$300,000 6 unit rental scenario.
U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes
$300,000 6 unit rental scenario.
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Developer · Portland, OR · Member since 2012 · 55 posts · 40 votes
13yBen Leybovich I think your last line needs to be at the top of any forum thread. Great point!
"Long term property investing has 2 speeds. Forward is slow, but reverse is usually very quick and it can hurt..."
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First, and most importantly, you need to determine how will the units rent for each month.
For a 6plex, you probably want a rent to purchase price ratio of somewhere between 1.5 to 2 percent. So rents should be around 750 to 1000/month.
The prolem I see with going in with 2 other investors is that you will have to split the profits 3 ways. This means you will really only see the equivelant of what you would for 2 of those three units in profits. In this case, why not just use 30K to get a duplex and stay partner free?
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Well im thinking i can pay back the other two investers + a hefty 10% return on their investment then after they are paid back i will be getting all the profits. If this isnt how it works. What is a better way to aquire financing? Personal loan or having a second mortgage on my personal home. Is that even possible. Consider if i have an 800+ credit score.
- Wholesaler · Friendswood, TX · Member since 2012 · 1 post · 0 votes13y
If they loan you money they are lenders--not investors. The best way to acquire equity financing is to give the investors a piece of the upside of the deal. There are lots of ways to do this other than an a straight split. Hoah.
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Can you elaborate on these other ways Norman and explain more on how this would be written out in an investment contract. Seems like the cheapest way to do this would be a $30k personal loan from a bank. Even with 10% interest over 5 years it would still be a better deal than giving a third of my profits away... Any opinions on this?
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Now that I think about all of the advice I have received on here. It may be more doable for me to aquire a $200,000 six unit building. that would only require me $40k-$50k down payment and I could do that without other investors if I can get a $30k personal loan or if I have to just apply for two $15k personal loans from two different lenders at the same time. combined with my on hand cash of $30k I think It would be more managable. And If I need to, since my personal vehical is already paid for it is worth $10,000 and I could use it as collateral for $8500 as my current bank will pay out 85% of a vehicles value.
This would give me a total of $68,500 for a $200,000 apartment building. Does this seem more realistic? Once I get this first purchase out of the way I think things will move more smoothly, but I would be on a 5 year track to pay off these loans and then refinance the property at 5 years, hopefully with much added value through smart property management.
any thoughts?>
p.s.
Here is the course I am taking in real estate management.http://www.apu.apus.edu/academic/programs/degree/206/undergraduate-certificate-in-real-estate-management
- Involved In Real Estate · Jacksonville, FL · Member since 2012 · 217 posts · 42 votes13y
Colby Miles I'm not sure if you know or not but anything over 4 units requires a commercial loan. This generally means a higher rate, a shorter term,a larger down payment, and often a balloon payment. You should consider that in 5 or 7 years when you are forced to refinance rates will likely be higher and possibly much higher than today. Buying long term assets with short term debt can be dangerous.
To add to Tim's valid comments about commercial financing, borrowed money used as a down payment is not generally considered acceptable by lenders. So you need to have "seasoned" money. Seasoned money would be cash that you have had for about 2 months and can verify with your bank statements.
Borrowing money for down payments does two things against you:
1) it increases your debt which hurts your DTI
2) the recently borrowed money can lower your credit scoreAlso, if financing a SFH, duplex, triplex or 4-plex, it is not likely the bank will consider your vehicle as collateral. They may refinance it for you and then you would be in a situation with borrowed money again.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes13y
Colby,
Judging by the questions you ask, it feels that you may be jumping the gun a bit. Your questions are all intelligent questions, but it takes time to find your footing with the analysis and strategy stages of the acquisition process. BP is an excellent place to get a lot of the answers. Keep asking questions. The analysis stage is the most critical part of what we do – gain a very clear understanding of how to do it the right way.
Some of the terminology that you need to have very good understanding is:
CAP Rate (what it is, when it's used, and how)
GRM (what it is, when it's used, and how)
DSCR (what it is, when it's used, and for what purpose)
Cash on Cash
NOI
Cash flowKnowing all these and more is mandatory to be able to put a healthy transaction together. Google these, and if you need help myself and others on BP will certainly help you.
