HEY YOU!!!! Financing Advice with Apartment Building

[Justin Goodin]

Can some experienced investors with apartment buildings help me clearly understand the financing aspect of purchasing an apartment building. I am looking to purchase a building with 10-30 units anywhere from $700,000-$1,000,000. I want to purchase a property that needs mild to moderate renovations. 

Will a bank require 30% down? Has anyone raised money from private investors or bought a building without using private investors? Depending on how the deal is structured, how will my private investors be paid throughout the year? I am looking to buy and hold the property, so what if I refinance the property and I do not receive enough money to pay the investors back. Any information, or a walk through the process of purchasing an apartment building would be greatly appreciated. Thanks. 

[Michael Ealy]

Originally posted by @Justin Goodin:

Can some experienced investors with apartment buildings help me clearly understand the financing aspect of purchasing an apartment building. I am looking to purchase a building with 10-30 units anywhere from $700,000-$1,000,000. I want to purchase a property that needs mild to moderate renovations. 

Will a bank require 30% down? Has anyone raised money from private investors or bought a building without using private investors? Depending on how the deal is structured, how will my private investors be paid throughout the year? I am looking to buy and hold the property, so what if I refinance the property and I do not receive enough money to pay the investors back. Any information, or a walk through the process of purchasing an apartment building would be greatly appreciated. Thanks. 

Justin,

Apartment investing is my expertise as I have acquired over 1,000 apartment units.

With the price range you mentioned, you can get banks that can finance 75% of the purchase price.

You can also negotiate with the seller for them to take back a 10% seller second. That's normal practice in the MF world.

So that means all you need to come up with is 15% downpayment plus the repairs. 

Based on doing a property inspection, you can also negotiate a deferred maintenance credit from the seller. Let's say that amounts to another 10% of the purchase price. That means, all you need to come up with is 5% of the purchase price plus the repairs.

Let's assume some numbers - say purchase price is $1M, repairs is $50,000 (that will be light to moderate rehab for that price). So that means you need $100,000 cash to close the deal (5% down or $50K plus $50K rehab equals $100k)

Structuring Deals with Private Investors

You can structure the deal in whatever way your private investors require. My investors are happy getting 2 things:

1. They get preferred shares and therefore they get paid FIRST before I get paid

2. They get at least 50% of the profit afterwards

Preferred shares work this way. You can promise them, let's say an interest of 6% on their money.

For example, if that $1M property has a 12% cash on cash return, that means it produces $120K in income per year (after debt service). Your investors put up $100K. They first get 6% or $6,000 on their $100K. 

The remaining $114K ($120K income less $6K) you then divide that 50-50. They get an additional $57,000 on top of their $6,000 for a total return of $63,000 on a $100,000 investment or a whopping 63% cash on cash!

On your refinance, if you don't get all the money back, then the investor gets to keep a portion of their equity in the deal based on how much you "buy out". For example, during your refinance, you were able to pay off the investor just $50K of their investment, then, they will still own 25% of the deal (50% of 50% = 25%).

Then, they still get the 6% (but this time of $50K or $3,000) and they only get 25% of whatever is left while you get the remaining 75%.

Is this clear as mud? :)