[Winning]

Let 1st establish the facts..

• My vantage 3.0 credit score is 796.
• I flat out own my primary residence. with no helocs, or any other liens/loans against it.
• I have never invested in real estate other than in my own home I own.
• I am located in Dallas Fort Worth Texas metroplex.
• I am a business owner (no mca's, no loans of any type in my business name)
• The business I own has nothing to do with real estate (I have no experience in Real Estate investing).
• My business lease about 1700sqft from a "Land Lord".
• I am the "Land Lord's" biggest tenant, and have been his tenant for over 6 years.
• The "Land Lord" would like to retire, and has offered me the option of buying the entire commercial property.
• The current "Land Lord" is the same person that actually built the commercial property in 2003.
• The property is completely rented out.
• The property is 9900 square feet.
• His 1st offer he presented to me was to purchase the property for 1.19 million dollars (seller finance).
• When I looked over his total revenue and expenses, I calculated it to be an 8 Cap.
• The "seller finance" details... He is asking for 20% down and he would finance the remaining 80% principal for 20 years at 5.5 percent.

So based off the existing relationship I have with the Land Lord, the offer he has extended me is a no stip/no documentation owner finance option.. I just need to come up with the 20%.

But just cause he offered me that, doesn't mean that is the best deal available to me.

So I need to explore all my options on how I could get this done and the cost. So that I can properly evaluate what my Cap rate would be if I do this.

I have seen a few people here tell posters that should post on scotsmanguide.com, which I plan to do as well to assist me with figuring out, and understanding all my options also.

I understand just because the current "Land Lord" cap rate is 8, doesn't mean mine will be 8 once i factor in the cost of the money i need to borrow.

I am not interested in buying some property to break even every month, and only be looking to make money via the equity when I sell it later.

[Atlas Financial]

Seller financing is a great option. You should take it plain and simple. It's a win win for both parties. You do not need to get bludgeoned to death by some local bank over every tax return or P&L you have ever produced, and the interest rates would be similar. They are looking to "retire", so earning 5.5% annually over the next 20 years is a safe investment for them as they entire the period of life where fixed income is the most important.

[abfunders]

Seller financing is a great option. You should take it plain and simple. It's a win win for both parties. You do not need to get bludgeoned to death by some local bank over every tax return or P&L you have ever produced, and the interest rates would be similar. They are looking to "retire", so earning 5.5% annually over the next 20 years is a safe investment for them as they entire the period of life where fixed income is the most important.

I agree with Atlas 100%.
If you need the 20% down, I'm sure you have access to it from a local bank or credit union with an unsecured 5-year term loan, based on your credit score alone. Or you can tap some equity in your house and pay even cheaper. Pull the trigger if you think you'll get your ROI.

[Atlas Financial]

8% cap rate implies an NOI of $95,200.

If he is lending you 80%, then you only need $238,000 as a down payment.

A 5.5% loan on $952,000 over 20 years is $78,584.25 in annual debt payments.

Your cash on cash return is going to be :

$95,200 - $78,584.25 = $16,615.75

$16,615.75/$238,000 (Equity Required) = 7%~

[Atlas Financial]

Counter back with a lower interest rate or maybe 25 years instead of 20.

4.5% interest = $72,273.86 in debt service, so using my previous math, that would be a cash on cash return of 9.6%

25 year term = $70,153.36 in debt service, so 10.5% cash on cash return.

Many ways to skin a cat.

[Winning]

Seller financing is a great option. You should take it plain and simple. It's a win win for both parties. You do not need to get bludgeoned to death by some local bank over every tax return or P&L you have ever produced, and the interest rates would be similar. They are looking to "retire", so earning 5.5% annually over the next 20 years is a safe investment for them as they entire the period of life where fixed income is the most important.

Ahhh.. It's called Seller Financing, not Owner Financing as I was calling it, thanks!

When he approached me with the offer, I thought it sounded great, and to good to be true.. But I always try to remove any emotion and let the numbers speak to me and get a good understanding of what I may be getting myself into, an what is the best way to get into and out of the situation.