Using short term money can a viable plan, if done the right way. However, you need to know before you pull the trigger how you are going to get the cash out done. And you should have 2 or 3 ways of doing it. Relative to this, you need to know how the banks work better than the bankers themselves. This requires a lot of research.
Be careful my friend. Long term property investing has 2 speeds. Forward is slow, but reverse is usually very quick and it can hurt…
- Developer · Portland, OR · Member since 2012 · 55 posts · 40 votes13y
Ben Leybovich I think your last line needs to be at the top of any forum thread. Great point!
"Long term property investing has 2 speeds. Forward is slow, but reverse is usually very quick and it can hurt..."
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
So then my only option is to have investors to help me out?
- Rental Property Investor · Southport, CT · Member since 2008 · 160 posts · 137 votes13y
A third of a modest gain is better than 100% of a painful loss -- which what can happen if you try to over-leverage. Working with partners on a first deal is an opportunity not only to spread the risk around and minimize exposure to debt, but also a chance to learn from the experience of those partners.
As far as giving up part of your potential profit by having partners -- I've never forgottena lesson I learned a long, long time ago, when I was starting out. I tried to encourage a developer client of mine to really push a deal to the edge to maximize his profit. He said to me, "Son," (I didn't have gray hair back then) "Let's do this deal the way it is and move on to the next one. I never lost money making a profit."
And I never forgot that.
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Good advice frank. I really appreciate your added insight.
- 13yRobert AdamsBusiness MemberReal Estate Broker · Henderson, NV · Member since 2009 · 1k+ posts · 373 votes
Are you looking for a 6plex in Vegas? We have one listed and the seller is close friend of mine. List price is $175k and it is fully leased out.
The Adams Team at Rothwell Gornt Companies4.972 Reviews - U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Appreciate it robert but i wont have the money until the end of next year. Just trying to figure out how to make it work at this point.
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Originally posted by Ben Leybovich:
Colby,Judging by the questions you ask, it feels that you may be jumping the gun a bit. Your questions are all intelligent questions, but it takes time to find your footing with the analysis and strategy stages of the acquisition process. BP is an excellent place to get a lot of the answers. Keep asking questions. The analysis stage is the most critical part of what we do – gain a very clear understanding of how to do it the right way.
Some of the terminology that you need to have very good understanding is:
CAP Rate (what it is, when it's used, and how)
GRM (what it is, when it's used, and how)
DSCR (what it is, when it's used, and for what purpose)
Cash on Cash
NOI
Cash flowKnowing all these and more is mandatory to be able to put a healthy transaction together. Google these, and if you need help myself and others on BP will certainly help you.
Using short term money can a viable plan, if done the right way. However, you need to know before you pull the trigger how you are going to get the cash out done. And you should have 2 or 3 ways of doing it. Relative to this, you need to know how the banks work better than the bankers themselves. This requires a lot of research.
Be careful my friend. Long term property investing has 2 speeds. Forward is slow, but reverse is usually very quick and it can hurt…
Thanks for this valuable information. I just realized i hadnt been subtracting the debt services from the NOI. Looking up the formula for the DSCR reminded me of that but it is also a bit discouraging knowing that if i invest $30k it is only going to yeild me about $2,500 per year and that i if everything goes well! The way i came to this conclusion, and you can check my math, is through th NOI of a $200,000 6 unit building with a CAP rate of 8%. This would yield about $16k per year. Now if me and a partner both put in $30k with $50 going toward a down payment. A 30 year $150k mortgage at 6% would be about $900 per month. Thats nearly $11,000 per year and leaves $5,000 for me and a partner to split.
At this rate i will be old and dead before i will wver be finantially free... What am i missing here?
