Can anyone give me reasons not to back out of my MF deal?
I'm leaning towards backing out of a deal I'm under contract on (earnest money isn't hard yet). But I'm curious to see if anyone other than my brokers can give me a good reason why not to.

It's an 8 unit value add deal, older building, all small 1 beds in a desirable neighborhood. The tenants are mostly young, recently out of college. The four I found on linkedin have titles like "junior data analyst" but I'm guessing there's some people in food service in there. It seems like tenants at high risk of losing their jobs or taking significant hits on their income. And since each unit only has one person bringing in income they would have to dig into savings, if they have any. The other piece is that the deal includes a vacant lot which I was intending to sell off to someone developing condos. That would significantly reduce my basis. If the value of that land drops significantly it's a problem.

The upshot is that it's a desirable neighborhood that people are going to continue to want to live in. But ignoring the vacant land the deal is a 3.5 cap. RCA shows prevailing cap rates of 5% in Denver metro and presumably this will go up significantly. The building has been neglected so needs a lot of work and I'm skeptical the rents I was projecting can be achieved.

Because I was anticipating this deal the bulk of my assets are currently either cash or in treasury backed money markets and thus unscathed. I feel like there may be some great opportunities out there soon for someone who has the cash.

&amp;#x200B;

*Edit: I'm buying a building at a 3.5 cap for two reasons. 1) There is a vacant piece of land attached. Selling the land reduces my basis by 2/3 and ostensibly brings it up to a 4.4 cap. 2) The seller's P&amp;L's are weird for 2019 with inflated expenses due to him calling a significant amount of capex opex for some reason. There was no way to suss it out because he kept poor books. Using 2018 NOI and removing the land sale from the price the deal is a 5.2 cap with significant headroom*
[{"id": "fkoo7jh", "text": "I feel like backing out just because of what's going in isnt the right move. \n\nRather, I would never buy something with only a 3.5 cap rate. That seems not very good. Surely you could do better then that? At that rate I would expect a brand new everything. For the condition the building is in as you described, you will be much worse than a 3.5 cap if you fix those items. Seems very expensive.", "replies": [{"id": "fkorri8", "text": "It's a 3.5 cap but the vacant land sale reduces my basis by like 2/3 or more. The seller also has owned it for 25 years and isn't interested in moving it upmarket to capture higher rents. I don't like the cap rate on it's face but the numbers seemed to work.\n\nHowever, when I reduce target rents, push the land sale further back and reduce what I net from the land sale, the numbers don't work as well.\n\nI'm curious why what's going on wouldn't deter you? Everything is locked in at the peak of the market and now some of the tenants will be out of work for at least two months.", "replies": [{"id": "fkouesb", "text": "Its yet to be seen I suppose, I just feel the impact is going to be more temporary than people think. I dont see apartment values plummeting. Especially this deal you already said is under rented. So is it going to become more under rented? Likely not.", "replies": [{"id": "fkp1j0n", "text": "I think it will remain fully leased up if rents remain where they're at. But I'm skeptical rents can be raised to where they need to be to make this worth the effort and risk. The type of people who rent small one beds are going to be hit the hardest. And if the land is worth less or if cap rates go up I'm in a deal that's struggling.\n\nI just haven't read anyone saying this is going to go away because of quarantines. We're just attempting to slow the spread so it doesn't overwhelm healthcare systems. After that is a big if", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fkox53t", "text": "How are you financing it? We\u2019ve completely stopped lending.", "replies": [{"id": "fkp1mtr", "text": "Out of curiosity, what lender do you work for?", "replies": [{"id": "fkp1r2q", "text": "A large private mortgage reit. I probably shouldn\u2019t say which.", "replies": [{"id": "fkpc82o", "text": "Totally understand, thanks.  I assume not Fannie and Freddie backed?  If so, it makes sense to put a hold on lending.  