First Portfolio Acquisition

[Cory Edds]

I’m under contract for my first rental...and it’s actually a portfolio of a few single family homes. I based my offer (426k) off a loan with 20% down payment with 3.75% interest rate over 30 years, but the bank came back and will likely give me a commercial loan of up to 75% the appraised value at an interest rate of 4.5-5% over 15 years. I’ve worked with the banker before on my personal home, and they are familiar with the portfolio of homes and expect they will appraised between 600-700k meaning I might be able to get a loan out covering the whole deal plus an extra 100k.

Cash flow will be negative but I can cover it. Appreciation at a conservative 1.5% will be greater than the extra cash I put in towards debt service payments. Does the financing seem reasonable / what does the community here think about having a zero money down commercial loan at higher interest rate / shorter amortization vs. multiple single family loans at lower interest rate / longer amortization? I feel like I’m effectively paying now for more equity later and not sure how to think about that. My end objective is cash flow but can see how this might potentially help me build equity so I can 1031 these properties into a higher cash flowing investment down the road. Thoughts?

[Joseph Cacciapaglia]

What does the rent growth look like in the area? Will they be positive in a year or two, or will it be quite a while down the road? If it just takes a year or two of rent bumps, then it might make sense. When you say it will be cash flow negative, is that after vacancy and maintenance assumptions, or is the rent less than the PITI? If it's the latter, then I would be a little more hesitant.

Also, is there a prepayment penalty on the commercial loan? If not, you might be able to refi out in 6 months into conventional residential loans. Then you get the benefit of the 100% financing, but are able to get the rate and terms you want, but just with a short delay.