So let say, I take him up on his seller financing, I still need to come up with the 20%, roughly 238K.

What would be my options and costs involved to get him the 238K?

Then I can add his financing cost, with the additional $238K financing cost. So I can get a picture of what my net profit would be each month.

[Winning]

8% cap rate implies an NOI of $95,200.

If he is lending you 80%, then you only need $238,000 as a down payment.

A 5.5% loan on $952,000 over 20 years is $78,584.25 in annual debt payments.

Your cash on cash return is going to be :

$95,200 - $78,584.25 = $16,615.75

$16,615.75/$238,000 (Equity Required) = 7%~

When I did this math, which was pretty much the same as what you did here.
I broke it down 1 step further, to the month.
16615.75/12 = $1384.64 per month
And that is not even factoring any additional monthly cost on the debt payments on the down payment.

Also I currently pay $2200 per month in lease payments to the current land lord..
So if I took the 1384.64 and reduced my lease payments, I would only have to pay $815 per month to my own real estate investment company.

I guess me being a tenant throws the numbers off a little bit, and making it harder for me to realize the value of this deal... Then throw in a few vacancy's, some unexpected repairs, then BAM, I am possibly losing money...

So I would think that one would need to account for these situations upfront, and have some funds readily accessible for these scenarios.. Is there a certain reserve amount of funds one should have to help cushion the down months? Perhaps 1 or 2 months of your break even cash on cash return requirement, sitting in an account ready to go, just in case...???? Guidance please..

[Atlas Financial]

The key three metrics most lenders look at are Debt Coverage Ration, Debt Yield, and Loan to Value.

Debt Coverage Ratio = Net Operating Income/Annual Debt Service : $95,200/$78,585 = 1.21x

Debt Yield = Net Operating Income/Total Loan Amount : $95,200/$952,000 = 10%

Loan To Value is self explanatory, (80% for this deal)

The debt coverage ratio should provide some clarity on any "wiggle" room you brought up such as vacancies. You have a 21% cushion to work with essentially. So if your net operating income dropped by 21%, then you'll be making exactly enough to cover the debt payments and not default.

You should have enough liquidity in savings accounts, or brokerage accounts to cover about 10% of the loan amount. Your net worth should also be 100% of the loan amount if you want to look at it like a bank would, which you should, because your butts on the line.

I'm not one to suggest borrowing money to get the 20% down payment, but to each their own, just know you're playing hot potato at that point and any set back could really mess you up.

[Winning]

The key three metrics most lenders look at are Debt Coverage Ration, Debt Yield, and Loan to Value.

Debt Coverage Ratio = Net Operating Income/Annual Debt Service : $95,200/$78,585 = 1.21x

Debt Yield = Net Operating Income/Total Loan Amount : $95,200/$952,000 = 10%

Loan To Value is self explanatory, (80% for this deal)

The debt coverage ratio should provide some clarity on any "wiggle" room you brought up such as vacancies. You have a 21% cushion to work with essentially. So if your net operating income dropped by 21%, then you'll be making exactly enough to cover the debt payments and not default.

You should have enough liquidity in savings accounts, or brokerage accounts to cover about 10% of the loan amount. Your net worth should also be 100% of the loan amount if you want to look at it like a bank would, which you should, because your butts on the line.

I'm not one to suggest borrowing money to get the 20% down payment, but to each their own, just know you're playing hot potato at that point and any set back could really mess you up.

You hit the nail on the head...
When I did all my numbers plus adding in servicing the 20% down payment loan, the deal didn't look to good..

Also I thought about the cost of getting new tenants, because with new tenants you sometime have to invest in the property to make it ready for them.

This deal would be a no brainer if I had $200K sitting in some account not doing anything with.

