HOW DO YOU FINANCE YOUR DEALS --- WHAT RATE DO YOU EXPECT?

Question

I am looking to get into multi family investing. But I've never even owned a single family rental ! HAHA

I did my first flip and ran the math and fig'd out if I have 10 years, WHICH I DO cause I am 26 years old, then multi family buy/hold is the best over a long period.... HOWEVER, I only have 160K in cash capital. I cant do much with that ! LoL
But I wanna know how you guys run your numbers. cause the devil is in the details...

PLEASE- ONLY EXPERIENCED MULTI FAMILY INVESTORS SHOULD REPLY

So we can all learn !

QUESTIONS !1)How do YOU finance your multi family deals? LTV Rate? How much of your own cash?2)What cap rate is your minimum?  and more importantly, how exactly do you calculate your cap rate?  (Please post the algorithm/math in your response)3)What percentage rate do you need to make it work?4)Where is the BEST place to go to get your loan ? broker ? Private ? FHA ?5) How long before your deal is paid off (average) conservatively estimating. 6)What size plex do you do ?  2-3-4-5-6-7-8 ? Jesus, I really need a mentor in the multi family arena, How did you get started ?

Brian Moore · Answer

@Nicholas Moffett I agree with you that multi family investing is the best way to increase your wealth. I have been doing it full-time in Chicago for the past 3 years. Before that I developed, financed and oversaw the management of multifamily deals for a large real estate firm.

Here are my answers to your numbered questions:

1) I use bank financing. 75% LTC (up to 75% ARV) with 1.3 DCR. 25% equity. I do syndications to raise equity usually between $250,000 and $500,000.

2) Cap rates are very market-specific. In Chicago some properties sell at a 4% cap and some over 10% (other cities will start at 10% and go up from there!). You have to do your market research and calculate the cap rate of completed sales in your target market. I suspect you will find that cap rates are almost impossible to determine with any kind of accuracy. Instead I use GIM (gross income multiplier). I don't use this to determine how much I should pay (I use a detailed cash flow analysis for this), I use GIM get the approximate market value/appraised value.

To calculate cap rate use NOI divided by sales price.

3. The cap rate you need to make your deal work will vary based on the market and your investment strategy. My deals' cap rates are irrelevant to you unless you are investing in Wicker Park.

4. Bank financing is ideal but hard to get. You have a good chunk of equity and if your credit is good, you should be able to find bank financing from local banks in your area. Your terms may not be quite as good as mine, but you have to build a reputation with the bank first.

5. My loans have a 25 year amortization schedule, and five-year term with a balloon. With rates so low you will probably not find long-term financing for your deals.

6. I invest in 3-flats up to 12 unit properties. I try to buy at around $200,000 per unit, rehab the property and achieve ARV of $300,000.

How I got started: I have owned a three flat in Wicker Park for 15 years (originally we lived there and rented the other two units out). About four years ago I noticed the neighborhood rents were going up rapidly and the credit of my tenants was outstanding (6-figure incomes and flawless credit). Thus I decided to go into investing on my own full-time.

Brie Schmidt · Answer

@Nicholas Moffett

1)How do YOU finance your multi family deals? LTV Rate? How much of your own cash?

The first few properties were residential financing 75% LTV coming from our own funds.  The next 10 were commercial financing with a 80% LTV with the down payment coming from our own funds.  The next 5 and future 5 are commercial financing with 80% LTV with the down payment coming from a loan from family.

2)What cap rate is your minimum?  and more importantly, how exactly do you calculate your cap rate?  (Please post the algorithm/math in your response)

Cap rates are so market and asset class specific, so what I do could be very different than what you do.  But How I initially caluclate it to determine if it is worth seeing is:

Annual rent

- 1 month rent for vacancy

- 8% Repair

- 5% Capex

- 9% Management

- Tax  (verify with the city)

- Water and Insurance (I have a per unit average based on my own historical costs)

Once I go under contract I require last year's Schedule E or a 12 month P&L - Then I input the actual numbers and verify it is still at my minimum cap

3)What percentage rate do you need to make it work?

My commercial loans are 5 years at 5% on a 25 year amortization

4)Where is the BEST place to go to get your loan ? broker ? Private ? FHA ?

Broker

5) How long before your deal is paid off (average) conservatively estimating.

Probably 25 years, I keep reinvesting all the cash flow

6)What size plex do you do ?  2-3-4-5-6-7-8 ?

I have (as of Friday) 12 duplex's 3 triplex's and 1 four unit 1 five unit and 1 six unit.

Wendell De Guzman · Answer

I bought my first multi-family (36-units) building for $1 down, take over the mortgage payment (seller financing). I bought my second building (133 units) for $1 Million down and I qualified for $5 Million non-recourse financing. My own "skin in the game" though for my second building is only $5,000. You can find out how I did this by listening to my podcast - http://Biggerpockets.com/show65

Matt Inman · Answer

@Nicholas Moffett great questions.  I had some of the very same ones in mind.  I look forward to seeing the responses.  And thanks to those that already posted.

HOW DO YOU FINANCE YOUR DEALS --- WHAT RATE DO YOU EXPECT?

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