9 Duplex Purchase - how to finance?

Question

Hello all,

North Texas investor here.I have an off-market opportunity to purchase a portfolio of several duplexes. They are all in good condition and are in a well-established neighborhood with a good school district. All on the same street. All less than 20 years old. All currently 100% rented.

The seller is offering them individually and has priced them at around 80% of their market value. But they are open to offers on the whole lot (thus providing even more equity). Asking price is around $1.6 million, market value is a little over $2 million.

Net operating income using the current rental income is $7,870. Rents are below market, so increasing them would increase the net operating income to $9,800. (This is using last year‘s insurance premiums, last year‘s property taxes + 10%, 10% property management fee, 6% vacancy and collection loss, and 7% repairs and maintenance cost.)

I have three rental properties. Combined, their tax value is $617,000 . There is approximately $50,000 worth of loans against them - so I have quite a bit of equity. Two of them are single family homes in one LLC, the other is a commercial building that is in its own LLC.

I have around $20,000 in cash (I would have more but I just used $28,000 to purchase a 4th rental).

Can I finance this deal? How?

Thank you immensely for any input you can provide!

Shawn Rasmussen · Answer

@Justin Dominguez

I would put together 12 folders, each with all of your property information, the properties you want to buy and your financials. Visit 12 different banks and ask what they can do for you. All it takes is one yes.

Caleb Heimsoth · Answer

@Justin Dominguez well first off kudos for having your current properties and lots of equity.

To be totally honest I figured I’d click on this thread and it would be another “I have no money, no property and no experience, how can I buy this 1.6M deal?”, but clearly that’s not you, so that’s awesome.

First what I would do is don’t base your current portfolio value on tax appraisals.  That’s could be different than market value.

After you do that, I would pick 1 (only choose one if need be, or two if that’s necessary) and then you can refinance that one, and use that as the down payment on these duplexes.

A commercial local bank is who would do this.  Now this only works if your income is good.  Personally I would refinance just one property and only buy what that gets me.  I wouldn’t want them all tied to one Loan.  It’ll be one loan.  If you don’t pay, you’d lose them all.

Unless you have 400k plus reserves plus closing costs in liquid cash this is most likely your best bet.

Patrick Menefee · Answer

@Justin Dominguez this is exciting and sounds like you have a lot of options. Here’s another recommendation based on what I’m about to do with a property I’m under contract for (but 3 duplexes instead of 9)-

First, buy whatever properties you can with a commercial loan up front. It sounds like using a refi, HELOC, or both would be great options to provide the down payment. Let’s assume you put 25% down, and finance $1.2M.

Then, you refinance into conventional residential mortgages (subdividing the properties into two duplexes per). I’ve had a hard time finding a commercial lender that will do a loan at the same term/rate as a residential loan, but since you can get up to 4 units on one conventional loan you can do a cash out refi at 80% LTV for each pair of duplexes. This refi will be off of appraised value, not purchase price, so if you do that on a $2M portfolio you’ll pay off the commercial loan and also pull all your money back out (less closing costs).

Obviously this can be risky because you have multiple mortgages, multiple closing costs, etc., but now you can not only pull cash back out but you can also sell 2 duplexes at a time if need be.

Justin Dominguez · Answer

@Shawn Rasmussen

Lenders I have spoken with can do up to 75% of the loan to value OR the loan to cost… Whichever is lower. Even with an huge amount of equity built in, they still want 25% down in cash.

Of course, they also advertise refinance options that would let you get cash back out up to 75% LTV. So my hope was that if I put up my 3 existing properties as collateral they would just give me the loan and lump all the properties together. Essentially, I would be asking for a max loan of  $1.5MM in exchange for a portfolio worth $2.7MM. But that doesn’t seem to be a common setup.

All of that said, my local bank was willing to explore doing just that… But their commercial loan terms are 6.25% over 20 years, and the monthly payment left me with zero monthly profit or repair/maintenance reserves. If I could find more favorable financing,, it might work.

Caleb Heimsoth · Answer

It varies by bank.  Since this would be a commercial product, the loan is kept on the originating banks books, instead of being sold on the secondary market.

What you’re talking about is called a release clause.  Basically the bank allows you to sell one property.  This will likely come with some stipulations such as the proceeds go to the remaining balance.  Varies by bank but does exist

Justin Dominguez · Answer

@Caleb Heimsoth

Thank you so much for your reply. Your approach makes a lot of sense.

I’ve been quoted 6.25% over 20 years for any commercial loans. A 30 year note on the group would make the margins a bit better, but like you said, rolling everything together means they stay together.

Do loan products exist that would allow you to sell off pieces of assets in the portfolio? If I could talk the sellers down a bit, there would be quite a bit of equity built in and I could sell some of the duplexes at market price to repay the loan and keep the remaining units. I just don’t know if it would be allowed?

Thank you for your insight!!

Justin Dominguez · Answer

@Michael Kieffer

The duplexes produce $15,600 in the rental income each month, and could be increased to more than $18,000 if brought up to market rents.

The net operating income is $7k.

Justin Dominguez · Answer

@Anthony Wick

That’s what I need to be looking for then, because no - the terms aren’t all that great and they definitely don’t work for my situation.

9 Duplex Purchase - how to finance?

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