First Swing at Mid-Size Multifamily - Best down payment strategy?

Question

Hi all,

I currently have 3 four family buildings, and have been saving and working through some financing options to scale to a larger 18+ multifamily. I would like to do so without selling the current 3 buildings.

There is a 24 unit for sale currently in my area that is value add listed for 1mm, after raising market rents and some cosmetic renovation worth 1.5mm. I have about 70k cash (not including reserves for properties), and probably about 120-140k in obtainable equity in the current buildings. However, I also do not want to refinance as they are very strong rates, and HELOCs are very hard to come by i've found for investment properties.

Wanted to get your thoughts on best approach to finance:

1.  I was offered about 140k in credit line. Could perhaps combine with my current cash  and let it season. Then see if i can get a conventional loan at 20% down, and pay down the credit line with the cash flow. (Property would cash flow to cover loan payment, credit line payment, etc until paid off or refinanced)

2.  I believe i can get a loan for the property at 10% down with an investor group since their is some cosmetic rehab.

Any thoughts greatly appreciated!

Tyler

Chris Seveney · Answer

I am risk averse, so I would attempt to bring in other partners into the deal vs. being over leveraged in an inflationary market.

Tyler French · Answer

@Chris Seveney Thanks so much for the feedback. I have gone solo for all prior deals and am new to the partnership approach. Here are two things I feel I haven't yet learned enough about:

1. How common are partnerships where the more passive partner only provides capital and get a return after a given time period rather than % of cashflow permanently? Since I am handling all of the property management, finding the deal, etc I would prefer to be able to pay them out after value add work has been done, refinance, etc.

2. I unfortunately don't yet have anyone in my network that has the capital to partner on this. Are there any venues besides local RE chapters to do an all call for those interested?

Ryan Tuttle · Answer

@Tyler French You'd push to have them sit in 2nd lien position on the currently-owned properties. It would bring your effective interest rate up, but you'd still retain your conventional 1st interest rate.

Something to be weighed against the returns the new purchase would bring to the table

Tyler French · Answer

@Drew Sygit You're right i have not tapped into a large number of family/friend/colleague network. I suppose i feel always an inclination to find venues where i can source private partners that i may not know.

@Ryan Tuttle I actually had a previous deal that was going to cross-collateralize one of those properties. That was a conventional commercial lender, 20% down, etc.  I have not yet asked whether two properties can be cross-collateralized at the same time. Also, you feel that cross-collateralization is still worth if even if the interest rate is going to increase for both properties?

I will definitely dig into some info on those partnerships.

Ryan Tuttle · Answer

With the built-up equity in your current portfolio, I'd recommend cross-collateralization via your purchase loan.

To piggy-back, on your response to @Chris Seveney regarding bringing on a passive partner. You can structure the partnership so they receive distributions at certain capital events, i.e, lease-up, disposition, refinance. Your offering memorandum would dictate this.

We do fair traffic in partner-buyout financing, so their is definitely a market there.

I'd recommend researching equity waterfalls and LP/GP relationships to get more insight into this. Generally for larger deals, but no reason to not start early given your current rate of scaling.

Feel free to PM with any other questions.

Drew Sygit · Answer

@Tyler French we all typically know around 150 people.

Find it hard to believe none of them would have the 20-25% down you need from their 401k or IRA.

Perhaps you haven't structured your "pitch" correctly?

First Swing at Mid-Size Multifamily - Best down payment strategy?

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