First Deal, what type of loan should we get?

Question

This may be rudimentary, but there is a lot out there, so I wanted to have some other opinions. I've found a 10 unit that is selling for a fantastic price especially considering it already has cash flow, it's fully occupied, and everything has checked out. The owners have had it in their business for a long time and are just ready to retire. My partner and I have enough for 20-25% down, and were wondering which type of loan would suit us better as we would still need 160k or so. Would you try to do a commercial real estate loan or conventional? Going to chat with the bank tomorrow and wanted to have my head on a swivel prior to having that chat. Bigger Pockets has got me this far, don't fail me now!

G. Brian Davis · Answer

I like that idea of not labeling it Casey, since some people will have a gut reaction when they hear the words "seller financing". But by keeping it open-ended, you can explore options together with the seller, and let them come up with ideas as well.

Casey Mericle · Answer

I try not to label things like owner finance or options. I would just say I can give you some  money now and some money later.

If they won't do an option or an owner finance situation then I think you should look in the master leasing it from them. Essentially they would lease the entire property to you and you would sublease to tenets. You would take over management and maintenance and get a cut while learning more about the property. They would get the advantage of no hassles no maintenance no management and no problems.  Make sure any money that you pay them on the master lease goes towards what your agreed upon price would be. Also make sure that if there is room to raise the rents that you get those funds.

Jacob Price · Answer

Thanks Brian,

Yeah, I tried to be pretty conservative as it is my first deal. I have his operating statements from the past few years, so really the only extra expenses will be any improvements we plan to do and the note.

G. Brian Davis · Answer

Hi Jacob,

Casey makes a great point about negotiating for seller financing as Plan A. For Plan B, look into commercial loans, but don't stop there. If you have a home with equity, you can also pull some money using a HELOC. Nothing wrong with you and your partner cobbling together the funds from a range of different sources!

As a final piece of advice, numbers might look fantastic, but make sure you're including costs like CapEx and repairs, vacancy rates, property management fees, accounting costs, etc. Be super conservative when running your numbers.

Feel free to shoot me a PM, would love to hear how the deal goes for you!

Cheers,

Brian

Jacob Price · Answer

Should they not want to do owner financing what would I be looking at doing. I'm meeting with them tonight, so I will discuss that with them, but they seem to want cash based off previous conversations. In that case which route would you turn?

Casey Mericle · Answer

I'd chat with the owner first to see if you could finance through them.  They likely won't ask for a personal guarantee, a personal financial statement, or have miles of exculpatory language in a loan that they would give you.

Typically I ask what they are going to do with the money.  It's likely that most of those funds are going directly in the bank.  The bank pays 0.5% interest, offer more than that.  Then I usually just ask if we could raise the price and move the interest to 0%.  This maneuver will save them taxes and save you thousands.  If they ask for something like 6% then just raise your purchase price by 6% (yes this seems counter-intuitive).  If you look at an amortization schedule you'll see that based on a bank loan you'll save tens of thousands of dollars over the years.

If that doesn't work you might look into master leasing from them with an option to buy later.  That's a nice strategy as it lets you try the property before you buy it while still making money.