need help/advise with a 30 unit N.M.D. deal - Posted by Kris J

import · January 20, 1999, 1:25am

Posted by JPiper on January 20, 1999 at 14:31:11:

Tim:

It may be that these property taxes referred to are paid in advance in this particular county, as opposed to arrears as it is in my area. There are some areas of the country where this is true. In any case, taxes for the first 6 months of 1999 need to be paid, but the rental income for the first 6 months has not been earned. I don’t see how this influences an expense rate of 50%.

Again, the utilities evidently have not been paid. Does this mean they are not included in a 50% estimate of expenses?? Or does it mean that the owner did not pay them, instead putting the money in his pocket?? I don’t know the answer to this, nor I suspect do you.

Here’s what I do know. I have seen few buildings with expense rates exceeding 50%. I would prefer to analyze this building based on what I know to be true from experience, rather than based on supposition.

Even if we raise the expense rate to 60% there is still a modest cash flow. The income is not what makes this building a bad deal. Nor are these extreme assumptions of expenses. What makes the building a bad deal perhaps is the existing financing.

What we don’t know here is the value of the building, and whether the rents are market rents. Either of these factors could change the whole appearance of this deal.

JPiper

import · January 20, 1999, 1:25am

need help/advise with a 30 unit N.M.D. deal - Posted by Kris J

Posted by Kris J on January 20, 1999 at 02:25:50:

I have a 30 unit apt bldg. that I’m working on. something that was brought to my attention by Tom Brown. It’s an apparant No Money Down deal. The price is around 560k. the catch; assuming the first trust deed of 375k principal bal @7% intrest only pmts (2187.59/mo), due and payable in 2002; assuming the second trust deed of 85k principal bal @10% intrest only pmts(708.33/mo), also due the end of 2002; and asuuming third trust deed of 60k @11.95% amortized over 20 years (pmts 727.52/mo). Gross income on rentals total 121k/annual, and expenses (listed as conservative estimate)is 60k/annual. The offer is a no money down offer but stipulates that i would have to assume the 20k utility debt (pmt plan available with dwp), pay property taxes( approx. 3k. first half of “99”), escrow title and documentation.

Is there any advice that could help me with this n.m.d. purchase? Is there a way that I can give a promissary note for the taxes escrow title and documentation? I’m new to this and this would be my very first purchase if I can make the numbers work without going belly up in debt in 4yrs with baloon pmts.

Please help if you can. Also, Thanks Tom for the tip.

import · January 20, 1999, 12:23pm

Re: need help/advise with a 30 unit N.M.D. deal - Posted by JPiper

Posted by JPiper on January 20, 1999 at 13:23:59:

I think you?ve correctly identified one of the problems here?..what happens in 4 years when the balloons come due??

Right now, it appears that your annual cashflow approximates $17,000. See my post below. One problem though is that 2 of the mortgages have interest only payments?.so you have virtually no equity buildup. Therefore, a serious question arises. What is the building worth?? And what type of financing can be put on this building in 4 years??

Here?s one way I would look at this. The financing that you put on this building in 4 years is probably going to be limited to 70% LTV. Since the amount that you will need to refinance is about $520K (no equity buildup), that means the building will have to be worth about $745K in 4 years. Just to test this $745K number, let?s take the net income of $60,500. The capitalization rate using this income and this value is about 8.1%. I can assure you that the building is not worth that now?..meaning that you?re banking on appreciation to bail out your financing needs.

Back to the cash flow. Even assuming that we can put financing on this building, what happens to cash flow. Chances are it goes down. Why?? Because most lenders are going to want an amortizing loan, not interest only payments.

Which brings me to what I would want to know if I were you. First, what?s this building worth?? Second, are the rents at market?? Third, what is the age of the building?? Fourth, what is the unit mix??

You?re going to need to answer some tough questions. Buying a building with no plan is not the way to invest. You might ?luck? out, but that?s not what this business is about.