Plus, not being a bank, increases the risk due to the nature of the loans and investors in the REIT makes sense. \n\nI have a property I am about to finish remodeling in two months, and I am thinking about renting instead of selling based on the market, but if non-conventional lenders such as your company are not lending, that plays a factor in my decision.  \n\nI like everything being in the LLC, which Fannie and Freddie does not permit.", "replies": [{"id": "fkpcmlf", "text": "I used to do Fannie/Freddie third party underwriting but no, we\u2019re don\u2019t do Agency. We do bridge loans, which are generally pooled into CLOs and we also do CMBS fixed-rate loans. \n\nWe\u2019re well capitalized and COULD be lending, but it doesn\u2019t make sense to be lending into so much uncertainty. For now we\u2019re focused on making sure our current portfolio is performing and anticipating questions and concerns from our investors and our warehouse lenders.", "replies": [{"id": "fkpgozz", "text": "Makes sense.  I foresee a really bad 6+ months for the residential market, and everyone I speak with says \"nah, rentals were fine in 2008 and 2009, so they will do well now.\"  I try to explain this is completely different than 2008, but everyone looks at me like I am crazy.", "replies": [{"id": "fkpgz6b", "text": "I have to agree with them for the most part. Not that there won\u2019t be be downside, but that leased MF will be safe with minimal disturbance. Leasing will probably take a beating and building in lease-up could struggle. Rents could stagnate or decline. Hotels are in trouble but it\u2019s likely temporary; current issues will be exacerbated. Retail will likely see a continued, slow-burn decline as people don\u2019t shop as much.", "replies": [{"id": "fkpihgv", "text": "My focus is single family rentals.  That is where I see the ugliness.  Something like 80% of single family rentals are owned by individual property owners (less than 10), and they will not be able to weather a major disruption to rents.  \nApartment complexes have the reserves (or at least should) to survive and retractions in rental price.\nI do not work with retail/commercial/industrial, so that is outside my knowledge.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "fkpef7q", "text": "We have not, assume you leverage with warehouse lines?", "replies": [], "depth": 2}, {"id": "fkrxte9", "text": "I went under contract and lined up financing about two weeks before the virus came on everyone's radar.", "replies": [], "depth": 2}], "depth": 1}, {"id": "fkozjpz", "text": "What part of Denver?", "replies": [{"id": "fkrxuw1", "text": "Wash Park", "replies": [], "depth": 2}], "depth": 1}, {"id": "fkp3apu", "text": "I am in Silicon Valley investors balk at that cap rate.  In mid west investors will not touch any multifamily unless it is 12-15%.  You have 8 rents to collect. People move in and out constantly.\n\nFrankly, this 11 year economic growth cycle is over.  Housing price erosion has occurred about 1 year ago. Expect them to go down more.", "replies": [{"id": "fkryjzk", "text": "I edited the post to explain the low cap rate. If I use his 2018 numbers without inflated expenses and take the vacant land sale out of the price it's a 5.2 cap. Before the virus popped up it appeared to have a lot of headroom. This is my first deal, but that's not atypical where I'm at.\n\nBut yes, I just don't think the target rents are achievable anymore. So your vote is to back out?", "replies": [{"id": "fks55vc", "text": "Yes. Find another 4 plex 2/1.5 families to save head aches having to deal with that many single tenants.\nGood luck.", "replies": [{"id": "fks6n3n", "text": "Great. Thanks for your input.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fkpb5xd", "text": "OP the situation is fluid and while there are lenders that might have stopped there are others that are still in business. The problem is that at that CAP rate you will probably have to come up with a lot of money to make the minimum 1.25X Debt Service. On the other hand, money is really cheap right now.", "replies": [], "depth": 1}, {"id": "fkpfnvx", "text": "Wtf you buying something at a 3.5% cap!?!?!?", "replies": [{"id": "fkrwdi8", "text": "I guess I edited it out of the post. There's a vacant piece of land attached. Selling it at a conservative price reduces my basis by 2/3. The owner also was running the building the same way he did when he bought it 25 years ago before it was a nice neighborhood. There's a lot of headroom. Or there was.", "replies": [], "depth": 2}], "depth": 1}]