All Forum Posts by: Mark Mosch

No - you need to get permission to do that.  Plus it's hard with only 4 units.  Usually you can do it during inspection when you're already in escrow.  While you're hanging out while the inspector does their thing, if you causally drop a little "hey have you been here long?" or "you like living here?" type of questions if appropriate, then that's how you get the info.  Otherwise, they try to keep the tenants out of the process as much as possible so they don't get bothered and/or annoyed.

the inspection thing is whatever you can get them to agree to, actually.  Usually you need to pay a qualified inspector to do it...so he can verify all that stuff the seller is claiming.  You probably don't want to do that unless the offer is accepted.  You most often make the inspection and other due diligence items as a contingency in your offer.  Although - you can walk the premises yourself casually and look around before the offer.  So if they accept your offer then they have to work with you to let your inspector on premises, give you copies of the leases, show you the trailing 12, and give you the list of all the repairs they've done in the last 3 years.  And - another useful item to make sure to get is the insurance printout of all losses for the last 2 years.  That can show anything they are trying to hide - like a mold claim or something.  That's normal to ask for too.

Again - lots of details, but all manageable, and the more you do the more it becomes like second nature.

sure - good luck.  Just as an FYI, Assessments are usually terrible measures of value.  They are from earlier periods and almost never reflect the market value.  What would work much better is if you could tell them "There were two other 4 plexes of similar ages that sold for $225,000 and $235,000 in the last 6 months, so I think yours is worth $230,000...".

Lots of things here:

1.  Don't believe anything the owner says - just as a matter of practice.  make sure you hire an inspector to look and confirm.

2.  You can offer anything you want - they can just say no.  If it's a multiple bid situation on a hot property that just came out, then you need to do your best offer.  But if this is a random thing you just found, then the worst that can happen is the guy says no.  You can then start a dialogue about "what would you want" and see if you can agree on a price.

3.  As your first investment property it is likely you will need to come up with the 20% unless you get really lucky because you have no track record.  Can you try to borrow from friends and family and give them an interest in the deal?  Once you get the first one under the belt it will get a lot easier, but this first one you might need to stretch on.

4.  Check sales in the area for 4-plexes.  Go on Loopnet or if you're working with a broker have him run comps.  Look at similar properties as far as size, unit type, and age and then you'll see if your $210k is reasonable.

5. As far as financing, a 4-plex is considered a 'conforming' loan - like a single family house, so you should be able to use your good credit to get a decent financing rate. But I as i mentioned above you likely will need to have at least 20% if not 25% down, because banks are more picky on rental properties you don't live in. I would recommend talking to a bank first and telling them your plans and then asking for what kind of things they think you could afford. I never underwrite a property evaluation without knowing up front more or less what the bank will do for me. I've had deals that i've killed off because the bank wanted to do 70% LTV instead of 80%. Good to know that stuff up front.

6.  Also - make sure you fully load up a spreadsheet to project the cashflows.  Looks like your rents would be good to make you money on anything up to the purchase price, but you need to see all the costs.  What are utilities?  Are any separately metered or do you have to pay them?  That can be a big item.  What will the property taxes be after you buy it?  If they've owned this for a long time, they might be really low but when you get reassessed by the county after you close, they could double.  are there other maintenance things that he has to do for tenants like mow lawns, shovel snow in the winter...etc...  Get all that information from him (called the 'trailing 12' - for all the numbers for the last 12 months) and see where it leads you.

These are just a few things, and there are calculators for these things you can download on this site.  All in all, don't be deterred - once you've done all your homework and it still looks good jump in and figure things out.  You never can figure everything in advance, but do your best and then let the learning process begin.

Best of luck!!

@Eric Schleif - As you surmised, didn't want to go that high on the leverage, since i wanted to keep a nice safe debt coverage ratio. What we have been able to do is hit up Freddie for a supplemental after 18 months when NOI growth has occurred and if the cap rates have held stable or dropped. At that point, you can take more out and get in effect 85-90%.

