Journey to $5M with Multi-Units: FAQ

[Nichole Stohler]

Hello BP community! We’ve followed BiggerPockets for years and a few months ago I posted in the success story forum on how my husband and I went from complete real estate failure and debt to coming back and buying a $5M property in 6 years. Some community members asked questions in the post about things like how we got started, when and how we “traded up” properties and why we chose certain exit strategies. Others asked about books we’d recommend and other resources.

In this thread, we are going a step further and answering those questions and more that you might have.   We came up with the most frustrating or challenging aspects of multi-family and will post in this thread each week.   Here's the first post:

Gotta know where you stand.

Your opportunity awaits. What kind of financial base do you have right now to go after your first property?

So you’ve been listening to BiggerPockets podcasts for months… You’ve decided you want to start with multi-units. Where do you actually begin? How do you know where to start? In later forum posts we’ll talk about the business plan but before you can build the plan, you need to know where you stand today. In this post, we’ll look to answer how much money you’ll need to get started. Let’s begin with some very basic property research.

Research

First, we need to determine how much do multi-units cost in your area? At this point, we are NOT doing a full property analysis but simply starting to determine how much you’ll likely need. When it comes to your first multi-unit, there’s a lot of discussion on BiggerPockets about “house-hacking” which means creating rental income that can cover the costs of your monthly mortgage. A common house-hacking scenario described is to buy a duplex, live in one unit and rent out the other.

Very sound strategy… but is this an option for you? House-hacking is not a one-size-fits-every investor. What if you already have a house? What if you have kids in school and there aren’t any multi-unit properties in your district? What if your local area doesn’t have multi-units in safe neighborhoods?

You may be wondering why we are trying to determine this so early in the process. The reason is that as we get into the mortgage options there are some scenarios that will only apply if you will be living in the property. And, the various pros/cons of different types of mortgages include the amount required for down payment.

Ok. So, is house-hacking right for your first multi-unit? Here’s a simple decision tree:

What did you decide? Or, not sure yet? If not, take a drive and see what you think of the properties currently for sale. Maybe list out a pros/cons for your situation.

Now we are ready to look at costs. Let’s use the below example multi-unit costs as a starting point for this analysis with a purchase price range of $100k-$219k. We’ll be using the Phoenix 4-Plex as our case study property throughout this series of posts.

Determining Gap to Down Payment

How much money are you going to need for the down payment? This depends on the type of loan and your credit rating. The great news about properties with 4 units and under is that these properties are still classified as residential. With a residential mortgage you’ll have lower qualifications and the ability to lock in long-term fixed rates.

For our first 4-plex, we worked with Dan Francis, who is a nationwide residential mortgage lender. Because of his experience working with investors, Dan understands the funding details of rental properties as well as tax and income. We caught up earlier this week and he shared the different types of residential loans available and pros/cons of each for investors.

One question you may have is when should an investor start the prequalification process?

Dan’s recommendation is to start as early in the process as possible. He has found that many times potential investors have misconceptions about what is required. Some people might think they don’t have enough of a down payment or that their credit score won’t qualify. A good mortgage broker will help you create a plan for your specific situation.

What types of mortgages are available and could be part of your overall plan? Dan provided me with the following initial guide on mortgages that can be leveraged for 4-units and under:

Looking at our case study property which has a purchase price of $219,000, and using the guide above, we can see that the minimum down payment amounts would be:

• House-hack + FHA = $7,665
• House-hack + VA = $0 (!!!)
• Stay in primary home = $32,850

With a clear direction on the initial funds needed to get started, we can now focus on saving for the down payment. In our next post, we’ll dive into this.