San Gabriel, CA · Member since 2017 · 11 posts · 3 votes
My husband and I are looking to buy an apartment complex in the next year. We are working on our investing education as well as our criteria. Ideally we would like at least 15 units. We have 550k in cash and would be willing to put 400k down on a property up to 1.3 million. We are worried that a few factors such as our young age (both 23 at the moment), our short credit history (only 2 credit cards and a truck), and our desire to buy out of state (we live in Los Angeles and neither of us want to stay here as it's too expensive) will work against us. Right now we are both working on master's degrees so we are staying in LA for at least 2 more years. What are your thoughts on this? Im new to this blog/these forums! My husband and I want to be able to set lofty goals and obtain them, but we also want to be realistic. Our main goal is cash flow as we are really just interested in passive income. We both plan on having W-2 jobs but hope to retire in our 30's and live off of our investment property.
I guess my question turned into more of an intro. Has anyone had success with large loans at such a young age? Our only stable income is 35k/yr as my husband's fluctuates. We usually make around 50-60k a year but aren't able to save much due to the high cost of living here.
Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9y
Congratulations on being so fiscally prudent that you have saved up that much money to work with.
The thing to keep in mind is that commercial loans work very differently that residential ones. One key difference is that, to qualify for a loan, commercial lenders generally require the ownership group to have a net worth equal to or greater than the mortgage amount, with 10% in cash, excluding the money that you are putting into the deal as the downpayment. Even if the loan is non-recourse, it will be subject to what are known as "bad boy" carve-outs, which turn the non-recourse loan into full recourse if you do any of a list of bad acts. Because the lender wants to know that it can recover against you if you commit a bad act, it has the net worth requirements that I described earlier. So, even though you have a large downpayment saved up, you won't be able to multiply it by 4 to figure out how much property you can buy. (And you really should expect to put 30% into the deal, when all expenses are included.)
Instead of attempting to buy a single large property equal to 4x what you have available as downpayment, you should look into buying several smaller properties for the same value. By doing that, you are able to count the equity you have in the other deals in your net worth as you apply for each loan. And, of course, as your net worth grows, so will your ability to finance new deals.
Of course, all this depends on whether you can buy at the right price and the property is cash flowing well from the very beginning. Never invest in property because you think it will appreciate, unless you are also getting enough cash flow from the property to cover all expenses, debt service, reserves, capital expenditures, and some profit for you.
Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes
9y
Hey there! A few thoughts. First off, commercial lenders still take personal assets/income and experience into account, so that may limit you - but forget that, let's say you could do what you're talking about doing.
The market we're in right now is a pretty hot one. I think that sinking such a large amount of your capital into such a large project, which would be your first, is staggeringly risky. Especially with your income compared to the potential losses you will incur at some point - and you will incur losses, it's just a matter of when and how big - that's part of the fun of learning.
If I were in your shoes (and I do have some similarities, being 23 and having just bought my first place outside of LA for $425k last year,) I would take a far smaller amount of your $550k and take a bold-but-smaller-step. After making sure I had 6 months in personal living expense reserves, I'd probably be out looking for a single 1-4 unit property that wouldn't use up more than $80-$100k of my money at the most, including all down payment/closing costs/repairs, while also making sure I was setting aside 6 months of expense reserves for that property too. And even that number is still a pretty giant amount of risk for a newbie.
Since we're in a hot market right now, a correction is without a doubt in the near-ish future, which poses a big risk to newer investors like us, so you have to play things cool and conservative. So I'd be still taking bold affirmative action, but with a much smaller amount of money, so that you can start learning a lot - but without a staggering amount of risk in a market that will be leaning the other way before too long.
