Need Creative Financing Ideas
Here is the situation. Our real estate group (2 couples) currently has combined home equity of $316,000. We are looking at the following situation Property 1: House for $550,000 and Motel for $400,000 one seller. Property 2: 16 unit apt. blding for $910,000 seperate seller.
My husband and I are looking at selling our current home and purchasing the house. The RE Group would purchase the hotel and apt. complex.
Seller number one is willing to consider flex. financing on the motel but not the house. Seller number two says he is not flex, but we feel with a win/win he may be.
Motel and apt. complex cash flow $12,000/yr each using interest only home equity to cover the 20% downpayments. Our thinking is to use the combined $24,000 cash flow to offset the debit service, taxes and ins. on the house. This is achieved by using $350,000 of our own $ from the sale of our current residence as the downpayment on the house. The downpayment on the motel would be $80,000 home equity money from our other partners. After the purchse of the house we would have instant Home equity of about $400,000 out of the new house. We are thinking of leasing the apt. complex for 6 months afterwhich we would purchase it for $915,000. This gives us time to close on the house and motel and gain access to our new home equity money. We are giving the seller of the apt. complex an additional $5,000 plus the lease payments would be a predetermined dollar amount higher then his current debit service.
Any comments or suggestions?
[ Edited by shewey on Date 04/01/2004 ][ Edited by shewey on Date 04/01/2004 ]
Let me ge this staright for a moment leave out the house. And look at the cost of two, you want to spend yourself into a cost for an apt and a motel costing you a little over $1.3 million just to make $24000 a year. I sit in my house dam near do nothing and make more than that. and it didn't cost me $1.3 million.
Do ya kinda catch the drift. You could do a hell of alot better if you took some cash and just started buying Nod's SFR's and multi units. Dam I know of an apt complex back there 127 units for 1.3 mill. that after all's said and done net's over 100k proof from the actuial proforma and executive summary. I'm sorry but thats just my opinon. 2/3rd's of this deal already bites. But I could be wrong, there's not one investor I know of that would touch that deal with a 10 ft. pole. and they could call that type of money pocket change. Believe me I'm not trying to burst your bubble but I do Think you could do yourselves a whole lot better. And runing a Norman Bates and Apt complex are major jobs in them selves. Break it down run the numbers look at the apt alone $910000.00 to make 12k. Go run some numbers on NOD's and multi-units than compare the two.
Gee you want to invest $1,860,000.00 in a house,motel,and 16 unit apt. complex with a net income of $24,000.00. This will give you a 1.29% return cash on cash return per year. You can buy tax deeds/warrants in Iowa and make 2.0% per month=24% per year. This can be done with far less stress.
I've got a 1 million 500 thousand dollar 40 unit apartment complex (recent conservative bank appraisal) on the Westside of Atlanta under non-exclusive contract for a total of about 805K. Just renovated so rents are going up:
572k = take over exisiting.
9K - taxes.
24k - water/sewer.
200k - cash to seller.
Should have a cap rate of 10 after rents go up and management fees are reduced. Rents are at $380-$400/month per unit now, going up to $450 and new resident manager will live in 1 apartment as office instead of 2. Vacancy rate at 20%, owner says due to rehab.
Does this deal look any better? My understanding is anything over 9 for a cap rate in Atlanta for moderate apartments (not POST) is pretty good?
JohnCl
Perhaps it’s a typo!
A 16 unit apt building (assuming that it is fully occupied) with an annual 12k rent roll, equates to $63/month per unit. You can’t rent a parking place for that!
Could it be 120k combined?
I agree there has to be something wrong with the post. Either forgot something or typo. Let us know what we are missing. If we arent missing anything, then the buy price is too high, and perhaps a better deal is around somewhere. Or this deal needs more negotiating. Dont forget that none of us are used to paying 100% Fair Market value for anything. So forgive there harshness towards you, but they (and I) tend to get upset when the buy price is way too high. Which I personally feel is the case here unless I dont have all the details.
