Too many buildings, no positive income Help?

I have a coworker who I had spoke with recently whom happens to own several properties in the Pittsburgh area. I understand that Pittsburgh is an okay real estate market but, I worry that he is in over his head. This past year he has aquired three buildings that are two to three units, the loans are arm's and he has told me that he has not had that much of a positive income because of his tenants owing rent. Recently he has purchased a building that will be a resteraunt and his deal was for another arm for 175, 000 and it was for sale by owner. His home is also arm which it will reach its second year in 2/28 arm and he will have to refinance. he also has two auto loans of greater than 5,000 dollars I am not familiar with real estate but, how likely is he to be successful in a real estate business with all of this debt? I say he is in over his head. Am I wrong?

A lot of it depends on where his rates are on the ARMs. If they've fully adjusted (ie, if you were to price the loan today, you'd get the current rate he is paying), he may not be sleeping that well, but he just may get through it. For instance, if you have a loan that is at 1 year LIBOR plus 1.5%, and one year LIBOR is 5%, the fully adjusted rate would be 6.5%. If his current payment is based on say, 4.5%, then eventually, you'd expect the rate to adjust to 6.5%, and his payments would go up significantly. If it was 6.5%, then it figures to adjust as LIBOR adjusts. Looking at the futures market for short term rates, the consensus seems to be that rates are headed down. If that happens, and his loans were based on rates that were fully adjusted already, he may see some declines in his payments. Rents generally trend upward over time, so he ought to get more income as time goes along. If he can avoid increases in loan payments, the cash flow picture ought to get better as time goes along. However, he is clearly taking a huge risk on the direction of interest rates. If the rates on his loan haven't fully adjusted to the increases by the Fed, then he may be looking at negative cash flow once they adjust...if that happens, it'll be a matter of how long he can hang on. The restaurant may or may not be a good deal...the main questions are how much experience the operator has, how easy is it to re-lease if the current tenant bails, how creditworthy is the current tenant, and whether he can get the same rate if he has to lease to another tenant. If it is a national chain, then he doesn't have many worries there. If not...and if the area is dodgy, then he may be in trouble. Its very difficult to assess a situation like this without knowing all the details...hopefully, I've given you a range of what the possibilities are. Sounds like he is taking a ton of risk...it may work, it may not.

You haven't addressed his debt ratio--the amount he owes compared to the worth of the properties. If THAT is lower than 70%, he will probably be fine once he deals with his deadbeat tenants. If it's greater than 80%, he's in trouble for sure.
So find out.

As soon as those ARM kick in he will not be sleeping well. I sure the last thing i will want to hear is a I told you so, so stay on the DL.

HAH, been there and lost $1M in less than 60 days. After 9 years I have almost paid or negotiated out of debt.

It is just so easy to be "Diamond Jim" when the money is loose with ARM's. If the appreciation doesn't cover the deal before the ballon is due then he/she is SCREWED.

I would suggest that your friend wrap it all into a 1031 that carries and BAIL while he/she has the chance.

Perhaps a NICE 8-16 unit where he can occupy one unit and bail from the rest.

The resturant business is almost as "IFFY" as that Nigerian banker looking for help.

You friend is headed for BIG TROUBLE and needs to MOVE FAST!

He has a GREAT FRIEND that you would care enough to ask; hang in as long as you can because it can get bad.

Happy New Year,
J

suggest to your coworker to visit davreramsey.com to learn about the con job he been sold into before he loses everything.
thankfully for you , you will learn from his mistakes and not repeat them.
he will be foreclosed on and in the street or car within five years. see this nightmare daily . bankers will get papers on miss informed people any day, they win.

He will soon lose it all. The house of cards will fall.