Multi-family question from a novice investor

[Pamela Rogers]

Hello everyone, I am a novice to investing in real estate and am currently looking at a 12 unit building in my home state.  I can afford to put down the 20% but I don't want to. List price is $525k, brings in $102k/year in rent.  After all expenses, which are extensive, the CoCROI is about 11%. Any advice for me on the financing issue? I have read a lot of the BP books and podcasts and I think I am a little overwhelmed with all the advice.  I'm having a hard time figuring out the best way to finance the purchase. Any advice would be helpful, because I think I have too much info swimming in my head at this time. Thanks!  Stay well!

[Reginald Ross]

@Pamela Rogers

10-11% cash-on-cash isn’t *that* bad. Don’t forget that your overall return includes the tax advantages, equity increase from paying down your mortgage each year and appreciation (if approachable).

A few creative ways to boost COC:

1) Boost NOI - I know this may sound obvious but I have a subtle point. If you increase NOI through whatever means (boost rents, decreasing expenses, etc), this is exactly how multifamily property is valued. If you can boost NOI 10% in year 1 (and assuming cap rate doesn't change, your property value is worth 10% more. If you pull out cash with a refi, your IRR and COC/ROE immediately jump. Gotta love the time value of money eh?

2) Reposition Asset - this is more of a corollary to the first bullet point but if you invest in capital improvements that will allow you to command 25% greater rents, that additional money you invest may be worth it. Also, the refi strategy from above still applies.

3) Interest Only Loan Period - If you can get interest only for the first year while you are boosting rents, you can compound your COC growth.

4) Property Manager Partnership - you could perhaps even partner with a local property manager. Negotiate a lower property management fee thank normal but ask them to split the down payment and award them GP privileges,

5) Utility chargebacks - if your paying utilities now, transition to a tenant reimbursement model.

6) Optimal Lending - debt service can make or break a deal, no matter the NOI/cap rate/etc. LTV, APR, amortization, prepayments/yield maintenance/defeasement, balloons can all put a different spin on the final returns.

If I knew specifics, I could probably make more focused recommendations but hopefully that will give you some ideas.