Funding for multi-family MI

[Lee Van Every]

Just curious what the requirements lenders have for multiple buildings with multiple units? I found three 4 unit properties that are 80% occupied being sold by an individual in declining health at 86 yrs old. He has owned them for years, and looking to liquidate.

Price = $ 161,700

Rent = $ 4,450 per month

Tenants pay all utilities

Prop Mgmt 10% @ $445 per month

Taxes roughly $6,400 pr year

Insurance ( total guess ) $8000 pr year ( have to research  )

Vacancy = 7% = 311.5

Maintenance (guess again, going to view properties today ) figuring 15% = $667 

I have 25% down but was curious about deposits and what most lenders would like to see as far as reserves. Also, the security deposits, are they simply credited toward the purchase?

Also, if anyone has recommendation for lenders in Oakland county MI I appreciate it. Several quotes I have so far seem high closing costs to me ( 2-5 points?) 

This is my 1st post here after over a year of reading material. I just completed and sold 1st flip last spring, but thinking cash flow may be next. I am no expert by any means!

Thanks in advance. 

Lee

[Azeez K.]

Hi @Lee Van Every

Firstly, congratulations on finding an opportunity to pursue. Below are answers to your questions:

Q1. What the requirements lenders have for multiple buildings with multiple units?

A1. Assumptions - One seller owns all 3-4 unit apartments, cost and rents are for all four units/buildings you described.

• Rent Roll - Banks will certainly request the current rent roll
• Lease - The banks want to see existing lease on the apartments. Some banks won't consider leases that are about to expire. 
• The banks will look for a Debt Service Coverage ratio of 1.5 or more. What is Debt-Service-Coverage-Ratio?
• Credit score ~650+
• Your personal taxes typically last 2 years 
• 2 months of pay stubs
• Drivers license 
• Bank Statements 

Since the dollar amount and the # of units are low typically the banks will look at the strength of the borrower i.e. you. However, if the number of units were high and dollar amount high the banks will put more emphasis on the Income Statement and the ability of the property to generate revenue. 

Rent Revenue Assumptions: Assumes all units are for 161,700 and not per individual building. If its per individual buildings then its not a good deal. 

Monthly Rent Revenue: $4450

Vacancy: 7%

Financing Strategy: Assumptions

Down Payment: 25%

Interest Rate: 5%

Term: 20

Monthly Debt Service - $800

Property Acquisition - Assumptions

Purchase Price: 161,700  

Closing Rate: 2%

Deferred Maintenance Cost: 10,000 (assumption) if no deferred cost then better 

Operating Expenses - Assumptions

Property Taxes - 6400

Insurance - $4500 (8000 seems too high)

Property Management - 10%

Repair Rate - 6%

Maintenance - 6%

Result

Your Annual Cash-on-Cash - 28.6%

Cap Rate - 16.6%

Annual Cash Flow: 15k

So its a great deal assuming you buy all the units at 161k. However, if you are buying at 161k/quad then its not good.

q2. Down payment and reserves

A2. 25% down is good. 6 months reserves or 10% of the loan amount is what banks like to see..but again depends on the lender etc

q3. Security deposits 

A3. Security deposits are typically in a trust account or with the seller. These will be credited to you at closing. However, make sure to include in the special stipulations that the security deposits be refunded and rents pro-rated at the time of closing. Legally, security deposit belongs to the tenant and should be in a separate trust account non-interest bearing. 

Hope this helps.