How much money do I need?

Question

I have been looking at doing a value play on a multi family (20 - 50 units or so). First thing I would like to know is how much money do I realistically need to bring to the table? I hear that sellers often will  take back a second from 10-20% and a bank will loan 75-80%, if this is basically true and I have a nice paying job and decent credit do I need any of MY OWN money in a deal? If so, how little would I need? Can I even get this kind of financing if I'm going for distressed property that needs rehabbing?  I just want to get a feel for what ballpark I am playing in, the bigger the better in my mind.  Thanks in advance and if there are better ideas for doing this sort of thing please feel free to let me know how.

Tom Goans · Answer

You have overlooked many, many considerations long before thinking of how much money to bring to the table.

At the very least, how much money do you need to put into the property?

Recently I met an amateur investor who bought a hotel for what he thought was half price - $700,000. The hotel is a nightmare and a huge money pit. He was unaware of the huge black mold problem he had. The fire alarm system not only did not work, it was too out of date to meet current code requirements. The list of deferred repairs is pages long.

In the past year, he has invested more than $100,000 into the money pit and barely made a dent. Realistically, it would take about $1million more just to get the property back to good, not excellent, but good condition.

He is out of money, borrowing money from his wife, not paying vendors, not paying contractors, not paying employees, not paying taxes, not paying state required business fees ... the list goes on and on.

This is just a small example, and just one example of the expenses involved in ownership, which is why what you need to bring to the table is a very small issue.

One of my mentors has this rule of thumb. If you have $100,000 to invest, only invest $50,000 due to the large number of unforeseen costs you endure.

Michael D. · Answer

I think you'll find that this will vary quite a bit. I would expect some to want to see you bring 20% + rehad + cash cushion, while others will float most or all of it for you. Expect to pay more in points, fees and rate the less money you come in with. Also expect that your track record will affect the cost and even possibility of you getting financing.

Once you're past the rehab phase and into holding, things become less variable. You should be able to get a refi for 70-80% of the current value. This could take longer than you expect though. The lender is probably only going to trust income numbers that have been holding steady for a while - 12 months or more.

Joel Owens · Answer

Local bank might take on a rehab loan but the larger regional and national banks that do not have deep roots in the area not so much.

Most of these deals are HML loans. The goal is to refi out as soon as the 12 month mark hits so you base rents under market to fill up fast and land the most qualified tenants out of the renter pool for the area.

Most private lenders do not like totally vacant shells. Properties 40 to 70% occupied are preferred for easier turn around with proper management and fixing deferred maintenance issues.

How many units you go after will be determined by your cash levels you have to draw from and any properties you own that can be cross-collateralized in the event of default.

Todd P. · Answer

That's sound advice Michael, thanks. Are you giving them all your financial data or are you just chatting with them to see what kinds of loan programs they offer?

Michael D. · Answer

What I've started to do is call around to a bunch of lenders, just to start learning who they are, what the requirements are, and build a relationship. Some are hard money 15% + 5 points guys, others are 5% guys. They all have a fit in particular situations. I try to exchange as much information as possible early on, so that I can get an idea if there's a fit for my next project (whatever that is). I know what my personal strengths and weaknesses are, and I make those clear up front so that if there are any deal breakers we don't waste too much time. (The big one for me is being out of state. That's a killer for many lenders).

Todd P. · Answer

Michael D. That all makes sense and I will plan in a 1 year hold before a refi. The banker I talked to mentioned my track record as a plus so I know they are taking that into consideration. Maybe I should consider a partner to help cover some rehab and carrying costs...

Todd P. · Answer

That was my understanding (HML then refi into conventional) I just want to make sure that I can actually get that refinance when the time comes, hard money is expensive.  I did talk to a local banker and he will loan 80% and 80% of the rehab but like you say, does need to be somewhat occupied.

Todd P. · Answer

OK, well thanks for the comment but that is not related to my question. I'm looking for a commercial lender or broker to give me a realistic number of what I can expect to need to bring to the table if I want to execute a value play strategy.

How much money do I need?

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