But if I can put something together that I feel good about, this 1 deal could change my entire life.. Based on the knowledge and experience I would gain by being a owner of a $1M 8 cap commercial real estate property. After I do 1, the 2nd 3rd, and 4th are a lot easier. Not even thinking about the windfall when I sell the properties in 10 to 20 years, OMG..

and the fact that the owner even allowed me the opportunity is crazy, I don't know if I would ever get another opp to get into commercial real estate so easy, just based off the simple fact that I have been a good tenant, he is willing to do an seller finance. Or am being naive? Because actually, if i default and he takes the property back, he really wins in the end and get to resell the property to someone else all over again...

[Atlas Financial]

Up to you at the end of the day. The best deals are the ones you can walk away from. Some people don't have the appetite for the risk involved, in which case, go open up an account with Ally and earn 2.2% on your money. You won't get build wealth that way, but you'll be safer.

[Winning]

I have learned a ton of new concepts and theories, in just talking about this. Thank you all!

So if I were looking for a loan that would completely cover all what I need to be in a really good place to be able manage this property, I think I would be looking for a loan for close to 1.3M..??

Here is how I got to this number.
The seller is asking for 1.19M + I need 119K for the 10% reserve cushion = $1,309,000

I know for this example, it would be better to maybe get a LOC for the 10% reserve cushion, but for this example lets just look at the numbers on a 1.3M dollar commercial property loan..

I am better working in reverse...

When I purchased my house back in 2001 I was only 21. To start that process, I 1st went to the bank asked some questions and got all the pre approval stuff done 1st. They told me what my numbers would need to be and the stips required for various loan amounts. I also asked them to show me what my monthly cost would be for the various loan amounts, if I choose 15Y, 20Y, or 30Y. Based on those numbers they provided, I added up the total out of pocket costs for each of the terms. Based on those numbers it was clear to me that I was going to pick a loan that I could afford to pay off using a 15year term.. Fast forward 15 years later, in 2016 I am 36 years old and have a paid off house. So that is my extent of my real estate investment experience.

From what I am learning about commercial property, it is a lot different from how the value is assigned on a residential property. It seems like the most important part of commercial property is it cap rate and that the commercial property value comes from the positive cashflow that it generates (cap rate), which is completely different from buying a home, which value is based on a lot of other things.

So I think that would mean, that depending on the commercial property, if the calculated cap rate is high enough, the loan can be 100% backed by the value of the property alone?

So the question would be, could this property support a loan that could cover a 0 down 1.3m dollar loan, and what would be the interest rate, for 20, 25, or 30 years?

With that approximate info I could figure out the monthly payments. To then see how comfortable I would be with those numbers based on its Cap Rate (the revenue the property is generating minus it's expenses).

If this property could support something like this, and if I could get the right lender that believes that I could mange this, the lender and I would be on the way to world domination!

But even if the property can't support a 1.3M dollar loan, what can it support? I could then reverse engineer that and make a counter offer to my land lord, and who know's he might take it!

If I can't pull this off, that just means this deal wasn't a good deal for me. And I believe everything happens for a reason, so maybe the entire purpose of him presenting this to me, was not for me to buy his property, but was for me to start seriously learning about commercial real estate investing concepts and theories, and going out to find a property deal that is good for me.

[abfunders]

Winning, I'm sure that Atlas will do a much better job than me explaining this, but you should know that it's rare to get 100% financing from any one lender. In fact, banks will require 20-30% down, and in commercial properties may give you 30-year amortization (which gives you the lowest monthly payment), but with only 10 years at that rate, then you'll need to re-fi.

Lenders also won't take a "2nd position." That's the advantage of seller financing. The lender takes first position, and the seller takes 2nd. Most lenders will require you to "source" your funds, meaning that they don't want you to buy the property for $1.19mm and put no skin in the game, so they'll need to know where your down payment came from. Those lenders who do not are not banks, and the rates are in the 7's or 8's for commercial property.

There's a lender that some of us here work with, their minimum loan amount is $75,000, but you need to be a broker to get to them. I think Atlas is dominating this conversation, you should definitely reach out to him or me if you'd like assistance.

BUT: You're going to be MUCH better served on a 30-year amortization with lender financing in first position, and coming in with the 20% on a 4-5% rate from a small mortgage on your own house from your bank, that you'll pay no fees on, and get a UBLOC to cushion yourself, and that UBLOC could come from your bank or not, which is something a lot of us here could help you with as well.

