Financing my first duplex

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Financing my first duplex

Michael Franklin
Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes

Greetings, all.

I just went under contract on my first duplex and I could use some input in regards to the financing options I'm considering for the deal. This will be a non owner occupied investment property.

When calling to get a firm insurance quote from State Farm, they presented me with financing terms I didn't know were available for a multifamily investment property. I had already met with a local bank and discussed a 5/1 20 yr ARM @ 4.625% with 15% down. Assuming that interest rates will probably only go up from here, I wasn't thrilled with the ARM but the other banks I had talked to in the area offered similar terms and most wanted at least 20% down so I thought this was my best option. However, State Farm offered me up to 30 yr fixed @ 4.625%. The the caveat, though, is I have to put 25% down.

So basically, I'm torn between 5/1 20yr ARM @ 4.625% with 15% down and 30yr fixed @ 4.625% with 25% down. I realize if they were both fixed rates I could use a discounted cash flow approach to determine a winner. But considering the ARM as a variable, I could use some guidance.

I ran both cases through my spreadsheet, shown below. Granted, it doesn't account for the ARM adjustments or TVOM of the down payment difference between the two options. And my mortgage estimate calculation is yearly amortization divided into 12 payments, for those checking the numbers. I will probably get around to correcting it at some point but it's close enough for the sake of this analysis.

5/1 20yr ARM @ 4.625%, 15% down

30yr fixed @ 4.625%, 25% down

Thank you in advance for taking the time to read through and share your thoughts.

-Mike

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Jason Brouillard
Investor · Spokane, WA · Member since 2014 · 10 posts · 3 votes
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I ran into a slightly similar issue with my 4plex purchase (also non-owner occupied) last October.  the first several people I spoke said I had to have 25% down to get a 30yr fixed conventional loan.

I ended up doing a 25% down loan, but hated throwing so much cash into the deal.  This was my first non-owner occupied loan so i thought this was the price to pay.

I am working on my second deal and I found a mortgage broker in my area that could have down the same deal for 20% down and a better rate.  Basically, my thought would be to keep looking / asking around until you get what you want. Find a decent mortgage broker and see what they can do (or keep calling banks).

Hopefully this helps,

Jason

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  • Jason Brouillard
    Investor · Spokane, WA · Member since 2014 · 10 posts · 3 votes
    11y

    I ran into a slightly similar issue with my 4plex purchase (also non-owner occupied) last October.  the first several people I spoke said I had to have 25% down to get a 30yr fixed conventional loan.

    I ended up doing a 25% down loan, but hated throwing so much cash into the deal.  This was my first non-owner occupied loan so i thought this was the price to pay.

    I am working on my second deal and I found a mortgage broker in my area that could have down the same deal for 20% down and a better rate.  Basically, my thought would be to keep looking / asking around until you get what you want. Find a decent mortgage broker and see what they can do (or keep calling banks).

    Hopefully this helps,

    Jason

    1Reply
  • Michael Franklin
    OP
    Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes
    11y

    Jason, 

    Just as you alluded to, I'd like to put down as little cash out of pocket so I can pursue my next deal sooner. The biggest dilemma is whether the smaller down payment option is worth the risk involved with the ARM. Locking in 30yr fixed rate in this interest rate climate seems like a smart move.

    I will keep calling around to see what other lenders can do.

    Thanks for the input.

    -Mike

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  • Zach Nelson
    Forest Park, IL · Member since 2014 · 16 posts · 3 votes
    11y

    Hey Mike,

    I know we've talked about this property a bit but I thought I'd throw my two cents into this topic. Feel free to totally disregard it ;)

    A quick glance at the numbers shows that even with an extra 10% down, you're only getting an additional 1.5% COC ROI since the 30yr fixed loan nets $84 more a month in profit. And like you said, that small advantage likely disappears in 5 years, at which point this may very quickly become a poorly performing investment.

    Additionally, the higher downpayment gives you more room to adjust your rents to fluctuations in the market or area, giving you some more insurance for positive cash flow. In my conservative investment thinking, the temporary 1.5% COC ROI is a small price to pay for that added stability and for letting you hold onto this property for a long time.

    However it might be worth taking Jason's advice and continue hustling for a better financing option. But if these wind up being the best you can find, I am definitely for the safer long term option. 

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  • Henry Melair
    Columbus, OH · Member since 2010 · 15 posts · 4 votes
    11y

    The context of your post implies that you intend this property to be a long term hold.  If that's the case, to me at least, a fixed rate is the way to go.  If you believe you're only going to own it for less than 5 or 6 years, the adjustable is likely better.

    An even better solution is seller financing with little or nothing down, depending upon what you can negotiate.  That's likely not an option on this one but something to keep in mind for future deals.  If you market directly to owners and bypass agents, you should be able to get somewhere around 20% of the deals financed by the seller (maybe more, maybe less) depending upon the property type, market in your area, and the motivation of the seller.  

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  • Michael Franklin
    OP
    Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes
    11y

    Zach,

    I think that's a great point. With the potential for the ARM to hit 10+% (with 6/2 caps) at year 7(worst case), the cash flow could almost completely dry up.

    I'm going to try to line out alternative financing as Jason suggested, but I'm leaning towards the higher down payment to lock in 30yr fixed financing if I only have these options to choose from.

    Thanks for the input,

    Mike

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  • Michael Franklin
    OP
    Real Estate Investor · Bismarck, MO · Member since 2014 · 45 posts · 8 votes
    11y

    Thanks, Henry. I will keep that in mind moving forward.

    -Mike

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