All Forum Posts by: Bob Asad

If I live in a $600k SFH and have around 50% equity but want to "upgrade" to a $900k SFH, what would be the best option?

I was told by the bank that I couldn't do a 1031 because it's a primary residence, and 1031 are only for investments.

But I also don't want to sell and lose 20-30% on taxes (lived in the house for 2 years)

What's the best route?

Put 5% on the $900k SFH and rent out the $600k?

Quote from @Jason Wray:

Bob,

You might want to re-think that plan if you are going to use a HELOC versus an actual cash out refinance. Most commercial lenders 99.99% require you to own and have operated a commercial business or 2-3 investment homes prior to a commercial loan of that size. They also do not use most Heloc's since its "Not" a liquid reserve instead its a debt burden.

A bank does not offer a 30 year fixed conventional loan for a 12 unit commercial purchase. Anything over 4 units is commercial where DSCR usually goes up to 8 Max in most cases after that its strictly commercial or SBA.

I would strongly recommend getting a pre-approval or a letter of intent before you talk about a Heloc. Have you seen the business financials and previous years rents along with looking at that the banks will want to see its 100% occupied without vacancy to hit a Debt service ratio of 1.25% Minimum in most cases.

If you have any specific questions feel free to reach out I enjoy helping and talking REI!

Thanks for the great information. What are the normal loan terms for a 12-unit if it's not 30 years conventional nor DSCR?

And I was under the assumption that a HELOC could be used for anything without banks asking questions, is that not the case? (Since it's the equity of primary residence)

Wouldn't the bank mostly care about the rental income of the apartment to offset the debt to loan? 

Quote from @Bradley Buxton:

@Bob Asad

Once under contact getting the rent rolls, maintenance, and any capital expenditures expenses. Then I can dial in the analysis The other important docs to get are the estoppels signed by the tenants.  This will confirm what the lease terms and actual rents the tenants are paying.  Some seller will guess or fluff the rents and lease terms. 

 Thanks, so it sounds like the steps to send the seller are:
1) Letter of Intent (LOI)

2) Earnest deposit based on a 21-days inspection & financial contingencies

3) Coordinate time with the seller to have an inspection & general contractor (GC) walkthrough

4) Calculate the amount of repairs/fixes required to see if it makes sense

5) Ask the seller for lease docs (estoppels) in addition to rent rolls, maintenance, and all expenses

6) See if the bank approves the purchase

7) Purchase, send the tenants a document that says I'm the new owner, and start rehab

Does that sound right?

Would you recommend doing something like this?

Using SFH primary residence with a HELOC (ex. $425k) to purchase a 12-unit Apartment ($1.5M) with 25% down ($375k from the HELOC).

The remaining $50k from the HELOC could go into fixing/rehab of the 12-units.

Then cash-refinance the larger amount from the 12-units to pay off the HELOC in one lump-sum (as much as possible), then using the cash flow from the apartment to pay off the rest of the HELOC.

Repeat the process with a new apartment.

1) Does this make sense? Any flaws in the thinking or process? Would there be issues with the 30-year conventional bank loan itself for the 12-unit apartment since the down payment is from a HELOC?

2) In a cash-refinance, let's say the new appraised value of the apartments is $1.8M, does this mean you can apply the $300k into the HELOC and not pay taxes? (or are there fees? Aside from the cash-refinance cost itself)

3) Does this mean the new mortgage (30-year conventional for the apartments) be based on the $1.8M with new interest rate (at the time), etc.?

4) Is there any good way to "calculate" the new appraised value ahead of time to know what to fix/rehab?

Quote from @Bradley Buxton:

@Bob Asad

Those are good sites to start with and the right questions to ask. However, you might not get all the answers because some multifamily operators either won't provide certain information unless you're in contract or have an accepted LOI. Additionally, there are many operators who simply don't have that information. For example, I know of a deal in Reno, NV where all the records were still on paper, and the owners didn't even know the rents people were paying.

When I’m evaluating multifamily properties for clients around the Reno area, I calculate current, market, and proforma rents. I also check county and city records for rent permits and any major repairs. Talking with the building property manager can also yield valuable information.

You’ll never know everything until you’ve done an inspection. Initially, one of the most important pieces of information is the area rents. Are they increasing? What other comparable properties could tenants be renting, and is the building you’re looking at competitive? How much new inventory is coming online?

In the Reno, NV area, there aren’t many new apartment starts, and with tech jobs coming from CA, there’s going to be a shortage, which is driving up purchase prices. Buying a multifamily property is essentially buying a business—income minus expenses.

Thanks for the information. What forms/documents do you request from the seller? (aside from asking for 1-2 years rental docs, NOI, cap rate, etc.)

Quote from @Lucia Rushton:

@Bob Asad where are you looking ?

 Anywhere in USA

Does anyone know any good sites/places to purchase MF/Apartments?

I typically look at Loopnet, Crexi, and Google "Location + Multifamily Broker", any other recommendations?

Also, what do you typically look at before contacting the listing agents/owners?

I normally research:

-Location

-Crime

-Median House Hold Income (HHI)

-Zillow - other similar units + B/B that have sold in the area (ex. 1-2 miles in the past 90-days)

When contacting, anything you would ask aside from the following?

-NOI (past 2-years if available)

-Vacancy %

-Repairs needed

-Pro forma

-CAP Rate (something around 4-5% is what you recommend?)

-Calculate your own cash-on-cash

-Contingency 14-day inspection

Would you recommend doing something like this?

Using SFH primary residence with a HELOC (ex. $425k) to purchase a 12-unit Apartment ($1.5M) with 25% down ($375k from the HELOC).

The remaining $50k from the HELOC could go into fixing/rehab of the 12-units.

Then cash-refinance the larger amount from the 12-units to pay off the HELOC in one lump-sum (as much as possible), then using the cash flow from the apartment to pay off the rest of the HELOC.

Repeat the process with a new apartment.

1) Does this make sense? Any flaws in the thinking or process? Would there be issues with the 30-year conventional bank loan itself for the 12-unit apartment since the down payment is from a HELOC?

2) In a cash-refinance, let's say the new appraised value of the apartments is $1.8M, does this mean you can apply the $300k into the HELOC and not pay taxes? (or are there fees? Aside from the cash-refinance cost itself)

3) Does this mean the new mortgage (30-year conventional for the apartments) be based on the $1.8M with new interest rate (at the time), etc.?

4) Is there any good way to "calculate" the new appraised value ahead of time to know what to fix/rehab?

Quote from @Nicholas L.:

@Bob Asad

is this an actual property, or just a thought experiment?

 Actual property, trying to figure out what others would do since it's a new construction and the town's value (all houses) are going up and appreciating.

Quote from @Theresa Harris:

Can you save more or get it so you are at 20% down and therefore don't have to pay PMI? How much is it without PMI? If you are living in the house (typically the only way you can buy with less than 20% down), I wouldn't expect to break even while living there. You can't count on the value going up. Rent can be increased annually, but expenses also go up (hopefully at a lower rate).

For a second house investment, you don't need to put 20% down, it's 15% minimum. The difference between the two is $4,300 (15%) or $4,000 (20%) but the rent in the area is still around $3,500-$3,700 (so you'll still lose money), but hoping that when interest rates go down and appreciation goes up, you can make money then.