5 Plex Advice

[Chad Workizer]

First off I need some help understanding financing on a 5 plex. I've read that I can't do a convention 30 year fixed on property with over 4 units? If I can't what options do I have and how much higher are the interest rates?

Here are the numbers

PP: 170,000
Taxes: 1100
Insurance: 700
Rent per unit: 400
Year build: 1994
In good repair.
4/5 units currently rented
Tenants pay everything except trash

I was running calculators based on being able to get a conventional loan and was coming up with 900 dollars with taxes and insurance. I figured 80 percent occupancy which would mean always a vacant unit. So monthly income at 1600. After expenses I was figuring it to cash flow 400+ dollars a month. I have zero experience with 5 something like this so any advice would be appreciated.

I plan on managing the property myself.

Thanks
Chad

[Frank Gallinelli]

Chad -

Just a couple of quick sidebar observations.

The typical commercial lender will use the lower of the appraisal (their own) or the purchase price, and will apply their loan-to-value ratio standards to that number to set to maximum loan they might approve.

They will also apply their standards for Debt Coverage Ratio (typically 1.20 or higher) in making a loan decision. That mean the property's net operating income needs to be 20% or more than the debt service. That's essentially what Joel is telling you when he says the bank doesn't really care if you make a profit, but they want to be sure you have enough, (actually, more than enough) cash to make the mortgage payments.

Finally, that appraisal is almost certainly going to be based on capitalizing the property's NOI, so you should recognize when making your projections that repairs and capital expenditures are not treated the same. Repairs are part of the NOI calculation (and are also deductible currently); capital expenditures don't affect NOI, and they cannot be written off all at once -- they have to amortized over the useful life of the building.

Frank