Funding a fourplex without ruining the deal

39 Replies

A quick little background about myself. I recently turned 20 years old and gave up baseball about six months ago to work full time while going to school full time. I am a math major so numbers have always been my strengthened my current job is an assistant general manager at a restaurant. I don't make a great sum of money, but I am very conservative in my spending and a diligent worker. My dilemma is that I have found a Fourplex locally that was recently renovated and has a gross rent of 2600 monthly with a 99% occupancy. I am curious how to go about funding this property for rental purpose with minimal income. I have looked at a FHA loan as a possibility, but I was curious if my lack of understanding in financing option is blinding me from seeing a more efficient option. My purpose behind this investment is to own my first multi-family investment to lead towards a future in real estate investing.

Hi Noah-  Do you have down money?  How much does the property cost?  The lenders I use to finance my rental portfolio don't require W2s or tax returns.  Just a 650+ credit score.

FHA is a good way. I can assume you want to live in one and rent the other three? what is the purchase price. Do you have the 3.5% for a fha loan down payment. If the numbers work go for it.

@Salvatore Lentini thank you for your reply. I have access to 5k to 19k for a down payment and the property cost $280,000 and I believe I could get the seller to come down a little. I had a brief information with my post, but I haven't worked for long so I haven't had a tax return. My credit score is above 650.

@Eric C. I have looked into FHA. The is my last go to because it does narrow the cashflow which means any major repairs like a broken A/C unit would have less cushion, but I am open to the idea. I was just looking for an alternative option before jumping into that.

@Noah McBride Congrats on finding an opportunity! It sounds like you are working to figure it out and see if the numbers work for you. Good job in realizing you need to set money aside for capital repairs. Hopefully a recently renovated property would have few items that need repairing. 

What does the property need that would raise the value? One of my friends here in Jax gets a sofa, table and bed for her units and charges $200 extra per month for a "furnished" apartment. Lots of people starting out have no idea the cost for items, so you might see if you can charge a bit more for some add-ons to help cover the nut you are going to take by living in one of the units. 

Ask the seller to hold 10% of the note for 12-24 months so you can add more value to the property and pay him/her 9% on their money during the term, refi the loan after you have added value, raised rents and maintain the same cap rate or higher during the process. A simple 10x20 storage unit here in Jax is over $300 per month. Find ways to keep people funneling cash back into you and have it pay your mortgage. 

Congrats on the find! 

Originally posted by @Noah McBride :

A quick little background about myself. I recently turned 20 years old and gave up baseball about six months ago to work full time while going to school full time. I am a math major so numbers have always been my strengthened my current job is an assistant general manager at a restaurant. I don't make a great sum of money, but I am very conservative in my spending and a diligent worker. My dilemma is that I have found a Fourplex locally that was recently renovated and has a gross rent of 2600 monthly with a 99% occupancy. I am curious how to go about funding this property for rental purpose with minimal income. I have looked at a FHA loan as a possibility, but I was curious if my lack of understanding in financing option is blinding me from seeing a more efficient option. My purpose behind this investment is to own my first multi-family investment to lead towards a future in real estate investing.

Noah

House hacking is an excellent way to get started on your investing journey. If I were advising you on finance, I would first say find a multi unit and live in it. Use FHA because of the low down payment and forgiving debt ratio considering your income.

Regarding alternative lending programs and no income verification loans, exhaust your conventional financing avenues first before you go down that road.  The money is cheaper (lower interest rate and less points) and lower down payment requirement.   Because this is your first property and I assume you either rent or live at home, you may have to come to the table with more cash to close for those programs.

Go FHA.

Best of luck

Stephanie

FHA is the way to go in your situation. Live in one unit, rent the others out. I would not concern yourself with the cash flow issue in regards to maintenance like a "broken AC unit." Not because it's unimportant, but because it is unrelated. That issue will be the same regardless of where and when you invest. Know your market and know your numbers and jump in. Good luck!

@Jack Bobeck The property is pretty sound, but it could use some curve appeal and I worked for a rather popular landscape company during the summers while I was in high school so I can fix the property's appeal on my own. However, there is plenty of area in the back yard for some storing units so I will definitely look into those and the furniture. Thank you for your advice!

@Stephanie Potter This property is in a good location in regards to my schooling and my job so I definitely like the idea of house hacking. Is it possible to acquire other rentals while house hacking or does it make it more difficult to transition until the two years are over?

@Corby Goade I do agree the possibility is at any rental property. Is it more susceptible to repairs if the units are ran on window units?

Yes, but there's give and take to that.  A window unit won't last as long as central a.c., but you can replace one in 10 minutes for $125. Just make sure the utilities and finishes in your property are appropriate for the neighborhood and the property and you will be fine.

What ever you do I would strongly advise yu do nothing until you have a significant reserve fund for emergencies. Never invest without holding back reserve cash.

Originally posted by @Noah McBride :

@Stephanie Potter This property is in a good location in regards to my schooling and my job so I definitely like the idea of house hacking. Is it possible to acquire other rentals while house hacking or does it make it more difficult to transition until the two years are over?

 You can acquire other rentals at any time; the caveat is do you qualify?

You need a solid work history (2 years generally).  You need a pretty significant W2 income even though the lenders will allow 75% of the rent or even proposed rent to be used as income.

You also need down payment.  Once you transition into buying rental properties (turnkey, not renovation properties; that's a totally different ball game) you'll need anywhere from 15% down for a single family to 25% down for a multi-family.  

If I were you, I would try to find multi-family properties because the more doors you have under one mortgage, the more insulated you are from dead beat tenants and the more income you have toward qualifying.  I would also try to beat the bushes looking for properties that sellers are willing to hold the mortgage; probate attorneys, estate sales, properties with deferred maintenance where the people can't afford to make the repairs.

Best of luck

Stephanie

@Noah McBride I can definitely show you helpful tips on how to generate leads/sales. Message me so we can discuss more.
Originally posted by @Caleb Heimsoth :
@Noah McBride how can a four plex have 99 percent occupancy? It’s either 100, 75, etc..
Um nope.  Every 2 years they have one unit go empty for a month -> 99% occupancy rate.
@Jack Bobeck man that was great advice, I’m a newbie here all the way around and that cleared up a few questions I had also
@Caleb Heimsoth Out of the last 25 months, only 1 unit was vacant for 1 month equals 99% occupancy.

@Noah. Have you looked at your county or community to see if they have a program to help with down payment? There are a lot out there, and some work for 1-4 units FHA. That frees up your cash as a cushion for reserves and emergencies.

@Noah McBride The worst thing to happen to an investor is to not have sufficient cash reserves to get through some surprises and just plain bad luck. That opportunity does not cash flow enough after expenses and debt service. I know this not what you want to hear but you need more money as a cushion and with a math degree you should be able to get a better job; IMO invest in yourself to do whatever that entails first. With your career on track revisit investing when you have more income and can save more money. Just sayin'.

@Noah McBride Well done Noah. 20 years old, working full time, studying full time and investing in real estate!!! Way to go.

Don't hesitate (or give up) on shopping around for financing options that fit your needs from MANY banks- both near and far away.  You WILL find one(s) that work with your situation if you call enough of them.  We prefer to work with smaller banks and credit unions (like less than 10 or so branches) as they tend to offer better terms and less requirements for us as investors.  We have a great list of questions to ask banks if you are interested.  

@Salvatore Lentini do you mind me asking what lender you use to finance your rental portfolio don't require W2s or tax returns. Just a 650+ credit score.

Thanks,

Gina

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