Additionally, if you still have a good amount in the bank when the market starts correcting, you can be ready to take advantage! Your goal is 100% achievable and I believe you will accomplish it, but in a market like this, you want to carefully set yourself up for success.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
The numbers add up. If you are looking at 1.2M, the 25% down payment of that is 300k. So that means you have 250k in excess. You can use that money and finance the renovation for say 100k, then 150k will be your reserve funds. Personal credit history plays a factor on commercial loans but not that much as 1-4 unit. Not too familiar with commercial but have read a lot. Since cash is king, you have the power to shop around, try to see credit unions than commercial banks. There are also brokers that are really good at their job in finding a great program for you.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
I would take that leap tho if I had the chance. I've been taking bigger and bolder chances in my business, the more risk, the more reward I get. I don't think you'll lose money, if you can manage them well, the property should pay for itself. I would switch to a different more active strategy like a hotel or student housing where you could charge more for taking more risk. My goal in life is to retire early, or have an auto-pilot company where I work 2-3 hours a day that can make more money when I sleep. Sure, someone can buy properties and build a billion dollar empire, but the exchange is 10-14 hour work-days, nah, i'll pass.
Hey there! A few thoughts. First off, commercial lenders still take personal assets/income and experience into account, so that may limit you - but forget that, let's say you could do what you're talking about doing.
The market we're in right now is a pretty hot one. I think that sinking such a large amount of your capital into such a large project, which would be your first, is staggeringly risky. Especially with your income compared to the potential losses you will incur at some point - and you will incur losses, it's just a matter of when and how big - that's part of the fun of learning.
If I were in your shoes (and I do have some similarities, being 23 and having just bought my first place outside of LA for $425k last year,) I would take a far smaller amount of your $550k and take a bold-but-smaller-step. After making sure I had 6 months in personal living expense reserves, I'd probably be out looking for a single 1-4 unit property that wouldn't use up more than $80-$100k of my money at the most, including all down payment/closing costs/repairs, while also making sure I was setting aside 6 months of expense reserves for that property too. And even that number is still a pretty giant amount of risk for a newbie.
Since we're in a hot market right now, a correction is without a doubt in the near-ish future, which poses a big risk to newer investors like us, so you have to play things cool and conservative. So I'd be still taking bold affirmative action, but with a much smaller amount of money, so that you can start learning a lot - but without a staggering amount of risk in a market that will be leaning the other way before too long.
Additionally, if you still have a good amount in the bank when the market starts correcting, you can be ready to take advantage! Your goal is 100% achievable and I believe you will accomplish it, but in a market like this, you want to carefully set yourself up for success.
This seems like a reasonable approach. Surely there were many investors that wished they had $500k+ in cash at the ready after the housing crash. You could make a killing buying low.
As for the risk of the commercial property, what kind of risk do you forsee for her during a correction? Since she's looking to hold this property long-term, having to lower rents and reducing NOI shouldn't be too much problem. And it seems like she's got plenty of cash for reno and emergency funds. Maybe I'm missing something.
Lender · New Smyrna Beach, FL · Member since 2017 · 122 posts · 54 votes
9y
It is possible to get a commercial loan in your scenario, but you'd be seeking a local bank that believes in you at those numbers. Your net worth and credit history won't get you to a Fannie Mae or Freddie Mac small balance loan yet. Local banks can still have good financing for local apartment complexes, but not quite the rate of the Fannie/Freddie loans. If it's a steeper value-add scenario, you may also not be able to get bank financing, and would need to look at private loan options which are potentially 7-10%.
Another commenter has already pointed out that your deal scenario would be putting most of your eggs in one basket, which is a risk you need to consider. If there is a downswing and your property's cashflow goes sideways, you could be in a really tough spot, and your equity could dissipate. On the other end, a great project with strong execution could be a big jump up. The percentage of your equity that you're committing is high - make sure you have the knowledge and the help you need.
Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
9y
My husband and I are looking to buy an apartment complex in the next year. We are working on our investing education as well as our criteria. Ideally we would like at least 15 units. We have 550k in cash and would be willing to put 400k down on a property up to 1.3 million. We are worried that a few factors such as our young age (both 23 at the moment), our short credit history (only 2 credit cards and a truck), and our desire to buy out of state (we live in Los Angeles and neither of us want to stay here as it's too expensive) will work against us. Right now we are both working on master's degrees so we are staying in LA for at least 2 more years. What are your thoughts on this? Im new to this blog/these forums! My husband and I want to be able to set lofty goals and obtain them, but we also want to be realistic. Our main goal is cash flow as we are really just interested in passive income. We both plan on having W-2 jobs but hope to retire in our 30's and live off of our investment property.
I guess my question turned into more of an intro. Has anyone had success with large loans at such a young age? Our only stable income is 35k/yr as my husband's fluctuates. We usually make around 50-60k a year but aren't able to save much due to the high cost of living here.
I think your head is in the right place. But if you're going to be concentrating on education for the next 2 years I would purchase something like a 2 - 4 first so that it's not on your mind more than your studies. I would be thinking of 15 units much more than 4 units. You can still use your out of state strategy or look into Riverside or San Bernardino county. This way you can have an investment in CA and not break your bank.
This will get your feet wet. Good luck and keep us posted.
The risk in the all-in scenario with the market we're in is massive. Full disclosure, much of the perspective I have I've learned by following @Jonathan Twombly. So let's look at the fundamentals of what we've been told:
Consistent, reliable income: $3000/month
Occasional, unreliable income: $1025-$2083/month
Cost of living: ?/month (High)
Money diverted to reserves (savings): ?/month (Low)
The most we can rely on with any relative safety is the lowest estimate of the unreliable income, which combined with the reliable income equals about $4,000/month.
So let's look at a simple theoretical 10-unit building that is $800,000 and puts $400,000 down on it. Each unit rents for $500/month for a total of $5000/month.
Your payment on a 30-year loan of even just $400,000 at a very modest 6% is about $2400/month. Let's assume the following figures:
Property Value: $800,000 (Remember, you don't buy for appreciation, so assume zero.)
Rents: $5000/month
Taxes @1%: $667/month
Insurance: $100/month
CapEx @10%: $500/month
Vacancy @10%: $500/month
Management @10%: $500/month
Total Monthly Operating Expenses: $2267/month
Grand Total Monthly Cost: $4667/month
Forget for a second whether or not this property may be considered a good or a bad deal. We're just looking at some principles here.
Let's say the market corrects in the near future, a few things change slightly, and the property's characteristics change to the following:
Property Value -10%: $720,000
Rents -10%: $4500/month
Taxes @1%: $667/month
Insurance: $100/month
CapEx @15%: $750/month
Vacancy @20%: $1000/month
Management @10%: $500/month
Total Monthly Operating Expenses: $3017/month
Grand Total Monthly Cost: $5417/month
If their income averages $4000, and that's assuming $1000/month of unreliable income, how long can they afford a property that's hemorrhaging $700/month? Or should they sell it and lose $80,000-$100,000 including closing costs?
Take my numbers with a grain of salt and don't focus too much on how realistic or accurate they may be for your market, the underlying principle is the same, and it's partly why so many people lost their hats getting overextended in 2007-2009! The risks of putting so many of your 400,000-500,000 eggs into one basket as an inexperienced investor cannot be overstated - and I know because I am a very inexperienced investor! That why I stand by my suggestion to start small - the risks are smaller, the losses are smaller, but the gains are still tremendous because you are learning. That is what I learned when I bought my first property last year with a loan of $420,000. A bigger property with bigger risk will not necessarily teach you more when you're starting out, but it can definitely lose you more.
"Our only stable income is 35k/yr as my husband's fluctuates. We usually make around 50-60k a year but aren't able to save much due to the high cost of living here."
..I'd think the bank might ask how you came up with $400k when you only make $50/60k yr.. I mean, it would be hard to make a payment on such a large loan on that income.
