Help me with apartment purchase - Posted by CAL

Posted by Penny on April 16, 2007 at 17:31:52:

That is a reasonable number for today. It might not be in a year or two when you are ready to refinance, as I’d expect interest rates to creep up, but I could very well be wrong.

If you can add a clause into a regular loan for no prepayment penalties after, say, 3 years, then why not get a lower rate off the bat and avoid a negative carry before you refi as your exit strategy?

Help me with apartment purchase - Posted by CAL

Posted by CAL on April 15, 2007 at 12:41:33:

I am in the process of purchasing a 16 unit apartment building and I would like to get you guys to analyze it with me. This property has a tremendous upside because the current rents are way under market rent, but it actually seems to be a good deal even at the current rent. The entire complex is in excellent condition. All of the units are individually metered for water, electricity and gas. Here are the numbers:

Effective Gross Income (after 5% vacancy) - $50000
Expenses (Tax, insurance, maintenance, etc.) - $10,500
NOI ? $39,500
Price $400,000

The owner is willing to do owner financing with 20% down but the terms are not good at all. He is a hard money lender, and he wants to do the financing at 14% and then have me refinance once I get established and get my rents up. After running the numbers with the 14% I immediately said there was no way I could do this because it will cause me to have a negative cash flow. But, I did tell him that if he would add money to the selling price and escrow it for me to use as coverage for my cash loss for the six months I may be able to do the deal. He agreed to this. My assumption is that after I get rents up, the property will appraise at well over 500K, allowing me to get ALL of my cash back with the refinance. So, while it would produce a negative cash flow for 6 months, after the refinance, I would have no money in the property and it should be cash flowing (after debt service, expenses and everything) around $2000 per month.

I feel pretty good about this deal, with only one exception. I am new at commercial real estate (I have done several residential) and I want to take my time with due diligence. The seller wants to move fast. I am a little nervous about that, but the deal looks good to me.What do you guys think of this deal?

Re: Help me with apartment purchase - Posted by Penny

Posted by Penny on April 15, 2007 at 18:42:04:

Your expenses look a little low - 10,500/ 50,000 is only 21% of gross income. Banks typically figure this to be 40-45% of income.

The price may be good, but lousy financing terms can turn a good deal into a mediocre or bad one. If you think the revenue can be improved with rent increases, then calculate the negative carry and include it in your total investment when calculating your return.

14% interest will make it difficult to make a reasonable profit. Can you go for a commercial loan from a normal lender? I’m pretty sure you’d get rates much better than 14%.

Re: Help me with apartment purchase - Posted by Chris

Posted by Chris on April 15, 2007 at 15:54:15:

$320,000 @ 12%=3292/month or $39504/yr
$320,000 @ 8%=$2350/month or @28200/yr
What is true worth of building?
DSCR: $39500-$39504=-$4
$39500-$28200=+$11300 1.4

Have a contact that can help you put it together.

Re: Help me with apartment purchase - Posted by CAL

Posted by CAL on April 16, 2007 at 15:14:09:

I agree that with the 14% it looks bad, but once I refi things look pretty bright. I am assuming I can get a refi loan for around 7.5%. Does that sound right?