Cash strapped: How to Finance a pricey 3-flat?

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Cash strapped: How to Finance a pricey 3-flat?

Heather Shannon
Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes

Hi All!

I'm so happy to have found this community recently-what an awesome resource!

I currently own 2 condos in Chicago: 1 in Uptown that I've had a year-long renter in.  Her lease ends at the end of the month and I plan on selling it in June because the association won't let me do AirBnB and I find that to be a much better use of my investment dollars than regular renters!

The other unit I own is on the East side of Wicker Park and is already working well for me as an AirBnB.

I plan to take the money from the Uptown sale into a 1031 exchange to then invest in a multiunit property that I can do AirBnB with. The properties I'm interested in are 2 or 3-flats listed around $900K. The problem I'm running into is the FHA loan limits and the high downpayment required for conventional options (which are still limiting in their maximums).

Based on the area one of them is in, it would qualify for the HomeReady program which requires only 3% down, but I don't know if HomeReady will work with Jumbo loans or if there's a way to do a 1st and 2nd loan in that scenario that would still leave my downpayment low (around $45K).  The City of Chicago I think has a downpayment assistance program starting soon for up to 7% of the purchase price and it includes multi-unit properties (and you don't have to be a first time buyer), but I'm doubting they're really going to gift me $63K . . . 

So, if anyone has ideas on financing this type of purchase, I'm all ears.  I'm newish to real estate investing and have never done a jumbo loan or purchased a multi-unit property!

Thanks,

Heather

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Ashour Rehana
Real Estate Broker · Chicago, IL · Member since 2016 · 57 posts · 23 votes
10y
Heather Shannon its sounds like you keep hitting road blocks. Have you considered invest in a two flat for less, like a 600k range and still be in a great area for BNB. Another idea is buying in areas like avondale, Irving park, or Albany park near the train for half the price, you can pick up two units. You can still make a killing... Just a thought, hope that helps.
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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2013 · 6k+ posts · 5k+ votes
    10y

    @Heather Shannon - I believe the HomeReady program is only for owner occupants who currently do not own any property.  While there are higher loan limits with that program, have the lender double check the max loan for mortgage insurance.  This is a problem I have recently run into with my clients where the MI companies won't do anything over $625k so while a 4 unit limit is $800k it still can't be done.  

    Otherwise there is nothing around the loan limits, you will have to have a bigger down payment or consider other areas of the city

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  • Heather Shannon
    OP
    Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes
    10y

    Thanks Brie.  I would consider selling my other AirBnB property if everything else about the HomeReady program would work out (limits, etc).  

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  • Heather Shannon
    OP
    Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes
    10y

    As I'm digging, I'm finding new problems.  HomeReady doesn't sounds like it'll work.

    My mortgage guy said he can do only 10% down on a 2-flat with a conventional loan, but on a 3-flat it goes up to 20%.  I think I can make the 10% down work.  Does anyone know of a mortgage product that offers 10% down on a 3-flat?  Or other suggestions to come up with 20% downpayment money?

    The other thing I'm realizing/wondering as I dig around on this . . . if someone buys a $900K 3-unit property and puts 20% down, they are still looking to finance $720K, which is above conventional limits.  Do people just make larger down payments? Or get creative in some other way?  The same applies to a 2-unit place I like listed for $875K.  I could probably do the 10% downpayment, but it's way over the $533K limit for conventional . . . 

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  • Ashour Rehana
    Real Estate Broker · Chicago, IL · Member since 2016 · 57 posts · 23 votes
    10y
    Heather Shannon its sounds like you keep hitting road blocks. Have you considered invest in a two flat for less, like a 600k range and still be in a great area for BNB. Another idea is buying in areas like avondale, Irving park, or Albany park near the train for half the price, you can pick up two units. You can still make a killing... Just a thought, hope that helps.
    1Reply
  • Heather Shannon
    OP
    Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes
    10y

    Haha, I am stubborn.  It works both to my advantage and disadvantage!  This particular place would work great for AirBnB based on location and "wow factor."  I'm trying to keep my properties in the same area, which makes it easier for having an assitant take care of them and for having neighborhood expertise for my guests, so I would prefer not to branch into other neighborhoods.