San Gabriel, CA · Member since 2017 · 11 posts · 3 votes
9y
@Nick G. I appreciate the thorough response! It is also nice knowing someone just as young is diving in with success. I am hesitant to put all my eggs in one basket, especially with the market right now. I work for a billionaire property investor and occasionally we talk shop, and that makes it difficult to not want to take large but potentially risky chances!
San Gabriel, CA · Member since 2017 · 11 posts · 3 votes
9y
@Manolo D. Your dream is my dream! Good point about student housing. It's always in high demand!
My boss has one of those billion dollar empires and she's gotten to the point that she buys properties for fun so she can work on interior decorating. That is the life I want to have!
San Gabriel, CA · Member since 2017 · 11 posts · 3 votes
9y
@Shaun Weekes Thanks for the reply! Something smaller is less work, and I am feeling that we may have to prove that we can handle properties before we are able to secure a large loan.
San Gabriel, CA · Member since 2017 · 11 posts · 3 votes
9y
@Tim Milazzo Thanks for the reply, Tim! I am worried about putting all my eggs in one basket at this point. Especially with high interest rates. The kind of scenario that @Nick G. presented is what scares me. There are still a few months before we will be seriously considering anything so we are going to keep reading and learning. Thanks for sharing your knowledge!
Loan Officer / Processor / Life & Health Agent · Rancho Cucamonga, CA · Member since 2014 · 1k+ posts · 757 votes
9y
Originally posted by @Account Closed:
@Shaun Weekes Thanks for the reply! Something smaller is less work, and I am feeling that we may have to prove that we can handle properties before we are able to secure a large loan.
I respect your opinion but for me something smaller has been easier. But to each his/her own. Good luck and take care.
Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes
9y
Not hard to achieve if you have the resources. I'm amazed at how people look at character these days. Everyone wants to grab some money. :D The ugly thing about billion dollars is, you don't know how to spend it, how you can grow it, and how you can satisfy partners/investors. I believe in 5-10 years, I might achieve my goals. Ive been hitting them 80% of the time, but then, I tend to set growth at least twice every year.
Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes
9y
Cheers! I hear you, I have similarly successful acquaintances and friends in the Malibu area, but taking it slow and steady [read: smart] is what I've learned from them that tends to give us noobies the longest lasting and most impactful success. :)
San Diego, CA · Member since 2017 · 26 posts · 10 votes
9y
@Nick G. Thanks for that breakdown, it makes sense (also an inexperienced REI here). How do you think more experienced investors prepare for that sort of risk you described? Presumably if you have enough cash set aside for a downturn, it might be worth weathering the storm.
From what I've learned, the easiest way to prepare yourself is by not having to worry about it in the first place - AKA minimize your risk and buy smart.
Secondly and equally imperatively (especially when it's hard to do the first one,) you basically said it, have healthy reserves - and those reserves can't just be two weeks of operating costs with a smidge of vacancy thrown in. There are easy ways to calculate safe reserve levels, I'd search past forum posts, you'll find awesome and simple ways to calculate safe reserve levels.
Your reserves start at home, though. Do you have six months of living expenses socked away? If you don't have at least three at an absolute minimum, you're really gambling with your livelihood. The first thing @Account Closed should do, from what I've learned, is take six months of living expenses out of her inheritance and sock it away in an emergency account and pretend it doesn't exist - she's already shared with us that they have a very high cost of living and low savings, which means that if it weren't for this inheritance, they might be like me and may have a hard time weathering a bad car breakdown or a hospital trip with their current income, let alone a huge real estate investment going awry and really hurting their livelihood.
Once you have those accounted for, and you've identified the scope of the property you'd like to tackle, you'll want to put away some reserves for it ahead of time just to make sure you don't have zero set aside for Week 1 issues. Opinions differ on the exact amount you should aim for depending on how much property you have, but you can't go wrong with at least six months worth of gross expenses on a property, in my opinion. In this case, around $30,000 for our theoretical property.
