too much.

At any rate, thank you for participating on our site, and I hope you’ll be back,

Ed Garcia

just couldn’t stand it could you! - Posted by ray@lcorn

Posted by ray@lcorn on March 06, 2001 at 20:20:49:


My how time softens memories. As Mr. Piper, Mr. Vaughan, Mr. Roach, Mr. Alexander, and numerous others will attest, the final result of that 2:00 am discussion in Atlanta last year was the esteemed Mr. Garcia saying, “Ray, you are right!” Remember? Terry even put a post on the board because it was such a surprise that you finally agreed with me.

I never said cap rates were not important. As a rule-of thumb type of quick measurement they are invaluable in culling deals. The question was how you determine the RIGHT cap rate to apply to a deal. Your position was that the market sets the cap rate, and the investor must pay whatever the market rate happens to be. My position was, and still is, that the savvy investor will derive the cap rate s/he must have for the deal based on 1)capital available and the required return on that capital; 2) his/her borrowing power as it relates to terms, rate, credit, etc.; 3) the amount of risk and effort required and the value the investor places on that, and; 4) the general conditions in the market.

When those factors are properly quantified, an investor knows before starting into a deal where the cap needs to be for him/her as an individual in order to achieve the predetermined investment goals. In this way, the price becomes a function of the investor’s criteria, rather than the product of an arbitrarily selected rate. If the market is soft, and the deal is priced at a higher cap, then so be it… the criteria is met and the investor can move forward with further due diligence. If not, s/he passes and looks for another deal, regardless of what the market says. I always have the option to not play if I can’t make what I consider to be a sufficient return on my money, time and effort.

Remember also that the only way to acquire an accurate cap rate for competitive properties (i.e. the market cap rate) is to know both the income and expenses. In my experience, no amount of research can ascertain true operating numbers from competitive set properties, unless you happen to own one of them. Brokers and appraisers can give you estimates, but unless they did the deal on the competitive property, and will tell you, then they don’t really know. And don’t forget that the broker has a vested interest in keeping the price high. That puts the number in the realm of a GRM, another rough guide to value. All of those rough rules of thumb have worth, I just won’t make a final decision on that information alone.

Cash on cash return is also only part of the picture. I do put more weight on it than a cap rate, because it accounts for deal structure and debt service. But again, I will not make a decision based soley on that number. It takes all the above and more for a deal to be a deal. There is no one acid test that says yes or no to a deal until you have evaluated all of the numbers.

Is cap rate useful? Absolutely. I just answered a post over on the mobile home board in which the asking price cap rate was 6%, on projected numbers no less. Any need to go further on that deal? None at all. I can make more on bonds and manage the investment from the golf course.

Look forward to continuing our discussion in Atlanta!


being that as it may… - Posted by Jen-LA

Posted by Jen-LA on March 05, 2001 at 12:36:48:

I was wondering if you might be able to help us try and get some financing on this deal?? I emailed the info to your site a few days ago and we got a response saying you aren’t doing 100% financing right now- I guess whoever read our info misunderstood it as us needing 100%, but we don’t- we would be perfectly happy with 80 or even 75%.

Why I’m asking is that we met with our local banker who finances our small rehabs and he basically said that he didn’t think the board would approve us for that much money given our net worth is somewhere close to 50,000. Now we have wonderful credit and this deal is sound, they are just a small town bank and aren’t interested in getting into the real estate business, if you know what I mean.

Anyway- we are just looking into all of our options before we have to use a partner (which we’d rather not do) and you are one of them! Thanks for any help you might be able to give.