Looking to buy my first property. 2 separate 5 units.

[Jonathan Ramsuchit]

Hello everyone,

I am looking to buy a 2, 5 unit residential building for 400k. The owner is selling it as a package. The gross rent for both buildings is 84k and Noi before debt is 65k without accounting for reserves or vacancy. It seems like an incredible deal.

I would like to know if I have to do a commercial loan for this. I feel commercial loans aren't ideal since they have ballon payments and prepayment penalties, and Im assuming that would spread my depreciation over 39 years instead of 27.5

Is there a way to get a conventional loan either with a small bank, or portfolio lender that would maybe have friendlier loan terms?

It is also very important to me to be able to to a cash out refinance or HELOC on the property. If I took a commerical loan would I be able to take cash out of it similar to residential properties?

Thanks a lot guys.

[Daniel Miller]

Definitely want to go with 50% of Gross Revenue for expenses.

$400,000 Purchase Price

$84,000 Gross Revenue = $583.33/unit in monthly rent

$42,000 in expenses

$42,000 NOI = 10.5% Cap Rate

If you put down 10% (some lenders might require more. If you move into one of the buildings you might be able to get away with 10%) your monthly payments at a fixed rate of 6% (commercial is higher) for 30 years your annual payments would total $25,816.56.

$42,000 - $25,816.56 = $16,183.44. Your initial Cash on Cash Return based on the seller's numbers is 40.45%.

Yes, you do have to get a commercial loan. Commercial loans are specficially for multi-family properties with 5 units or greater. No way around this really. 

This looks like a great deal but there are a few things I'd look into. Is the building really old? Is it 100 years old, frame, and two-story? If so, your expenses might be a little higher. Do both roofs have life on them? It will cost you roughly $15,000 to do both roofs. How old are the hot water heaters? They last 6-10 years. They cost approximately $650 to replace. Is there any knob and tube wiring? Are there active code violations? What kind of area is it in? If it's in a rough part of town your occupancy rate might be lower than normal. Is the $84,000 based off actual numbers or is it based on rents and occupancy that the buyer believes is obtainable with a new owner (pro-forma rents)? 

Keep this updated. Looks like a great deal. I'm curious to see what happens.