What woud you do?

[Paul M.]

So here is my situation: 

I've decided to form an LLC renting multifamily properties. Right off the bat I will have 140k of my own cash to work with. When I initially became interested in the idea of multifamily rental real-estate, I contacted a family friend in the area who has become very successful with real estate, including the rental of multifamily properties. He, like myself started out his company with a decent amount of his own money right away. I was already looking at a few 3-4 unit properties when I contacted him and he showed me one of his 5 units that has a 6th unit which needs to be completely redone from top to bottom. I like it and I like the numbers it pulls in. Its currently fully occupied and the tenants have been there for the past 5 years plus. Its older, like all the multifamily properties in my area, but he had it inspected for asbestos and appraised last year. With just the 5 units its valued at 120k, and after adding the 6th it will most likely be worth 150k (there's a comparable 6 unit nearby going for that much atm.) He wants to sell it to me cash for 100k. Hes a real honest guy and told me up front, right away the cost to fix up the 6th unit will be in the ballpark of 10-15k and that within 5 years the roof will most likely need to be replaced for approx 20-25k.) This guy has made a lot of money in our area but is now in his own words 'burned out' because since he started this venture he also manages all of his 46 properties and within the next 5-10 years he wants to get into land development. He claims to love managing properties but feels that owning and managing both is too much after close to a decade. He's actually offered to manage any local properties I end up acquiring including his so I can focus on investing, which is great because I dont know the first thing about property management. He manages other properties which he currently does not own as well. Hes very resourceful, really good at property management and has a great proven system set up with his secretary to fill vacancies. This man is very valuable to me not just because of this property but also as a resource, property manager and of course friend.

On the investment side of things I dont think hes done all his homework and he even admits hes had to learn some things the hard way along his journey. At the time when we first talked about all this I was under the assumption that using cash and owning properties, building equity along the way, was the way to go because after all that's what he did. The more and more I read about this venture I'm seeing the value in not owning but rather mortgaging these investment properties (as suggested by Brandon Turner's blog on here and David Lindhal's book "Multifamily Millions") and focusing not on equity right away but instead on cash flow. There are two other potentially great 6 unit properties in the area that I am interested in purchasing as well. I contacted a couple local Credit Unions ( bank managers there that he actually recommended himself) and they said they would possibly be interested in financing all three properties including my friend's building mainly because of the cash I have on hand to work with. If I put 20% down on all three properties and finance the remainder, depending on what the other two sellers are willing to agree to that gives me anywhere from 65 to 85k left in my bank of cash to work with for a 'cushion' or for further investments. I was very excited at the thought of this prospect because it obviously reduces a lot of risk going into all this. When I mentioned this change in plan he insisted that he would only do a cash transaction with his property because he doesn't want the bank 'all up in his ****' as he says.

Before people start questioning his integrity, I can vouch personally that this guy is a really good and honest person who I've seen do great things for people when he didn't have to. Hes known my family for over 2 decades. Hes being up front about the costs needed for the 6th unit and roof. He's also offering to be my property manager for the very property in question. I really dont think his avoidance of the bank has anything to do directly with the property itself. I just think he genuinely doesn't like dealing with banks. I know hes personally also against any kind of debt. If there's anything hes 'lying by omission' about it has to do with his own finances and not this property. Having said all that, I'm not going to do anything without a professional inspection. I will make sure structurally that the property is what he says it is and what it needs to be. When its all said and done I will have done my 'due diligence.' If I'm somehow wrong and hes trying to pull some ****, rest assured, the deal is not happening. 

My question to bigger pockets is this: after it passes my inspection and we have that out of the way, is there some kind of process where I could do this deal and somehow still mortgage the property? Maybe this is dumb to ask but I see people on here all the time talking about private lenders and such. Is there some other financing option that I can put a down payment on the property and still have my 'cushion'? Like someone acts as an intermediary and buys it from him with cash and I use a mortgage to finance buying it from them? I suppose I could buy it borrow against the property after a year up to 75% but to me that 25% is a down payment on another potential property in the future and thats a whole year where if something goes wrong I dont have as much of a 'cushion.' He and I briefly discussed possibly doing a land contract over 12 months. I was receptive to that but I dont know how the bank would feel after I pitched my sales plan for two properties and then saw huge chunks of cash come out of my bank month after month for the property I want to buy from him. I feel like all three properties if they pan out would be a great start to my LLC if I can use lender financing. Again, just as important to my plan is my friend/mentor/property manager. Any suggestions? Thanks.

Paul