Purchasing a 100 unit apartment complex with the equity I've built up

[Stephen Jones]

BP,

I've been in the multifamily real estate game now for a little over 10 years. During this time, I've never once used any leverage, never re financed and cashed out, etc. I have always used my own money to purchase new assests since I've started (W-2 & cash flow from current properties).

I currently have a 100 unit apt complex on the table and I would like to use the equity I've built up over the years. I got an appraisal done (For cheap and not technically through the bank) and I have about 2 million in equity, which I realize I can only use 80% of that. Will someone school me on how this works? This particular property the asking price is 5 million. So can I use that equity as the downpayment? At 5 million I would have to come with a million as a DP. So I should have that comfortably with the equity I have built up. Is that as simple as it is? Or is there more to it? Any advice or feedback would be appreciated! Thanks.

[Sam Yin]

@Stephen Jones

First off, congrats and kudos on your achievements thus far. It is very cool to hear of such success.

Based on my limit knowledge, I think you are missing a few important points in your strategy.

First, using collateral in this case is pulling the equity out of your current holdings. This is either done through refi/cash out, HELOC, or second. All doable, but difficult at 80% LTV for a reasonable rate. Most lenders will likely do 60% to 70%. Remember, it must still meet DCR... unless these are not commercial loans... that's a different situation. A second mortgage may work. A HELOC is often tied to prime + 0.5 or higher.

Then there is the transaction costs to consider. If your 100 units is a few buildings, that's better than 20 to 40 properties.

Another big concern that a lender will look at is your global DTI. If you are confident you can over come all these things, you got a good shot.

I ran into a similar scenario. I did not have nearly as many rentals as you do. Last year, I broke through 50 units, across 4 properties. Total equity was about 5M. I pursued a 64 unit that needed A LOT of TLC. Seller wanted about 7M. Based on the NOI, I needed to come up with about 2.4M to close.

My options were: 1031x 2 of my lesser performing buildings. 1031x just 1 building, but cross collateral a few others for a bridge and refi out 12 months later, or use HML+private money.

At the end of the day, my global DTI was always evaluated. My exit needed to be solid. And most of all, I needed to make sure that my current holdings will still pass lender audits for DCR 1.25+, considering any new 2nd positions on it.

Others may have other options that I did not touch on. This is the game we play and you need to make sure you have a solid strategy.

For me, I found a local credit union that offered a optional 10 lock on HELOC at 6%. My friends told me not to take and and just keep it adjustable because rates were so low and they rate was 0.5%+prime. I went with the 10 locked at 6% because of my experience and risk tolerance. I felt more comfortable working with fix term debt.

Hope that helps and gives you some more things to think about. Good luck on your pursuit and I hope you find a way to make it work! It's always good to see the game played.