This Multi-unit, Multi-building Deal Is A Challenge - Need Help!
I am in contract - 2.4M, 111-units, in Dallas .
It is being marketed as a 13% CAP. I intend to buy it, hold for a year then sell at a lower CAP (2% difference).
I approached an investor group for the down payment (25%) plus closing costs (700K). Would like to push the limit and purchase a multi with no money down. My back-up plan is to sell a multi we own and 1031.
We own a 34-unit within a mile of the deal and have a good management company that can take this on.
Investor group backed out (didn't understand how strategy worked). I am going to approach another investor group.
Situation I need help with: The wheels of the deal keep rolling. I have received earnest money from one of the initial investors which will have to be returned (there is still a small chance that one other investor can rally the down payment - she sees this to be a good deal).
Here's the question: Do you have another strategy you would implement given the ticking clock?
Numbers:
Sales price $2,400,000
Down payment - 25% $600,000
Closing costs - 2% $48,000
Lease-up costs $52,000
Total required of investor $700,000
Gross scheduled rent $764,040
Vacancy - 15% (5% per owner) $114,606
Management - 10% $76,404
Expenses (Est. $170/unit/mo) $226,440
Taxes $36,000
Insurance $60,000
Net operating income $250,590
Capitalization rate 10%
Monthly income $20,882
Debt service 75%LTV,7.5%,20yr $14,501
Cash flow $6.381
Sales price in a year 8%CAP $3,132,375
Sale cost - 5.5% $172,281
Loan amount - after 12mos $1,759,623
Investor portion $700,000
Profit $500,471
My portion - 25% $125,117
Investor share - 75% $375,353
Investor ROI for $700,000 - better than 20%
We would take title in our name, give investors a DOT against other property we own to secure their investment. We would then grant deed property to LLC or land trust with the beneficiary being the LLC. Our management entity would be the managing member and the investors the other members. LLC gets added on insurance as additional insured.
So repeat question: What strategy would you use to pull this off given that time is of the essence? We are entering the due diligence phase.
Thank-you in advance for any input.
ps Numbers and strategy included to help in thought process.
I'm not quite clear as to what alternatives you're looking for, but I do have a question - what makes you think that you will be able to sell the same building in a year @ 8% cap rate? If the buyer is going to do their due dilligince, they will see that it was marketed before @ 13%, and @ 10% it's a good deal. 8% cap rate is certainly just average, and might take a while to sell.
Thanks for your response.
That was the concern of the initial investor group.
The 10% CAP was derived using my conservative numbers as was the 8% CAP.
Theoretically as the deal sits I could buy it at the 13% CAP that the seller is selling it for and sell it at a 10% CAP.
A year from now with good management and putting some of the cash flow back into the property, rents could be raised. If the due diligence shows that the numbers as represented by the seller is close, we could, with even higher confidence market the property at a 10% CAP.
The buyer would not necessarily be an investor who uses CAP rates as a way to evaluate his investment. It could be an investor who sees this investment as a way to get a better return on his money than what he's currently receiving.
I would believe there would be investors out there who would be willing to purchase a real estate investment that would generate a return that a 10% CAP or even 8% CAP property would provide.
Thanks again for your response. Do you have any suggestions or an alternate strategy?
Sorry if it wasn't clear what I alternatives I was looking for.
It would go something like this:
Given the timeframe of what has to happen in the purchase of a multi unit, the fact that you don't have a money investor already lined up, you're already in contract with the clock ticking, and that you're thinking about doing a 1031 exchange as a back-up plan, I looked at the numbers and the investment scenario and IF I WERE YOU, THE FIRST THING I'D DO IS...
Lets say that your investor can come up with the cash.
A back up plan to cash them out in two years might be to refi the property. If it has incresed in value you might be able to do a cash out refi.
But that does require an increse in property value and a loan that will allow you pay it off in two years.