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Category: Need Advice Current Grade: A+ Total Views: 1154 Member Comments: 5 |
Posted on: 12/02/2009 Posted by: Manolis55 Blog Points: 712 View all blogs >> |
Hello Buy and Hold Investors,
I need your help and advice on a property that I am looking to purchase with my partners. It is an 8 unit property split among 2 buildings.
1 building is 6 units with all 2 bed 1 bath per unit.
The other building is 2 units with 1 bed 1 bath per unit.
The 2 bedrooms go for $675 a month. The 1 bedrooms go for $575 a month. There are also 4 garages that go for $55 a month each.
With a 7% vacancy rate, the Realtor has provided us with a rent roll and expenses analysis. Currently, the analysis is as follows:
Yearly Income: $59,400
Yearly Expenses: $24,800
NOI: $34,600
Here is the kicker. We can get in on this property by assuming a $260,000 commercial loan that will need to be refinanced in 3 years, and the remaining portion via a second note by the seller for $90,000. The second note would mature in 5 years. The rate of interest on both would be at 7.75%.
Based on a 30 year amortization schedule, the yearly debt service would be 30,000.
I am looking at an annual cash flow of $4,600.
The only amount of money I would need to put down to purchase the property would be the seller realtor commission of 2.5% (as I am a Realtor we would waive the 2.5% that I would receive in order to lower the amount out of pocket). 2.5% of $350,000 comes to $8,750. With other costs to close, we believe that when all is said and done, we can purchase this property with only $12,500 out of pocket.
$4,600 cash flow divided by $12,500 out of pocket represents an ROI of 37%.
Although the Cash flow is only $4,600 per year, we are considering doing this deal. What do you guys think? Is there other thing I should consider in this deal?
Kind Regards,
Manolis
New Haven Homes, LLC
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Kind Regards,
Manolis "Manny" Sfinarolakis
$43,750 per unit still doesn't work if you assume the first and leave the second where it is. Bill is right. At break even in three years, what other bank will touch this property to refi? I would look for another deal if this is your average rent in this market. I would be more looking for $25k to $30k per unit to make the deal work. If you are buying in New England (where I am) we have this thing called winter right around the corner, that does three things.
1. It drops the prices for motivated sellers and narrows down your competition of the "fair-weather" buyers.
2. It usually brings on higher operating expenses with colder weather, heating (if you're paying it), and possible plumbing disasters with frozen pipes.
3. It snows - a lot. Adding to your property maintenance expenses.
Hello Everyone,
Thank you for your thoughtful advice. You are all right. The cash flow that this property generates would not be enough for the work that I would have to put in to manage it. What we will do is go back to the seller, and tell them that we would only assume the mortgage of 260k, and no second note. I think at that point, holding for the long term, the investment could become more attractive.
Thank you all for your help! This really opens my eyes to how other investors see things.
Kind Regards,
Manolis
Manolis "Manny" Sfinarolakis
Manolis, You'd make more as a manager! Looks like the problem is your second or better yet the principal (equity) financed. When you get to the first balloon, unless you make additional payments to principal, your LTV will be too high to refi unless the note holder of the second subordinates the loan. Since the second pops shortly after the first, both should be refi-ed. The second should have no pre payment penalty. Also, your ROI is negative, as your break even on the costs is almost three years. This looks like trouble down the road. Good Luck, Bill
Agree with Brian, this is not a good deal. The NOI can be $34k, but you need reserves for maintenance and vacancy. I calculate any time with 50% expenses, in your case $29,7k. If so, you are under water with the payment.
Don´t make this deal !!
-Uwe
Are you seriously looking at a monthly cash flow of $383.33 per month to be split between the partners? Why on earth would you do this deal? We are closing 3-unit buildings in our market, getting higher rents with monthly cash flows of $1,500.00. Where is your phone number? We need to talk...