How Do You Come Up With Large Multifamily Down Payments?

[Adam D.]

I'm looking to move into commercial multifamily in the near future and curious about a few things. With there being several barriers to entry, coming up with a large down payment being one of them, I'm wondering how many of you have done it. I don't think I'm interested in a real estate syndicate or fractional ownership.

I have a few properties of my own (a few single family, duplexes, and small multifamily) with some decent equity between all of them, but not nearly enough to provide a 25% down payment for a 2-10 million dollar multifamily property. 

What are some methods you've used, or heard of, for coming up with large down payments on commercial multifamily properties? Can private money be used for the down payment? If so, how does borrowing a down payment effect the rest of the deal? Can deals be structured in a way where the down payment is lowered? What do you recommend? 

Any ideas would be appreciated! 

[Michael Swan]

Hi @Adam D.

I have 1031 all my pricey San Diego rental properties, since 2015 and 1031 exchanged them for 7 apartment complexes and 109 front doors. I have basically traded in $50,000 cash flow for $160,000 cash flow and rising every day. Of course, love the cash flow, but more importantly, I am in the process of increasing the NOI dramatically, thereby increasing the value of the property exponentially. I have a 24 unit, 21 unit, 15 unit, two 12 units, 10 unit, 8 unit, and 7 little single family rental properties too.

I have done this on an $80,000 W2 earnings per year as a Catholic School Teacher.  In 3 to 4 years, I expect to 1031 exchange or refinance rinsing and repeating.   Ultimate goal to defer, defer, defer, defer, defer, and die with approximately 1000 front doors and 3 or 4 large apartment complexes, and $750,000 plus cash flow per year at death.  Then, my kid can inherit at a stepped up basis and then he can defer, defer, defer, defer, defer, and die and have about 5,000 front doors if he chooses to do so.  Also, when he inherits, if he keeps at least 50% debt and continues on this path, depreciation starts all over again for him too!!! 

Imagine if I reach even half my goals. WOW!! If I were you I would do the same. I have only invested together with my wife, mom, and dad on all of my deals but one. One deal, I took 2 of my friends along in an equity partnership on the 21 unit I mentioned above. So far, on that deal, after 12 months, we have replaced 15 out of 21 tenants with tenants paying $80.00-$100.00 a month more than the previous tenants and we have caught HUGE water and sewer waste, along with cut insurance costs by switching carriers etc... That one we only put $260,000 down and have already increased the NOI moving forward to $25,000-$27,000, increasing the value of the property $250,000-$270,000 after 12 months of ownership. The remarkable thing about it, is that we have not touched our reserves and only used our operating account to make ready those 15 units and other improvements. They were basic $1100-$1200 make readies when tenants moved out and a higher class tenant based moved in.

Now we have decided as a group to take some of our $60,000 in reserves off the table and start giving distributions as our operating account rises too after this repositioning is complete her in January-August of 2018.  We are expecting $36,000 cash flow minimum for the next 3 to 4 year period too, before refinancing and taking all of our money out tax free that we invested or 1031 exchanging $700,000 of equity with loan paydown into possibly a much larger 2.8 million dollar complex.  This complex a year ago we purchased for $900,000, we expect to pay down the loan to $550,000 and increase the value to about 1.2-1.3 million.  Not to mention the over $150,000 cash flow we expect to take in the next 4 years of ownership.

I love this stuff, when done right!!  Anybody that wants to talk shop, go to my profile and reach out to me.

What a country!! AMERICA!!!

Swanny