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We've used "seller financing" on two self storage deals in the past.
And it raised our cash on cash return by 20%+.
And lowered the amount of capital we needed by $500k.
Here's a THREAD about a deal of mine and how this magical debt structure can work.
👇👇
And it raised our cash on cash return by 20%+.
And lowered the amount of capital we needed by $500k.
Here's a THREAD about a deal of mine and how this magical debt structure can work.
👇👇
My method is simple. In the late stages of negotiation I submit two offers:
One at a lower price.
And one at the exact price the seller wants but with him holding back 10-20% of the purchase price in the form of a 2nd mortgage (with a second position to your bank loan).
One at a lower price.
And one at the exact price the seller wants but with him holding back 10-20% of the purchase price in the form of a 2nd mortgage (with a second position to your bank loan).
Contrary to popular belief seller financing rarely includes the seller holding back 70-80% and acting as your bank.
Two reasons:
#1 most have some debt on the property.
#2 most want most of their money now.
Two reasons:
#1 most have some debt on the property.
#2 most want most of their money now.
Have you heard the saying:
"you name the price and i'll name the terms?"
This is a case of that situation exactly.
Lets paint a picture here:
"you name the price and i'll name the terms?"
This is a case of that situation exactly.
Lets paint a picture here:
I was negotiating with a seller on a property.
Not many interested buyers so I knew I had some leverage.
His asking price was $4.5MM. I wanted to pay $4.2M.
After a week or two and a lot of back and forth I found his lowest number.
Not many interested buyers so I knew I had some leverage.
His asking price was $4.5MM. I wanted to pay $4.2M.
After a week or two and a lot of back and forth I found his lowest number.
$4.325MM.
At that point I made the two offers.
One at $4.2MM with normal terms and a bank financed closing.
The second at a price of $4.325MM with $500k of "seller financing".
So lets go over the dynamics:
At that point I made the two offers.
One at $4.2MM with normal terms and a bank financed closing.
The second at a price of $4.325MM with $500k of "seller financing".
So lets go over the dynamics:
My advantage is clear.
Instead of getting 70% ($3MM) financed through my bank and coming up with the last 30% ($1.3MM)...
I finance 70% ($3MM) through my bank, 11.5% ($500k) through the seller, and only needed to come up with 18.5% ($800k).
Instead of getting 70% ($3MM) financed through my bank and coming up with the last 30% ($1.3MM)...
I finance 70% ($3MM) through my bank, 11.5% ($500k) through the seller, and only needed to come up with 18.5% ($800k).
Quick note:
This deal was done over a year ago when the market was much different and good deals were easier to find.
It had a lot of cashflow and a good debt coverage ratio.
I wouldn't feel comfortable going to 80%+ leverage today.
Ok back to it:
This deal was done over a year ago when the market was much different and good deals were easier to find.
It had a lot of cashflow and a good debt coverage ratio.
I wouldn't feel comfortable going to 80%+ leverage today.
Ok back to it:
When you raise money on a deal the equity you raise is expensive over time.
Generally 15-25% per year is what you pay to your LPs or what you expect as a return on your own capital.
But the seller only gets 5%.
Lets talk about how its structured with him:
Generally 15-25% per year is what you pay to your LPs or what you expect as a return on your own capital.
But the seller only gets 5%.
Lets talk about how its structured with him:
Here's a picture of my Letter of Intent.
It's a 5 year term, meaning the rate is locked for 5 years. After that the rate goes up to 7%.
If I ever refinance, which I plan to do at 18 months, I have to clear his loan and pay it off.
It's a 5 year term, meaning the rate is locked for 5 years. After that the rate goes up to 7%.
If I ever refinance, which I plan to do at 18 months, I have to clear his loan and pay it off.
Our bank is fine with this because our entire debt obligation on the deal still meets their 1.25x DSCR and 8%+ debt yield. Aka its juicy.
And they have first position. Meaning if we default, they get made whole first.
+ they trust us and like us (that matters, a lot).
And they have first position. Meaning if we default, they get made whole first.
+ they trust us and like us (that matters, a lot).
Debt yield is the almighty stress test in real estate.
If you aren't sure what that means, take this free quiz:
nickhuber.podia.com/debtcashflow
If you aren't sure what that means, take this free quiz:
nickhuber.podia.com/debtcashflow
I don't use this on every offer.
Definitely not on competitive properties.
And not unless I have some leverage and rapport with the sellers.
Because it's a risk for them. They are your new banker. You stop paying or run the property into the ground, they lose big.
Definitely not on competitive properties.
And not unless I have some leverage and rapport with the sellers.
Because it's a risk for them. They are your new banker. You stop paying or run the property into the ground, they lose big.
Today, almost a year after closing, that $4.35 million property is worth about $6 million.
So that little bit of seller financing really helped us increase our returns and it has been a great deal.
In the next few months we'll refinance it and pay the seller the rest of the $.
So that little bit of seller financing really helped us increase our returns and it has been a great deal.
In the next few months we'll refinance it and pay the seller the rest of the $.
If you like this kind of thing, make sure you're on my email newsletter - as I send deal breakdowns and stuff like this often:
sweatystartup.ck.page
sweatystartup.ck.page
Lets breifly touch on what this seller financing does for cashflow.
NOI on the property is $360k per year.
Without seller financing we would have gotten $3m from bank and $1.5m of cash.
Debt service of $195k.
Cashflow of $165k, or 11% deal level Cash on Cash.
NOI on the property is $360k per year.
Without seller financing we would have gotten $3m from bank and $1.5m of cash.
Debt service of $195k.
Cashflow of $165k, or 11% deal level Cash on Cash.
Seller financed version, NOI is still $360k per year.
We have $3.5m in debt and $1m in cash.
Debt service is $227,500.
Cashflow of $132,500 on our $1m investment for 13.25% CoC.
We have $3.5m in debt and $1m in cash.
Debt service is $227,500.
Cashflow of $132,500 on our $1m investment for 13.25% CoC.
The equity multiple if we were to sell for the $6m valuation is even more significant.
$4.5m in total costs and a $6m valuation now means $1.5m in value created.
If you put $1.5m in the deal you've doubled your money in 18 months.
After $250k cashflow about a 77% IRR.
$4.5m in total costs and a $6m valuation now means $1.5m in value created.
If you put $1.5m in the deal you've doubled your money in 18 months.
After $250k cashflow about a 77% IRR.
With $1m of cash in the deal and $1.5m in value and $200k in cashflow, you're looking at a 113% IRR.
A big difference!
Note: The same can work the other way and leverage can amplify your losses and crush cashflow if the revenue slows down.
A big difference!
Note: The same can work the other way and leverage can amplify your losses and crush cashflow if the revenue slows down.
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Blake Burge @blakeaburge
·
Mar 10, 2022
Great thread, Nick.