@Darryl Dahlen - Just as an FYI, it's not just the core 6 markets you see 80% on. I've done 80% in Little Rock on 3 properties, 2 in Kansas City, 3 in Northwest AR, Lawrence KS, Dayton, and 2 in Memphis - in the last 14 months. And this not only is via a Community Bank but via Fannie, Freddie SBL, and CMBS. So it's definitely out there if you have decent cash flowing deals in solid secondary markets.

I think it has to do with the size, the area, your experience in the area, and the asset itself. 80-85% of what I've done in the last year (about 1,300 units) has been done at 80% LTV. And that's been split among Fannie Mae, CMBS, and Community banks. Where I've not been able to are where I am new to the area and my property management company is also new, or the asset is more of a turnaround. I just had to do 70% with Freddie on a 210 unit complex in St Louis because it had 80% economic occupancy vs 94% physical occupancy (aka crappy current management) and this was the first property in the submarket for both my Fund and my property management company. If you are working in an area where you have other assets, or are working through a property management firm who has other assets in the area, and the property is in decent shape with occupancy at 90% or better it should be a no-brainer to get 80% LTV going in on an acquisition. And rates should be fine too on that - right now Fannie should be 4% or less and Community Banks between 4 and 4.25%. I'm assuming you are buying something reasonable in size - like over $1 or $2 million. If the loan is really small, rates will be higher. Its a great time to be borrowing now - do all you can while the climate lasts.

Darryl, mostly true especially about the 10% down on agency. However SBL goes a little bigger. I'm getting ready to close an SBL property in Dayton that's $4.6 at 80% LTV - so that $3m cap is no longer an issue.

Actually - depends on your record and what property you are trying to get as well as where.  Since these properties are larger than 4 units you need to go commercial.  Your amounts are too small for agency debt - you have to be at least $3 million to qualify for the Freddie SBL program, and $5 million for standard Fannie/Freddie stuff.  So you need to find a nice community bank who you can build a track record with.  Community banks, however, should be able to do 20-25% depending on the cash flow of the deal.  The bank will look at your numbers on the deal and tell you what the deal can support mostly based on the cash flow numbers and your track record.  I do 30 year amortization, 20% down all day long with community banks - sometimes 25% if they feel the property is riskier.  I think you can do way better than 30-35% - unless this is in a really sketchy area or isn't cash flowing.

Well the funds that I run actually go for the high percentage yield. We feel like prices are very high in the big markets so we are looking in secondary markets and try to maximize the percentage cash on cash that we get. Any appreciation we get will be by driving the net income up over time.  We figured this is a little bit of a safer approach than having a very low cash flow and hoping that the property goes up in value. You can make money both ways though. 

You can't be so simplistic on multi-family.  There are so many variables.  You only can look at the pro-forma cash on cash return, and then balance that against the risks of the area.  First you need to REALLY know what the costs will be.  If you are going to manage it yourself go over the trailing 12 month financials from the owner and look at every item to see what it would be under you.  If you are hiring a 3rd party management company to run it (which i recommend in case you want this to become your business - so you can scale) then work with them to create the pro-forma.  Then you have to decide after everything, what % return do you need?  Most investors like 8-12% it seems.  In hot areas like LA you can't get that - people are getting 2% cash on cash and counting on the property going up in value to get them most of their return.  We have some properties in smaller areas like Northwest Arkansas that make 20%+, but they don't go up in value as fast as the hot areas like California.  But my point is just stop thinking about that "$200 per unit is good" thing - really extremely simplistic and can quickly lead you into trouble.  You can buy multifamily for $200,000 per unit, and for $10,000 per unit.  Is the $200 per unit good on the $200,000 per unit property?  Of course not.  Anyway - do the full analysis, then jump in.  Don't expect to be perfect the first time but the more you do the better you'll get.  Good luck!