First multi-family purchase

[Steven Lewis]

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Union City.

Purchase price: $420,000
Cash invested: $420,000

Purchased my first multi-family investment property. Sold my investment condo a few months back and used the funds to purchase this new property all cash. I am debating whether to do delayed financing on this and pull the money out, or leave the money in the property?

What made you interested in investing in this type of deal?

Multi-family in the area has great rent, high occupancy, and future potential for great appreciation.

How did you find this deal and how did you negotiate it?

It was on the MLS and I came in all cash so I got it below list price.

How did you finance this deal?

All cash. I am debating whether to do delayed financing on this and pull the money out, or leave the money in the property?

How did you add value to the deal?

Kept 2 out of the 3 tenants and made minor improvements in the units. Replaced the toilet and shower heads with low flow to save and conserve water. I also plan to finish the basement and add coin-operated laundry in the basement for all 3 tenants to use. I also installed security cameras throughout the home.

What was the outcome?

2 out of the 3 tenants are very happy.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I am a Realtor.

[Steven Lewis]

Originally posted by @Ray Johnson:

@Steven Lewis Congrats! If you pull 80% of the cash out, Does the property still cash flow? If so, there is zero reason for you to leave the cash in the deal. I always tell people to look at the deal this way, the cash you have in a deal at Closing on day one is basically prepaid rent that you loaned your tenants and they are paying you back in monthly increments until you hit the break-even point of zero out of pocket dollars in the deal. You don't see true cash-flow or profit on a deal until you have all of your money out of the deal.

An example on the better option on your deal would be:

$420,000 - purchase price plus all closing cost etc...

 $84,000 - 20% Down payment

$300 per Unit NET cash flow monthly (Not sure what you actually get but this gives you an idea if you drop in your number)

7.78  - years before you really cash flow and start to profit on this deal if each of the three tenants pay rent of $1,500 per month.  Since this is before EBITDA the timeline does get reduced a little on the back-end after EBITDA. Rent increases and the future Coin Laundry facility can speed up this timeline as well.  

Basically leaving the $420,000 all cash in a deal is a really bad idea especially since you can use the $336,000 cash-out on another deal.

I would sit the $336k in my Savings account at Goldman Sachs earning 2.25% until I need it, that way it's earning money instead of costing me money every month until I use it on a better earning option.   

Totally makes sense Ray. 

With your above example in mind, here are my numbers.

$2,000 Apt 1 

$1,800 Apt 2
$1,800 Apt 3
=$5,600 Gross

P&I $1,600 ($420k with $105,000 down payment at 4.5%)
Taxes $16,500
Heating $2500
Water/Sewer $1500
Insurance $1700
=$3,450/month with mortgage and utilities

=($5,600-$3,450) $2,150 net each month

$105,000 down payment / (2,150*12 months=$25,800) = 4.1 years to recoup costs.

Then use $315,000 for another property. 

Let me know your thoughts?