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes13y
Colby,
Before I get into some specifics, let me address what you currently have. First of all, I am not sure that you are aware of this, but you can NOT get a 30-year mortgage on a 6-unit. Fannie/Freedie regulation with respect to salable residential mortgages is that nothing over 4 units is even applicable. This means that you will be automatically kicked over to the commercial side, where your amortization will most likely be 20 years tops, and the interest rate of around 5% or mopre, thus this deal would likely be in the negative. So, it’s even worse than you thought…
Also, you mentioned a partner. Be careful! Think of money as a great amplifier of what is already there. Great and honorable people are even more so when money is involved, while the reverse is also true!!! As well, having two people in the boat who don’t know how to swim doesn’t make the trip any safer. Two people losing money is not better than one. By taking on a partner, each one of you will assume the responsibility for the other. I believe that a person must have much knowledge and a track record of success before assuming this responsibility…
Now. Not every RE market is created equal, and your market may be less conducive to CF than some others. There are many socio-political and economic reasons for this – but it is what it is. However, your impulse to invest for passive CF is right on – that’s how we achieve financial freedom. Unfortunately, you may need to look into a different market.
Appraisers use what is called a GRM analysis to arrive at a value of income-producing building, which establishes a relationship between the Gross Revenue and Value by way of multiplying the gross revenue by an appropriate factor (GRM). Thus:
Value = Gross Revenue x GRM
This is only used for buildings with 4 units or less, and it is very inaccurate since it doesn’t take into account the expense structure of the building. However, my experience has been that a factor of around 70 tends to result in 9 – 11CAP rate, and a strong CF.
Thus, as a quick rule of thumb, if the 6-plex generates $6,000 of monthly income, than I would expect to pay for it in the neighborhood of $420,000. If rents are only $3,000/mo. ($500/unit), then the price should be in the neighborhood of $210,000. This is not definitive, of course, but it’s enough to tell me at a glance whether there is a possible deal to be had.
Notice also that I am talking about the purchase price and not the financed portion of the price. You should not have to “buy” cash flow by putting more money down. The deal should be good enough when financed 100%. Does this help?
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
That is a lot of great info. How do you calculate the grm? Is it a percentage bases on the local area? Also if i had a $150,000 mortgage at 5% for 20 years it would come out to about $985 per month. About $1000 more per year so still doable with my senario but still not great... What would be your suggestion for someone starting out with $30,000 and a certificate in real eatate management?
What you could do is offer the partners a percentage of the deal without giving them an equal share. What kind of profits will you be looking at each year? Maybe you could give them 1/3 of the net operating profits while you own it but only 25% of the profits after you sell.
So when you sell, you pay everybody back their money (yourself included) and then whatever you have left, they get 25% of it each and you get the remaining 50%.
This way they're getting a good return on their money while you own the property - or at least they should be. But when you decide to sell it later on, you get a bigger chunk of the profits.
It all depends on whether you're operating profits provide enough of a return for them to make it worth their while and to allow them to overlook your larger share in the selling profits.
One argument can always be that you're the one finding the deal. Also, who is going to manage the 6 plex? Will each of you manage two units? Are all 6 exactly the same?
Definitely some issues with partners. I like the earlier post above that said to go with a duplex. You get to avoid the partner issues and, as the other post mentioned, your financing is much better and easier to get (conventional 30 year fixed loans at today's unbelievably low rates).
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Actually i have been thinking about that. The 4plex or lower deal seems nicer and i can get a $100,000 4plex. This way i can get a loan with 15 or 20 percent down and still have a low interest rate 30 year mortgage with a good credit score. I would still higher a property manager because i dont want that job. I want to be certified ao i know how to manage a property, but i dont want that headache. How does this sound for a first deal. I may be able to swing two 3 or 4 unit apartments with my small investment of $30,000...
Any ideas. I have about two years to refine my plan while i save up this initial cash.
- U S A F Academy, CO · Member since 2012 · 50 posts · 0 votes13y
Did some research on lenders with zilla. With a credit score of 760+ and a down payment of 5% i can get a $400,000 property for only $20,000. So if the 1.5% rent to value rule is true. I can get a $30,000 profit annually. I might try that.
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