Finally, your question about cash. You aren?t going to need much here to close. If you need some cash and have none, get a partner. But before you get a partner, you better have some answers to some of the questions posed?..at least you would need them before I would put any money up. Who wants to put money up when you have more questions than answers??

JPiper

import · January 20, 1999, 7:50am

If you need help, you’re in trouble already - Posted by Joe Kaiser

Posted by Joe Kaiser on January 20, 1999 at 08:50:46:

To buy a 30 unit building as your first deal you’d have to be really really smart, or really really dumb. I’m hoping it’s the former.

The point that it’s no money down is meaningless. Every deal is no money down if you’re set up correctly, so don’t get excited about that aspect.

It’s already been proven the numbers don’t work, at least for the current owner, because that utility bill wasn’t created due to a surplus of funds.

On top of that, you’ve got to refinance the balloons in a few years. Not good.

And then of course there’s the not so small matter of managing 30 tenants.

If you close on the 3rd of the month you’ll receive credit for $10k in rents. That’s probably enough to close the deal. However, that’s likely to put you into the very shoes of someone who’s trying to get out of them, and you’d better hope they’re dance shoes, because you’ll be tap dancing like crazing trying to make this thing work.

If it were me, I’d tie it up and flip it to someone who was better equipped than I to handle such a thing. Whether or not that person exists, given the current financing, is another matter altogether. I’d say doubtful at best.

Joe

import · January 20, 1999, 7:23am

Re: need help/advise with a 30 unit N.M.D. deal - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on January 20, 1999 at 08:23:32:

First, you need to find out how much the building will appraise for. You don’t want to get to the balloon payments and find out you cannot refinance because the building isn’t worth it.

Let’s do some numbers :
First, monthly debt service = 2187.59 + 708.33 + 727.52 = 3623.44, annually is 43,481.28.
Also, 60,000 in expenses. Does this number include the vacancy rate costs ? We will assume that it does not.

So your annual expenses will be 43481.59 + 60000, which is 103481.59.

Your annual income is 121000. Assuming a 10% vacancy rate, you are at 108900.
Therefore your annual net would be 108900 - 103481.59 = 5418.41

That seems to be a pretty slim margin to me. This doesn’t take into account the utility and taxes you say you need to pay. Is all this correct ?

import · January 20, 1999, 11:53am

Re: need help/advise with a 30 unit N.M.D. deal - Posted by JPiper

Posted by JPiper on January 20, 1999 at 12:53:30:

A couple of quibbles with your numbers.

You?re using an estimated expense rate of 50% of gross income. I would assume that this DOES include utilities and taxes. I would also assume that this includes vacancy. There aren?t many buildings that get above 50% of gross for expenses and vacancy?.unless they very old buildings.

If I?m right, the net income of the building is $60,500.

Now, the question of debt service. Currently monthly payments are $3623, or $43,476. At present the cash flow is $17,024 annually. See my post above.

JPiper

import · January 20, 1999, 9:20am

Re: need help/advise with a 30 unit N.M.D. deal - Posted by phil fernandez

Posted by phil fernandez on January 20, 1999 at 10:20:49:

Tim,

Don’t do it. There’s no deal here. What good is a no money down deal when the cash flow isn’t there and a short fuse balloon is ready to explode on you in three short years.

Also a 30 unit apartment complex is much too large of a project for your first deal.

import · January 20, 1999, 1:10pm

Re: need help/advise with a 30 unit N.M.D. deal - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on January 20, 1999 at 14:10:25:

The original post said the buyer would have to

assume the 20k utility debt (pmt plan available with dwp), pay property taxes( approx. 3k. first half of “99”)

Assuming that the 60,000 expenses does include vacancies, it does NOT include the 20,000 in back utility payments or the tax payments mentioned of 3000.

Where is the money going to come from to cover these ? Sounds like a bad deal to me.