As far as creative financing, if they are going to stick to that price, I would suggest that they do a seller wrap around until the equity is built up enough to get a better price. The buy price should be 80% of FMV for you to start to get a good enough deal. I shoot for 60% but will settle for 70-75% for the right deal. Unless of course the profit potential is so great its worth paying the higher price and raise the rents considerably (at least 20%) and reap the benefits within 6 months.
If you do need to get this no matter what we say, then I would suggest the seller take a second, or better yet a seller wrap around. A lease to own would work out to you coming out of pocket every month until you buy it. I wouldnt do that. Also instead of getting an equity line of credit (unless you are in a hurry to close) then just cross collateralize the property when you get the loan. It will be cheaper on the interest points.
Let us know what we are missing,
Kyle[ Edited by KyleGatton on Date 04/03/2004 ]
Here is some clarification. The prices I stated for the properties are reduced prices, they are prices we have recieved a verbal yes on from the sellers. We still feel there may be room to come down on the house and hotel once a contract is presented. The house would be our personal residence. The motel would help create positive cash flow to be used towards the house payments. The hotel flows at $12,000 per year. We feel that the rates can be increased on aver. of $8.00 per room. We also feel we can increase occupancy with the right marketing. The hotel is managed very loosely right now, so there will be room to decrease expenses and payroll as well. The seller is open to assisting in financing, therefore We are goingn to ask him to fund the downpayment.
The second property is where I am not as comfortable. This property went down from $950 to $910 final offer. The income is $106,080. The expenses are $30,755, The cash flow is 20,000 . After I subtract the interest and payments on my cash out put of $182,000 it nets down to $12,600. The projected sales on the building are 1.1 mil after 2 years. - giving me a approx. gain of 15% in the 2 year time.
I hope this helps. Do you still think it is too much of our own money to invest for the return?
Thanks for the input.
P.S. The idea of taking the cash flow from this building and using it towards the house payments, is to off set the mort. on the house so my husband can quit his desk job and we can focus on the Real Estate full-time.[ Edited by shewey on Date 04/05/2004 ]
After working on the numbers for the hotel today, I am seeking advice on the best way to use the owners willingness to assist in financing. Due we just ask him to fund the 20 percent downpayment at 1 1/2 percent over the current interest rate?? What are your ideas??
Allow me to make a suggestion which has little to do with the answer to your question. Put these presentations in a standardized form.
Income (so many units per month). . .. . . .total
vacancy/lost rents factor . ........
Total annualized Income..............................
Expenses (annualized)
taxes............................................xxx
utilities.... ..........................xxx
maintence
management
whatever else
total Expenses............................................xxx
net before debt .........................................xxxx
Discussions of mortgage alternatives
Net after debt ..............................................xxxx
in this way it is easy to analyse the project without sorting through the narrative of your e-mail
This would make me, at least much more wiling to do the analysis of looking at the deal. In addition the discipline of this form creates clear thought and clear thought is always a good thing.
It does make a little more sense as you have stated it. I think the confusion was that you stated the cash flow monthly and the expenses yearly, also most of us dont figure in debt services until the last minute. Mainly because of the rates changing so much. The format suggested would definitely work. But the minimum information we need for future referance are the Buy price, FMV price, Gross income,gross expenses, and condition of the property.
Dont worry about your deal, you can tell us everything except the location and names(business and owners), and it would be extremely tough to find it and steal it from you.
In short it looks like a good deal, I would definitely do it. But I would work on the buy price some more or get the sellers help.
There are many ways you could have the seller help. You could have him do your down payment as stated, if he has the capitol. Make sure your lender doesnt need the down payment sourced or seasoned for this to work. If the business owning it is an LLC or C-Corp, you could buy the company and then refinance the asset (Property). Or, Offer the seller to do a seller wrap around so he can make extra interest on the sale of the property. If there is extra land that could be developed you could get a construction loan to expand the business, or build a new one(c-store, laundromat, etc). Or offer to make him a partner on future equity, and take over management for a base fee of 10% of gross. After a year refinance with better financials and split the equity while paying him off. etc etc I cant think of any more until I get my third cup of coffee. lol
Good Luck,
Kyle