All Forum Posts by: Steven W.

@Nick Schoch Thanks for the follow up. Just wanted to make sure I understood properly.

@Nick Schoch Wouldn't a Fannie Mae Small Multifamily loan still be an option? https://www.fanniemae.com/multifamily/small-loans (750k - 6mil) Granted, I understand lenders may not deal with those loans. I'm just trying to understand what you mean about them going away. 

My big takeaway from this feedback is that the major and defining difference I need to deal with is the shift to commercial lending. Commercial lending has additional requirements that will necessitate I look at smaller properties (or even cheaper markets) than I originally intended.  On the flip, I am now more confident when evaluating these lower value multifamily properties.

I'm going to set up a meeting with my primary bank just to talk and get a feel for what price range I can play ball in.

Thanks again everyone.

Thanks for the information everyone. It's resetting some expectations or (mis)understandings I had.

I've also done some more research around commercial loans and discovered some "gotchas" I wasn't originally aware of. Namely that many lenders may require a net worth equal to or greater than the loan amount and 9 months of liquidity to cover payments. That net worth requirement is a big stinker I wasn't expecting.

@Jay Khoury That (replace my income) is basically my goal. I want to get close enough to my W2 where I wouldn't take too much of a pay hit when switching to full time investing. Syndication investing is something I've looked into a little bit, but admittedly have a lot more reading to do. I do like the fact that with direct ownership I have a lot of control over what can be done to adjust income, but I also accept that I might be too small of a fish to survive in the pond.

@Benjamin Ficker I definitely find more options outside of Portland proper, but I haven't seen anything in my range where the numbers make sense. Granted, I'm using Redfin, Zillow, etc just to gauge things. I know at some point, if I want to pursue property up here, I'll need to make connections with someone like you to find the better properties.

@Greg Dickerson You are making a point to separate commercial and multifamily. Are you using commercial to refer to business-style properties (office, storefronts, etc) while reserving multifamily to refer to 5+ unit residential? I just want to make sure I understand the distinction you are drawing. Is there a better term I should be using for "commercial multifamily" to refer to 5+ unit residential housing?

I know I have a lot more reading to do, and this has all been very helpful. It's given me some paths to go down.

I am considering shifting my investment plans over to buy-and-hold commercial multifamily. I have some things that I'd like clarity on. I appreciate anyone who takes the time to read this (and especially respond). I've tried to be direct with my questions/assumptions and moved the fluff to the end.

Are these generally accurate statements?

When going for commercial loans I can expect to pay a point or more over a typical loan, and may need to have 30% down to get financing. It will also be unlikely to get a 30yr loan and instead I can expect a 15 or 20yr loan. The property details are more important than my details, so my credit score, income, and other assets are unlikely to impact loan terms for the better.

A commercial loan under or near 1M is considered a small commercial loan, and I may struggle to find a loan provider.

I've been reading that commercial multifamily between 5 to 10 units adds a lot of headache without really leveraging any economies of scale. Larger than that is when you really start seeing benefits with efficiencies.

The 1-2%/50% "rules" are still applicable to multifamily properties for quickly judging expenses before digging more. I should have the benefit of getting accurate expense and income data for any real property to validate cap rate and other information.

Property management costs are similar to what they are for a SFH (10%/mo + placement fee) until you get to a certain number of units where it then makes sense to hire an employee.

Insurance costs will be proportionally more than a SFH/4plex in the area would. e.g. If insurance was 5% for a SFH, it may be 15% for a commercial multifamily.

Some specific questions I have:

Will most lenders be hesitant/refuse to loan to me as a sole investor with no commercial history despite any starting capital I may have?

If 1M is too small to get a loan/favorable rates, what is typically the starting point for better rates?

Am I overlooking any major differences between SFH and commercial multifamily other than "everything costs more"?

Backstory:

Until recently, my research and action has been entirely in the residential space. I have SFH rentals that are working out well with a long term goal of 100 doors. My original plan to do that was by investing in 3 and 4-plex units while leveraging FHA loans. A new unit each year, until the rates were impacted to the point that other loan options were equivalent or I had enough cash flow snowballing to fund additional properties without a bank loan. I have enough income that saving the downpayments to do this annually would not be a problem, but...

I have since moved to Portland, and it is very difficult to find a cash flowing 3-4 plex. They are rare on the market, and their market price is pretty high when you can find them. This has caused me to look outside of the local area for residential multifamily properties. It then occurred to me that since I would not be getting a FHA loan, and I would need to deal with a remote purchase/management regardless of if it was a SFH, 4-plex, or 50 unit building that there is no reason to stick with my original framework.

It's looking more and more like commercial is the better path to my long term real estate goals. These forums have been invaluable as a tool, and I appreciate everyone's time.

Thanks!

@Phil Shearcroft I have a SFH property near Moon Valley -- about 1hr northwest of Scottsdale due to traffic -- that gets $1500/mo. Scottsdale is a much more desirable area with more attractions (stadiums, events, higher end stores, etc) nearby. I also have a friend who owns a SFH in Scottsdale and rents it via Airbnb. Because of the stadium being nearby he can get 10k/mo during the summer (of course his expenses are much higher).

Without knowing the specific area or the difference in rent between a SFH and a condo in Scottsdale, my first thought is that $1500-$1800 doesn't sound unrealistic.

