What would you do? Financing 5 quadplexes

Question

Hey everyone, I recently saw five quadplexes - all separately owned and listed - in a C+ area on the MLS.

Each property has (4) two-bed one-bath units. They are listed for around $210k - 250k each. Rent in the area is around $750-850.

My issue is coming up with the down payments (20-25%) for each one.

Assuming each are "good" deals with a 15%+ ROI and $800+ monthly cashflow after all expenses, how would you go about finding the capital to purchase these? how will the note/mortgage need to be structured?

Daniel Dietz · Answer

What @Taylor L. is saying is exactly what we have done on our last deal, and a few upcoming deals also.

After getting to 26 units we were tapped out of capital to buy more. Thinking of what @Brandon Turner is always saying "50% of a good deal is better than 0% of no deal" we came up with a way to make a win-win situation by partnering with a Private Money Partner.

Our Private Money Partner brings ALL of the 20% down payment, we do ALL of the finding, purchasing, managing rehab if need, finding and placing tenants, and ALL ongoing PM and Business Management. We all sign on the loan, split cash flow and equity growth 50-50.

We plan on at LEAST a 10 year hold, and over that time we should EACH be able to make 9-12% returns on the original investment each year.

We get to 'make assets out of just our time/management skills', and the PMP gets a great steady safe return without having to do any physical or management work.

People seem interested in this type of partnership.... we have more interest than we can find properties in our market at this point.

Dan Dietz

Craig Jeppesen · Answer

It sounds like they are separate listings. Why not just buy one or two or how many you can buy with your capital? You don’t have to buy all of them.

Allen Tong · Answer

@Daniel Dietz Thank you for all the information you provided! This level of detail was exactly what I was looking - appreciate your time!

Allen Tong · Answer

@Melvin List, Yes, I have considered that option. Depending on final purchase price, I have capital to purchase at most 2 of them, assuming 25% down using a conventional loan. Just wanted to pose this question to the group to get ideas on creative financing and options.

Melvin List · Answer

@Allen Tong have you considered starting with a couple that you have the capital to bring 20% to 25% to the table?

Aaron Farr · Answer

@Daniel Dietz is there any value add?  If so, find a hard money lender who will do 10% down.  Perform the value add and refinance with a local bank or credit union that you have a relationship with.  Essentially a brrrr.  Might have to wait 6 months to refi.

Just make sure hard money costs still make it work.  If you don’t have 10% find a partner like others said who can put up the 10% and any rehab costs.

Daniel Dietz · Answer

@Allen Tong,

What we did was set up an LLC, where out *existing* LLC was a 50% owner and the PMP (so far individuals, but could be a different LLC etc...) was the other 50% owner. We meet quarterly to go over books etc... and we do a distribution of cash flow once a year.

The equity growth, meaning the loan paydown and appreciation, will not be realized until we either sell some point in the future, or do a cash out refi at some point. From our projections, we should have enough equity built up be around year 10-12 so that we *could* 'cash out' refi and pay back the original 20% downpayment to the PMP and we would be the sole owners of the LLC at that point.

The other things built into the LLC are predetermined values if a partner wants out, and provisions for the partners heirs to either stay in the partnership or be cashed out, their choice.

The one thing that sounds like it would be different in your case is that it sounds like you would NOT be doing the day to day PM on the properties being that far away? In our LLC, *we* are responsible for the day to day PM. *If* we are unable to, or decide to hire it out for other reasons, that cost would come out of *our* 50% of the cash flow. The thought being that great PM is a big part of what *we* are doing to 'earn' our share. Think of it this way... if you are not planning on doing PM, the investors you might find could ask 'what is Allen doing to 'earn' his half of the profits? They might prefer to just pay you a finders fee (think wholesale it to them) if that was the case.

Allen Tong · Answer

@Taylor L. Each building would be cashflowing around $800/mo and 5 total buildings. Calculation was based on after mortgage and expenses, assuming 25% down.

@Daniel Dietz Thank you for the insight! These properties are about a 3 hour drive from me and I have not completed any deals that are structured the way you mentioned using a PMP.

When you bring in a PMP for the downpayment on the loan, can you go into details on what type of legal entity do you use and how it is structured?

Taylor L. · Answer

See if you can find a partner who can bring capital to the table. They'll need to have an active role in the company with you, but that shouldn't be a problem. You can also use a partner's credit to help qualify for a loan.

$800/mo cash flow on a nearly million dollar investment isn't great. Or did you mean $800 each, so $3,200 a month total? Is that before or after debt service?

What would you do? Financing 5 quadplexes

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