$100K+ in Equity, no down payment, how do i buy this deal?

Question

I currently own a duplex in Philadelphia that is worth $285k conservatively. I owe roughly $75K.

I found an off-market, 6 unit deal that is owned by a customer of mine i'm interested in purchasing. She's asking $700K.

My question is how do i start the process of obtaining this property without having to sell and 1031 exchange my current duplex.

I have not much in savings, and no where near 20-25% for a down payment for the new property.

My current Duplex is fully rented and cash flowing at around a 7.5% cap. This new property is pumping out around a 10.5-11% cap currently.

My credit score is not great as it sits, hovering around a 650 but slowly increasing as i'm paying off debt. I'm self employed and not showing much income on my taxes.

Is there any way to use the equity in my current property to put towards the new property, or am i basically stuck selling the duplex and rolling it into the larger 6 unit rental?

If any further info is needed let me know and i can post it.

Appreciate any info or guidance in advance.

Stuart Udis · Answer

@Joseph Pelensky It does not appear you will have the required closing costs needed to purchase a $700K building through a refinance or sale of your $285K duplex. I also question whether this $700K six unit is a true 10.5-11% cap. I am familiar with the Philadelphia market and neighborhoods where units trade at or around $115K/door.

For this to be a true 10.5-11% cap the monthly income should be ~$10,750.00 or roughly $1,800/unit. If that's not the monthly income, you are arriving at your cap rate by using incorrect expense ratios/expense figures and/or the property benefits from an extremely favorable tax abatement which skews the operating costs. If none of those scenarios apply and the building is in fact grossing ~$10,750/m reach out because the building is not in a $115K door neighborhood in which case I would be interested and can find a way to involve you and make sure you're compensated :)

Joseph Pelensky · Answer

I appreciate the input

Melanie P. · Answer

I planned to recommend getting the deal under an assignable contract and if you can't make the financing work try to find an investor to transfer it to for a one-time profit.

HOWEVER, I recommend reading Stuart's advice above very carefully and perhaps soliciting his feedback on the deal in more detail before putting too much more time into it.

Bryan Stengel · Answer

Hi Joseph, I would look into going the seller financing route if that is an option in this case.  It sounds like you are in a great situation though currently.  It also depends on state of the 6-unit property that you are interested in purchasing.  Is it already fully occupied?  Does it require any additional rehab costs?  You probably know this already, but you don't want to put yourself in a situation where you are struggling to keep the lights on in the event that you put all of your equity into this home and can't take any out.  If there issues that need to be worked out with the 6-unit property, I would utilize that as a negotiating tool to work out a seller financing strategy with the current owner.  She is already is a customer of yours, which means trust has been built already.  Another strategy would be to partner with another investor who could provide more liquid capital and how obtain a DSCR loan on this property.

Steve K. · Answer

Sounds like seller financing or partnering with someone are your best options. Maybe you can use your duplex as collateral seeing as you don’t have a big down payment? If I were the seller I would want to  see a big down payment or collateral…

Aristotle Kumpis · Answer

You need to talk with a lender first. It sounds like you will have an issue obtaining financing. If your DTI is already high, taking on a higher loan amount might not work. You could try talking with a lender that offers DSCR. But you will still need to pull money from your duplex because they will require $175K for the down. If the numbers make more sense on the 6 unit, then maybe look into selling your duplex and doing a 1031.

Joseph Pelensky · Answer

Thank you Jaycee, I appreciate the response. My concern is that if i apply for a HELOC to use for the down payment before i apply for a mortgage, A) I wont get approved due to my DTI ratio, and B) I wont get approved without first showing the bank I have the 20% down payment before pulling the HELOC. I hope that makes sense as i'm trying to better understand how to go through this process the right way and increase my chances of approval.

I was under the assumption I could pull a $100K+/- HELOC out on my current rental, and show the lender I will be using that as the down payment for the 6 plex.

Caleb Brown · Answer

If you want to scale up I would 1031. That still wouldn't give you enough for the DP if you did sell(19% ish for a DP). You could see about being creative and doing a seller financed deal but again with no liquid cash you wouldn't have a DP. I think I would continue focusing on getting rid of debt and saving. I would see if there is something you can scale up to by doing a 1031 since you have a ton of equity if you wanted to trade up

Jaycee Greene · Answer

Hey @Joseph Pelensky, welcome to the BP Forum! Sounds like you have a nice cash flowing property already and see a tremendous opportunity with a new property. If your ARV is truly $285k, then I would estimate you could cash out around $135k that you could apply to the DP of the 6-plex. Happy to answer any questions.

$100K+ in Equity, no down payment, how do i buy this deal?

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