$175,000 Equity & $11,000 Cash on First Commercial Deal

Well, I feel like my real estate efforts have come full circle, and I can clearly see my future path ahead of me. On Thursday, I closed on my first apartment building and walked away from closing with an $11,000 check! If you have read my other success stories ($24,000 cash, $138,000 Equity and More and My Second Success Story), then you will notice that my deals usually come in pairs. This one is no exception.

I found this particular property in the MLS system when it was listed with a Realtor. It was listed for $350,000 and had just been decreased from $425,000. The gross scheduled income listed was $95,460/year. There were 12 one-bedrooms and 12 two-bedrooms. Using my quick calculations that I always use to evaluate income property I figured the CAP rate.

To do this your take the income $95,460 and deduct 10% for vacancy/collection loss. This gives $85,914. You then take 33% off of this for expenses, taxes, insurance. This left a NOI (net operating income) of $56,703. You take this number and divide it by the price to come up with the CAP rate. This gave a CAP rate of 16.2%. This meant the property was worth further attention.

I viewed the property and just happened to run into the seller while I was there. We spoke for a while about possible structuring, and he said he needed to pay off his first Mortgage of ~272,000 and walk with $10,000, but he would take a note for the rest. Great! With that in mind I requested actual operating results on the property and several other due diligence items.

This brought some additional pluses and minuses into play. The nice thing was the two bedrooms were at least $35 under market and possibly $60 too low. The bad news was that there were five empty apartments, and there was a manger who was living for free in another. This brought the gross actual rent income down to $6,100/mo.

This made it less attractive, but my plan was to get it filled and get the poor manager out. Assuming I could get the rents up to market, get the apartments filled, and get the manager out, the gross rental income would be up to $8,400/month. This created the upside of the deal. Since I had already had a previous deal fall through due to financing, I set out to get my financing lined up before I even signed a contract.

My first stop was the bank that had the note currently. If the current mortgage was assumable, I could assume the old, find a way to give him his cash, and be done! I called the small, local bank that has the current mortgage and talk to a loan officer there. He checks into it and says that the loan is not assumable, but I could get a new loan from them for it.

I asked about the terms and he says “We like to see 70% loan to purchase price and like to see the 30% down come from you.” Yuck! Next bank right? Well, I did ask him if I gave additional collateral, could the LTV go higher, and he said yes.

I figured I could get better terms than that, so I went out to shop. I then took this deal to two other bankers that I was “romancing” a la Ed Garcia and forgot about bank #1. I go to my other two banks, but the historical cash flow numbers do not look great so neither of them want to take it, even if I am putting cash in.

Now I am discouraged and had many long talks with Ed. He told me to not give up and let the seller know about the troubles I was having to keep him in the loop. He also advised me to make the argument to bank #1 that they are familiar with the property and have a performing loan now, so why not keep it at their bank.

So I talk to the seller, and he tells me “I was golfing with the banker from bank #1 the other day and asked how the deal was going. He told me you were going to check on some things and call him back. You should probably give him a call and see what he can do.” Still skeptical since he seemed the most conservative banker I had talked to, I called him and set a time to sit down with him to talk. MAN, when I got in there EVERYTHING changed!

On the phone they were “a conservative bank,” and when I got in there he says, “Well we like to keep the LTV under 80%, but we can go higher if you can cross-collateralize with another property’s equity.” I ask is it okay if the rest of the price is held as a second?? “No problem.” He tells me “Hammer out your deal with the seller, and then we can look at it.”

This is the day before the seller goes to China for three weeks (retired now and wants to travel), and I don’t have time to get a contract in before he leaves. After three VERY long weeks, the seller returns and I set up a time to meet. I came in with this offer: $290,000 new first mortgage, $35,000 second mortgage for a total purchase price of $325,000.

This worked for him. I got aggressive and asked for 7% fixed with a 5-year balloon on the second, and he didn’t argue! (a side note I also required right of first refusal if he decided to discount his note.) Now I take this along with some supporting documents and other info to the banker and let him start his process. In the mean time I set up my LLC that would be holding this property.

About this time I had another rental condo that I was selling after renting for a couple of years. I had a person approach me about buying it at a fair price and a tenant at the end of a lease, so I bit. The gain was around $20,000, so I decided to do a 1031 exchange. Since I was getting the 24-unit no money down, I figured I would buy something else with the $20,000.

So the condo sale is about two weeks away when I get a call from the banker at Bank #1. He tells me, “John, I took your deal to the senior lender, and I thought it would happen, but since you are a new customer with us he wants you to put in some cash of your own.” “How much? I ask. “We determined if you can put in around $20,000, we can do it.”

Now how’s that for coincidence!? At any other time this would have been a major problem, but this time I can say, “Okay, lets do it!” The closing on the condo goes, and then a week later the closing on the 24 goes. No problems? I scheduled the closing on the 24-unit on the fifth of the month to benefit from the rent prorations and security deposits.

With $6,400 in security deposits and $5,300 in pro-rated rents, I end up LEAVING closing with a check for $11,000 after all costs. While these funds are already earmarked, it is still a nice feeling. So when all is said and done, I will be into this property for ~20,000 in funds I wasn’t going to see anyway. This is around 6% down payment, which is not too bad on a commercial loan.

The property should gross around $8,400/month when full. Using my standard calculations, this gives a NOI of $59,875. At a 12 CAP rate (which is conservative) this building will be valued at $500,000. At a 10 CAP, it would be worth $600,000. The debt service works out to be $2,575 on the first and $314 on the second. This works out to around $2,100/month net after the debt payments and all expenses. Get a few more of these, and I won’t be able to afford to keep the J.O.B.

Special thanks go out to Ed Garcia who spent MANY hours on the phone with me going over every question a banker would ask and coaching me with what my answers should be. I would also like to thank everyone on the board because without you guys there is no way I would be where I am today.

To all those still sitting on the fence, get out there tomorrow and do something. The first deal is the hardest, and then it is all downhill. This may be my last “official” success story but, trust me, I am just getting started! Thanks for reading and I hope it helps

By CREOnline Contributor

A content contributor to the original CREOnline.com.