Funding a multi family buy and hold needing minimal repairs

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Funding a multi family buy and hold needing minimal repairs

Matt Pitschman
Monroeville, PA · Member since 2014 · 23 posts · 2 votes

I have seen many strategies for raising funds for purchasing properties from my research. Most of them seem to pertain to properties with major rehab needed like fix and flips or wholesaling. My partner and I are trying to figure out how to buy a 2-4 unit property that doesn't need much in repairs using little money for a down payment. We would then rent it out. We both have full time jobs and are not experienced in construction. Managing a contractor may not be best (since this is our first deal) to make it simpler. We are in the pittsburgh area. Some options we are thinking about are...

FHA: this would be a personal loan and I would have to live in one of the units, and stay for at least a year (I think), I could put a small down payment (3.5%), in this case i would like to eventually move the property to an llc maybe after a certain amount of equity is reached, then refinance. We would then try to purchase and repeat but would have more funds.

Commercial loan through llc: we are considering this since we would eventually want to hold properties in an llc, but we would need 20% down which we don't have

Seller finance: we would need to find a willing seller and make a deal, maybe difficult to find

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    There are many different methods for finding money for investment. What has worked for me is to develop a sales pitch. The sales pitch should show your investors how much money you need from each of them, how much money you will make with the property and how they will be paid back. Ideally, you would have some collateral to put up for the loan.

    My first investor deal was with two guys at work. I offered 5% for 10 years with a minimum investment of $5,000 (I didn't want to have 10 $500 loans to pay back, paperwork headache). Because we are an employee owned company, I was able to use my company stock as collateral.

    When I met with the guys, I met with them each individually, explained what I wanted, how it would be paid back, where I would get the money to pay it back, what the property looked like, recent comps, recent rent for the area, etc. I gave them a semi-flexible, semi rigid deadline to let me know; I didn't want to apply too much pressure, but I didn't want the deal to get away. After a couple of days, they both came back with a 'yes'. One of the guys lent $15,000 the other $5,000.

    I feel that part of the whole package is to make sure I'm good for my word, so I've made the agreed upon payments (as expected). I will be making some additional payments this year.

    The loan I described above was a personal loan, but I purchased the property through an LLC (I'm in State College, PA). There is good and bad to this arrangement: The good is that the money is simply listed as owner investment to the bank and on taxes. The bad is that when I pay these guys back, it's listed as "Ownership Disbursement", which I believe has different ramifications from a straight loan payment.

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  • Matt Pitschman
    OP
    Monroeville, PA · Member since 2014 · 23 posts · 2 votes
    12y

    @Liam Goble So you got some private loans to make a down payment. I see how this could work. Did you make monthly payments to these people? And how much did you pay? Can you run through the calculation for how much you paid out to one of them monthly?

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    @Matt Pitschman Yes, I did do exactly what you said, except the cash I received was enough to pay for the entire house in cash ($18,500). I offered my preferred terms, figuring they would negotiate (they didn't), so I got $20,000 cash at 5% for 10 years. For this specific transaction, I wanted the lowest payments possible to keep cash flow as high as possible for as many months as possible, so I offered to pay all the interest in a lump sum, once per year, rather than spread out over the year.

    For this specific instance, I took the $20,000/10 years/12months = $166.67/month. I then pay 5% on the remaining balance, so my first interest payment was 5% x $20,000 = $1,000. Year 2's interest was then $18,000 x 5% = $900. Year 3 is going to be $16,000 x 5%....etc.

    At this point, I have more stable cash flow, so I think I would either ask for variable payments with the minimum being 'interest only', or try to extend the payment period, but you may find that difficult given the specter of higher interest rates in the future.

    In another instance, I am working with an investor to complete a flip. The investor is putting up all the cash and I'm putting up the project management and any labor intensive work (painting). I'm paying interest only on the investor's cash (to be paid at closing). When all the dust settles (no pun intended), we will close the flip and out of my earnings, I will have to pay the investor Xmonths of interest at the rate they are getting from their bank (about 4.75%). This flip should cost approximately $50,000 in total, assuming we hold for 6 months, I will owe about $1,100 for the access to the cash ($50,000 x 4.75% x 6mos/12mos). This $1,100 is in addition to the regular profit they will receive. My Realtor feels the house will be worth ~$85,000, so after holding costs and closing costs, we'll be splitting about $20,000. Out of my $10,000, I'll owe the investor the $1,100, so my net will be about $8,900.

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  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Matt Pitschman check out naca.com as well. They have several programs running all the time.

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