What are the best ways to finance 5+ unit deals valued at

Question

I'm currently looking at deals in my market that are 5-10 units.  Nothing wild in comparison to the 50-100+ unit deals being discussed, but still exciting for me.  The financing aspect of these deals is usually killing my numbers. (30% down and 20 year ARM).

Is 30% down pretty typical on lower value and lower unit deals or can I find better? (20% or even 25% makes the numbers much more appealing for the cash outlay)

Are 20 year ARM loans the standard or do some lenders offer longer amortization periods and rates that fluctuate less on these kinds of deals?

I'm just looking for some general advice.  I haven't done anything more than 4 units so this is different for me.  Ideally I would have the equity in a primary residence to do a HELOC.

Jeff Kehl · Answer

@John Barkow why are you focusing on 5-10 unit properties? And how many loans do you currently have? If you stick to four-plexes you can get fannie-conforming mortgages and any bank will write it for you at 80% ltv. Also the interest rates will be higher than a typical residential mortgage but much better than a commercial mortgage.

If I were starting all over again today I would buy 10 4-plexes that way and then buy 10 in my wife's name before I would ever start on commercial financing.

Seth Williams · Answer

So rates, we just closed on a deal Wednesday, was a 4.875%...It can adjust after 5 years, but cant go up more than 200 Bps or 2 % points. Basically the way it works is if you have a ton of equity in property, you essentially refinance it at the same time you buy something else...So the bank out here takes property A that you own, and appraises it which you pay for ( commercial appraisals are more expensive ) and then takes property B, something you are under agreement on, and appraises it, and as long as you have equity in prop A, you can use it instead of Cash on Prop B. This all gets into one Mega loan. Make sense?

Example: you own prop A worth 1 million, and owe 600k. You Put it up as collateral towards prob b, another 1 million, which you will need 200k to buy. You can either use cash you have and put 200 k down, or put up prop a towards the two together. Thus making one 1.6 million loan vs. 2 mil in property. All of this has to meet criteria, IE. Appraisal, Cap Rate that suits bank, and DSCR or Debt Service coverage ratio...Banks usually want over a 1.2 Ratio. In other words, it takes monthly profit / debt, so rent - expenses divided by debt service monthly.

Hope this helps, start with credit unions, they are going to be the best by far.

Seth Williams · Answer

Hey John, congrats on scaling up. I think what you need to look for are local portfolio loan lenders, meaning they offer products ( loans ) that arent being re-sold on the secondary mortgage market ( fannie freddy conforming loans get sold ). Typically this will be a local small chain bank, credit union etc. I use a local credit union here that allows cross collateralizing ( if thats a word ) and 20% down or 80 LTV, whatever language you prefer. This way I can offer up my other properties as collateral and re-appraise them all, and use them as the downpayment since I can leverage the equity, if I, or you have it. Closing costs are sometimes higher, but since they are loans they dont sell, or keep in house ..."their portfolio" they are good deals and allow you to move faster! Start calling / grinding and talk to everyone you know locally, im sure you can find something in Chicago.

Good Luck!

Stephanie P. · Answer

There are lots of financing options out there in that space including no income verification loans if you don't qualify for the bank's financing, but have 25-30% to put down.  Rates are a little higher, but if the numbers work, they work.

Stephanie

Jack Barkow · Answer

4plex is good it just depends on the deal.  I don’t want to exclude myself from a great deal just because it’s 5 vs 4 units if the numbers work.

For 4 units you need 75% ltv and on a delayed financing loan product you need 70% ltv.  I think that the 20% is only for SFH or duplex.. I’m not sure though since I stay away from SFH.

Jack Barkow · Answer

@Seth Williams  That is really cool!  I like the idea of having one payment rather than two (although in the grand scheme of things it doesn’t really make a difference).

Your explanation makes perfect sense.  Very well said.

I’ll have to see what I can find as well as hopefully longer amortization periods.

Jack Barkow · Answer

@Seth Williams thanks for the feedback.  That sets things much clearer.  What kind of rates are you getting? (Just for reference)

So you’re able to use equity on other loans as a down payment?  I’m assuming you’re doing some sort of recourse loan then?  Would that affect your ability to refi other properties?

I’ll ask around locally.. I’m sure I can find someone.

What are the best ways to finance 5+ unit deals valued at <$1MM?

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