Need feedback, please! - Posted by Fletch

Posted by youngsterz on March 20, 2002 at 22:39:33:

My two bits. . . .

Cap rate: It’s a factor of local conditions & norms, and ultimately it only matters what you are willing to personally accept in your deals. Up to you.

Loan: You should be able to find a 90% loan on a 3-unit for 8% or better. Some variability may be had on point buy-downs, etc, but there are definitely 90% programs out there. One thought: See if the buyer will carry 15% at 30 yr amortization, but with a 3 yr balloon. 30 yr amort will lower your monthly payments and increase cash flow. Do an 80% first and avoid the PMI (increase cash flow), then refinance in 3 yrs. Between upgrades, rent increases, captured equity, appreciation or other financial tweakings, you may be able to cover it all with a new 80% loan in 3 years at the increased appraised value, not the purchase price. Crunch the numbers. Heck, increase the purchase price and have the seller carry 20%, for nothing down out of pocket (minus loan costs). That would certainly help your return on your down payment!

Final thought: 35% for vacancy, maintenance, etc. may be a little stiff. It’s good for conservatively evaluating, but if you manage the property right, and it’s in good condition right now, you should be able to keep that percentage under control, and increase your monthly cash net. I’m just saying to confirm your assumptions, and break it down in a little greater detail. You also should evaluate the potential to increase rents, even $10 or $20 per unit. That would really give you more margin for error, in addition to increasing the property value from an income valuation approach.

From the looks of it, this has nice potential for a nothing down deal, to put in the keeper portfolio for awhile, if that is your intent.

Need feedback, please! - Posted by Fletch

Posted by Fletch on March 19, 2002 at 15:31:16:

I have talked to the owner of a FSBO who has agreed to carry 5% on his three unit, and the asking price is 75k.

I am trying to figure out if this deal is going to pencil out.

There are two efficiency units and one two bedroom unit. It has seperate electric meters, off-street parking, and will be in move in condition before I take over the property. It is currently vacant, but there is plenty of demand for the rental units in the area. The units should be able to bring in rents of $275, $275, and $550.

gross operating income = $ 13200

less 35% for expenses, vacancy,
taxes, utilities leaves NOI $ 8580

CAP rate 8.7??

If I did 90-5-5 my down payment would be $3750.

Monthly payments on the first mort. 30yr 8% $495 X 12 = $5940

Payments on 2nd $3750 financed 3yrs with 10% =
$121 X 12 = $1452

Mort 1 5940
Mort 2 1452


That leaves about $100 positive cash flow per month. When the second is paid off that would give me $221 positive cash flow per month.

I need a second opinion. Did I figure out the Cap rate correctly? It seems pretty low. Will a lender like Ed Garcia give me a 90% loan at 8%? Also, I came up with a yield of 33% on my down payment, is this right?

Dan Fletcher