Seller Financing on an Investment Multifamily

[Michael Willis]

If I only have 20% and banks are requiring 30% for a down payment, and I have no reserves after the down payment but the seller is willing to hold a note, whats the best structure for that deal to be made? 

1) I remit 20% and the seller holds the note for the balance? Interest only?

2) I remit 20% to the bank and the seller holds a 10% second mortgage interest only?

or is there a better way?

Thanks to all!

[Bill F.]

@Michael Willis

There is no "best" way since there are bunch of ways to structure a note depending on the your and the seller's goals. How big of a property are you talking about and what's the NOI?

-Will the bank let you fund the down payment with a second and no cash reserves? Does the property cash flow enough to support this?

-What's the minimum amount the seller will take as a down payment? I wouldn't want to buy a MF without at least some reserves so 20% down probably isn't the best play. 

-In general I'm not the biggest fan of IO notes unless you know for a FACT that you can get financing and/or you'll use the excess cash flow to add value. Also IO dosn't really help the seller since he still will have a big tax bill at payoff. 

-What amortization will the NOI support? 10, 15, 20...? If this is a core asset I'd go with the shortest term possible to make refing with a bank easier. Value add gives you some more options, but with both be careful of exit cap rate projections being to rosy.