[Winning]

you should know that it's rare to get 100% financing from any one lender.

So is it possible to find a lender that will? How would I find such a lender? If I could find out what the numbers need to be regarding the property, I can then do the work to find the property's that will fit there requirement. This particular property I am discussing may not, but if I can find a lender that does 100%-110% and educates me on what a property needs to bring to the table that would qualify it for for a 100%-110% financing, Game Over!

in commercial properties may give you 30-year amortization (which gives you the lowest monthly payment), but with only 10 years at that rate, then you'll need to re-fi.

So they give you some sort of adjustable rate, that goes up significantly after 10 years... Got It..

Lenders also won't take a "2nd position." That's the advantage of seller financing. The lender takes first position, and the seller takes 2nd.

So most lenders would not lend me the 200K downpayment with the property being the backed asset, because that would put them as 2nd, due to the fact the the seller that is financing the other 80% would be the 1st positon. Right?

[Winning]

I did a quick search on scotsmanguide.com for Texas Lenders, that loans +1M, LTV 100%, for purchase of an office complex.

The results are at
https://scotsmanguide.com/rsLenderSe...||||||||||||||

River Valley Bank

South End Capital Corp.

The Bancorp Bank

Starbanco Business Finance.

So let me see what I can find out about these companies here on the forum as well as elsewhere on the internet

[abfunders]

So is it possible to find a lender that will? How would I find such a lender? If I could find out what the numbers need to be regarding the property, I can then do the work to find the property's that will fit there requirement. This particular property I am discussing may not, but if I can find a lender that does 100%-110% and educates me on what a property needs to bring to the table that would qualify it for for a 100%-110% financing, Game Over!

Still not worth it. The rate the seller is giving you is too good. I don't know of lenders who will do 100% financing anymore. You NEED some skin in the game.

So they give you some sort of adjustable rate, that goes up significantly after 10 years... Got It..

Not true. Many will give a fixed rate for 10 years, and then they'll adjust it based on the interest rates that exist in 10 years.

So most lenders would not lend me the 200K downpayment with the property being the backed asset, because that would put them as 2nd, due to the fact the the seller that is financing the other 80% would be the 1st positon. Right?

That is correct. And to preemptively answer, "seconds" from traditional lenders don't exist anymore and the hard money lenders / high risk hard money lenders who do it them, they're EXTREMELY expensive and won't help you any. Your seller has to take the back seat if you want to get a loan using just the commercial property, or you can take money out of your pocket / equity in your home / UBLOC and do it yourself. Seller financing seconds are more common, they'll go on title behind the first position lender (if they want!), and that can close the day after the first position is funded, if they so desire. But if you close with a traditional lender, you'll still need to put 20-30% down. If it's a bank, they'll source it. If it's others, they may not need to, but YOU still have to come with the money to wire to the closing agent.

[Winning]

Seller financing seconds are more common, they'll go on title behind the first position lender (if they want!), and that can close the day after the first position is funded, if they so desire.

Another new concept for me grasp! So why would the seller agree to be a second, unless the seller decided to switch roles...
So i guess this would work like this...
I would borrow the 80% from the bank, to pay the seller. I would need to have the 20% at the time of closing. That makes the seller whole, and removes all his positions. Then I do a new deal with the seller and borrow 20% against the asset that I just bought from the seller. So I do 1 deal to take him out of 1st position and make him whole.. Then I do another deal borrowing 20% from him, making him the 2nd.

But if you close with a traditional lender, you'll still need to put 20-30% down. If it's a bank, they'll source it. If it's others, they may not need to, but YOU still have to come with the money to wire to the closing agent.

So the 20% I need to cover the "Double Closing" (I just learned what that is also) would be a scenario that a "Bridge Loan" is used for?

[dfishman]

I would try offering the following.
1.10% down
2. 5% Interest
3. 25 year term / With a 5 year balloon. You are asking for a better deal, so he needs to get something.
Go find new financing in 5 years...