The reason why it's suggested to finance instead of buy in cash is because it frees up your money to invest in more properties. For example, if you have 100k to invest you can buy one home with 100k cash, or 5 homes with a 20k down payment. If the homes cash flow properly, you wouldn't care if you're paying $0 or $1000 in interest every month. Your total cost into the property is that 20k. The tenant is paying everything else for you. 

If you're really adverse to carrying the debt, you could then use the net profits from the 5 properties to quickly pay down each mortgage one at a time. That'd be an extra $6000/yr towards one of the mortgages which would be paid off in 10 years. Then you have even more cash flow to pay off the next one a few years later. It snowballs pretty quickly and at the end of 15 years you could have 5 fully paid off properties for that initial 100k. If we say each property gets 10k/yr after being paid off, that's 50k/yr after 15 years.

But if you use that 100k to buy a single property that gets you $10k/yr in net profits, it'd take you 10 years to get your 100k back for re-investment. At the end of 15 years you have two properties cash flowing at 20k/yr after 15 years.

These numbers aren't meant to be exceedingly realistic, they overlook things like taxes/expenses, and are just meant as a rough ballpark to illustrate the concept. You need to run the numbers with actual properties and expenses to see if it makes sense for what you're trying to accomplish.

How did you arrive at the $800-1000/mo rent for the mobile home?

If you can get that much, have you considered putting two mobile homes on the land and renting one?

Are mobile home rentals common in your area? Are you sure you can find someone?

Are you able to handle repair costs? My understanding is that mobile home parts are often non-standard and thus cost more.

You are spending $1100/mo for the TX home, and only taking in $1200/mo? Is that accurate? If anything happens to that home (new AC, roof repair, carpet, can't place someone for a month or two, etc) you are out of money. Is the rent under market?

They are not putting in a literal 100 hours of work each week.

100/7 = 14.5 hours a day

Another way to phrase it would be "If you're not sleeping or eating you should be working on your investments."

What does that look like in action? When you're driving to do errands you're keeping an eye out on properties. When you have spare time you're doing research and crunching numbers.

You will burn yourself out very quickly if you try to actively work 100 hours a week every week, even if you ease into it. Just 1-2 weeks at 70-80 hours is enough to stress family life, cause mental fatigue, etc.

@Wes Brand Assuming the numbers worked couldn't I later do a HELOC to do the same thing and wind up with two properties instead of one? And if it turns out renting it out is terrible, wouldn't I still have the option of selling regardless? I'm definitely more interested in buy and hold than churning properties. I'm not saying "No", I am trying to understand why I would seemingly dump a property I can get well under market (assuming the numbers worked).

@Rob Gillespie I'm definitely wary of Zillow and am not basing anything entirely on it.  Before I commit to anything I'll be getting my own inspection, appraisal, etc. Other sites give similar (+/- 10k) home value estimates, and other homes in the area have sold for similar amounts, so I think that is pretty close. My main unknown is rental rates which is why I am going low.

You are right to be suspicious of his motivations. I have known this guy personally close to a decade and it really is as simple as he's ignorant of the selling process and thinks he'll take a big hit in taxes, realtor fees, etc. and doesn't want to deal with it all. I've done enough dissuading to ease my conscious regardless of what I do wind up doing.

If I'm not missing anything in my numbers then I guess I'll need to figure out what it'll take to get the deal to work. Worst case scenario, in the end, I can just flip the house to pull some cash out.

Background: I have the opportunity to buy out a mortgage on a piece of property for roughly half of what it's currently worth. I know the owner personally and have explained he is leaving money on the table by going through me as opposed to selling on the market, but he is still willing to move forward.

There is an additional "mother in law" addition on the unit (approx 300 sq ft with bath and kitchen), but it does need some TLC. I am not factoring in the potential rental income from the MIL unit in my numbers, but previous rentals have been at $300/mo.

I am also familiar with the property (lived in the MIL unit for a year) and don't know of any "gotchas". I will still get an inspection and contractor walkthrough of course. I am very interested in purchasing his property as a rental to start my foray into real estate investment.

My understanding is that he can gift me the equity in an agreement and the bank should take this existing equity as a "down payment" towards the 20%. My credit score is 820 if that is relevant at all. Because of this I am not factoring any major initial cost into my analysis.

Property value: $118,000 (Via Zillow)

Purchase price: $55,000

Principle & Interest: $298/mo

Tax: $89.40/mo (30%)

Insurance: $74.50/mo (25%)

Rental income: $950/mo (Est. $1100/mo via Zillow)

Repair/CapEx: $190/mo (20%)

Vacancy: $142/mo (15%)

Management: $95/mo (10%)

Landscaping: $47.50/mo (5%)

So by running the numbers I come out with a sweet $13/mo after all expenses (incl. mortgage). I am trying to err on the side of caution. Realistically I can charge a bit more rent (or rent out the MIL addition as well), and am trying to be conservative on my vacancy rate. 

Once things are "stable" I would be interested in redirecting the repair and vacancy buffers to paying down the mortgage earlier. On a personal finance side I can afford any capex issue that comes up without relying on banking the repair buffer. I could also pay the initial $55k to eliminate the mortgage entirely, but I'm trying to leverage debt to help build wealth through "passive" income.

Am I missing anything I should be factoring in? This deal seems kind of crummy despite getting the house for roughly half its market value. I feel like I am messing something up.