Should I get a 5 plus unit?

Question

Hey guys. My head is spinning on the next step. 6 years ago I bought a 3 family. I currently owe 212k on it and it's worth around 400k. I'm selling my single family house now that I kind of did a live in Reno on. All said and done I'll have about 50k in my pocket. In my area I could probably find a 6 family for 500k. This is where my head spins.

After paying the realtor and using a 1031 tax exchange I could have 170k to put down. With 50k I have in cash I could use 30 of it to put down also. This puts me at 200k

With 25% down I could buy up to a 800k property.

The problem is I know nothing about business loans. With rents around $1000 a unit on the safe end in my area I want to make sure I can have good cash flow. I'm already making 1,200 a month profit on the three.

I either go this route or mess around with 4 unit and under properties

I'm new here and lots of inspiration so if anyone has any knowledge or ideas I'm open to them thank you!

Tom S. · Answer

@J Pavao  As others mentioned, it depends a lot on your goals and your appreciate for risk.  Probably a good discussion for your financial advisor.

Just posting my experience, I have a mixture of SFR, duplexes and a 5 unit.  The 5 unit has done well for me, you just have to crunch your numbers to make sure it's worth pursuing.

"Business loans" aren't too much different.  It will be a commercial loan with a shorter term and mostly likely variable rates, so you'll have to account for that.  Mine was 5.5% fixed for the first 5 years, floats with prime after that, and a 20 year term.  The bank I used, used a combination of the rent rolls and my personal financials (because it still requires a personal guarantee) to approve me.  For tax purchases, it's the same as a normal loan, you just report everything on Sch E: rents, expenses & depreciation, and the interest from the mortgage payments.

Hope that helps!

- Tom

Will Fraser · Answer

Hi @J Pavao, welcome back to the BP forums!

This question is difficult to answer with any real depth without knowing:  what are your goals?  When you dig down deep and imagine your future through real estate, what is it you see?  Why real estate?

Once you get really macro with that, the granular decision of how to manipulate your holdings will become clearer, since more units may be ideal, or bad depending on the destination.

Paul Moore · Answer

@J Pavao.  The problem is that selling at the top of the market usually means you must buy at the top as well. Here is an alternative to the 1031-exchange and one that could potentially fix your problem (of there really is one!)...

Sell your (non-personal) property early in 2021 while the market is (hopefully) still hot. Then take the whole year to see if the market drops (as most expect it will).  Then you could potentially invest in assets at a non-top of the market price. And the bonus depreciation on the new property(ies) could potentially offset your capital gain. See this post for more info in this regard: https://www.biggerpockets.com/...  Good luck!

Ryan Howell · Answer

Personally, I'm a fan of not "having all my eggs in the same basket".  I assume at some point, I'm going to make a mistake or a bad deal...If it's one out of five or ten, then I'm okay, but if I keep trading up to a larger property, my risk grows each time.  I don't think there is a wrong or right answer, but that is how I approach it.

J Pavao · Answer

@Paul Moore great read thank you!

J Pavao · Answer

Cash flow now is definitely a goal. I have equity and will have cash from this single fam as well. I bought the 3 fam at 24, the single at 28 and I am 30 now and ready to make serious moves now. I'm a union laborer and am physically beat up. I'm going for my real estate license online right now when I'm not working. If I can have 3 or 4K cash flow (possibly more)a month and sell real estate full time, my life will drastically get better. In the long run, yes I would like to own more but my current goal is to make this a career to get out of construction, my long term goal is of course to become wealthy. Where I get lost is that with the commercial loan, I see no benefit. 25% down at 5% interest with maybe 25 year loan for let's say an 8 unit? When I can get a 4 fam at 2.75% and 3.5  down with fha for 30 years for the first one. Then the other use a conventional 20% down and still 2. Something% interest 30 year loan. Maybe I'm answering my own question haha but I'm guessing it's not worth it unless you're getting a killer deal or buying a property with a lot of units.

Fernan Nava · Answer

The real question is what do YOU WANT?  Is cashflow now your main objective or do you want to star a wealth accumulating process. Everyone here has something to help you, but you got to tell us what you want. Is a big question, but you will have to answer it at some point. Why not now?

Timothy Hero · Answer

Depends on your market. One thing to consider is the financing is structured different for properties over 4 units. If you're going private/commercial, anything over 4 units is considered "commercial". Therefore, 30-year fixed is rare. It's usually 30-year amortization and 5 or 10-year fixed terms. Down payment is often 25%, not 20%.

It appears you already calculated the 25% down, so it's clear you're not clueless on the difference. If the cash flow is there, do it.

J Pavao · Answer

Hey guys took me a little while to figure out how to reply haha. Lots of great advice! Like time said I have more numbers to crunch your input gives me a few more ideas. Very much considering a house hack or two and staying with 4 and under families. Where I'm at now is sell the single and buy a 4. 1031 sell my 3 fam and buy another 4 with a big downpayment. Take the equity from that house and buy another 4. Very excited for 2021 and to be a part of this group

Should I get a 5 plus unit?

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