    What about hard money loans or private lenders?  Have people had success going that route?

    Thanks!

    Heather

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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    @Heather Shannon

    If you buy a 900k 3-unit property and put 20% down you're financing 720k, yes, but that puts you into "jumbo loan" territory not "needs PMI" territory. It means that the loan will probably be serviced in house and not resold in the short term. You shouldn't have any problems getting one as long as your income can support the mortgage debt and you have 20%(for owner occ) down.

    The FHA/low down payment loans require PMI because they're being backed by Fannie Mae / Freddie Mac and those are their requirements. Banks can offer loans with low % down and no PMI if they wanted to, they just won't be able to resell them. You *may* be able to finance 10% of your down payment and put 10% down with a piggyback loan, assuming you have 10% down. You'll want to talk to some(5+, since you're doing something fancy) mortgage brokers in Chicago about your plans and what resources you have available. Concentrate on credit unions and local banks -- big banks likely won't be able to help you out much.

    Also, you might want to check out Sofi

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  • Mindy JensenPro Member
    BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
    10y

    SoFi doesn't do investor loans, only owner-occupant loans. They do have a $100,000 personal loan, but that isn't going to get you far on $900k. I don't recall reading if you are owner occupying any of the units.

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  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y
    Originally posted by @Mindy Jensen:

    SoFi doesn't do investor loans, only owner-occupant loans. They do have a $100,000 personal loan, but that isn't going to get you far on $900k. I don't recall reading if you are owner occupying any of the units.

     I assumed it was owner-occupy because of this: "The problem I'm running into is the FHA loan limits"...FHA only does owner occupied loans.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    10y
    Originally posted by @Heather Shannon:

    The other thing I'm realizing/wondering as I dig around on this . . . if someone buys a $900K 3-unit property and puts 20% down, they are still looking to finance $720K, which is above conventional limits.  Do people just make larger down payments? Or get creative in some other way?  The same applies to a 2-unit place I like listed for $875K.  I could probably do the 10% downpayment, but it's way over the $533K limit for conventional . . . 

     Loan limits go up with unit count. Fire your loan officer or mortgage broker if she or he does not know this.

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  • Heather Shannon
    OP
    Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes
    10y
    I'm open to living there or not based on financing terms. The conventional limits do go up, but not enough to cover $925k, so I'm definitely in jumbo territory unless I put like 30% down. Guaranteed Rate says thy have a 5% down jumbo that will work with a 3-flat. I'm skeptical but have a call shortly with a mortgage broker there so will see what they say. I've wound up using them for my last 2 (small) transactions too, so we'll see.
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  • Atul Mohlajee
    Oak Park, IL · Member since 2014 · 285 posts · 114 votes
    10y

    Will your numbers work?  Would you be able to charge enouph to make a positive cash flow?  That is usually what I look for in addition to possible appreciation.  These areas are pretty good in that regard.

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  • Heather Shannon
    OP
    Investor · Chicago, IL · Member since 2016 · 15 posts · 6 votes
    10y

    The numbers are beautiful...when my plan was to run it as an AirBnB...but they are currently voting (like right now as I type this) on all sorts of terrible legislation in Chicago that would limit Airbnb to 90 days/year and prevent it from being an entire Airbnb building. Good thing this is happening before I buy!

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  • Assata Moore
    Investor · Chicago, IL · Member since 2015 · 40 posts · 24 votes
    10y

    @Heather Shannon Check with Daniel at RenovoFinancial.com.  They're a local hard money lender that have a number of different products.  I've sent a few people there that was able to make things work. Good luck.

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