The CapEx and Vacancy expenses in our analysis, by the way, shouldn't just be for analysis - that actual money ought to be channeled into your reserves. Even if you don't need to spend it that month, you'll need it at some point.
Again, check out a user around here named Jonathan Twombly. He has some awesome recent posts that really speak to risk exposure in this market, and he really knows what he's talking about.
Rental Property Investor · Brooklyn, NY · Member since 2014 · 722 posts · 1k+ votes
9y
Congratulations on being so fiscally prudent that you have saved up that much money to work with.
The thing to keep in mind is that commercial loans work very differently that residential ones. One key difference is that, to qualify for a loan, commercial lenders generally require the ownership group to have a net worth equal to or greater than the mortgage amount, with 10% in cash, excluding the money that you are putting into the deal as the downpayment. Even if the loan is non-recourse, it will be subject to what are known as "bad boy" carve-outs, which turn the non-recourse loan into full recourse if you do any of a list of bad acts. Because the lender wants to know that it can recover against you if you commit a bad act, it has the net worth requirements that I described earlier. So, even though you have a large downpayment saved up, you won't be able to multiply it by 4 to figure out how much property you can buy. (And you really should expect to put 30% into the deal, when all expenses are included.)
Instead of attempting to buy a single large property equal to 4x what you have available as downpayment, you should look into buying several smaller properties for the same value. By doing that, you are able to count the equity you have in the other deals in your net worth as you apply for each loan. And, of course, as your net worth grows, so will your ability to finance new deals.
Of course, all this depends on whether you can buy at the right price and the property is cash flowing well from the very beginning. Never invest in property because you think it will appreciate, unless you are also getting enough cash flow from the property to cover all expenses, debt service, reserves, capital expenditures, and some profit for you.
Lender · Nat'l Commercial Mtg Lender - Round Rock, TX · Member since 2014 · 916 posts · 235 votes
9y
I agree. Since you do not have the investment experience and limited credit experience, start smaller and buy two properties versus putting everything into one basket. At the same time do not go too small. Commercial loan size matters. (Commercial financing is 5+ units or more). If you go below $250K commercial loan amount, the less financing options you have available to you. You will not be able to get a Fannie Mae or Freddie Mac loan but there are other apartment loan programs out there with competitive rates and terms.
When I look to purchase an apartment, I like looking at what drives the economy in the area so for example an apartment near a hospital. Hospital staff will always need a place to live that is convenient to the hospital. I also seek apartments that do not have row after row of apartments in the area. If you have too many apartments in the area and the market drops, the risk of competing for tenants becomes very high. So basically, location - location.
I do not recommend your first investment be a fix and flip project. Fix and Flip takes a very specific skill set unless you have a partner that has those skills and you can learn from them. I recommend for a first time investor to look for a cash flowing apartment, an apartment that can debt service a mortgage after expenses, and an apartment that has a 90%+ occupancy rate.
Now that's some sagely advice.. one everyone reading this should be paying attention to. Many writers, forums and blogs, will give you risky ways to do business. With great risk comes great reward everyone says. But remember, bad stuff happens and you have to hedge against it and make sure that you and your family come out of it safe and sound. Don't just take risk if you don't have the money to lose. Coming back from those pitfalls could ruin literally 10's of years worth of hard earned money if you have to pay it back.
Take Jonathan's advice and build a sound foundation.. it will pay off in the long run and you'll be happy you did.
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
9y
I'm pretty sure that age discrimination is an ethics violation in the banking industry. Money doesn't care how old you are. The loan should be based solely on the merits of the investment. Your cash position is strong, so the Debt Coverage Ratio would need to be 125%. Unless there is something on your personal credit like a bankruptcy, your age should not be a factor. BTW, if you are going to be full time investors/ entrepreneurs you don't need a masters degree in anything. Save your money.