10% down payment on a 11-unit property

[Brandon S.]

I'm looking at purchasing a 11-unit complex in Little Rock, Arkansas.  This cost is $609k.  I would like to put 10% down which is $69,000 and finance the rest.

Does anyone know any way I could do that or is the 20% requirement not avoidable?

Thank you!

[Paul Thompson]

@Brandon S.

There are local banks in Central Arkansas that will do 85% LTV. These are commercial loans with a 3 to 5 year balloon but are amortized at 15-25 years depending on the age of the property. My experience is they typically won't amortize more than 20 years unless it's a very new property.

What condition is the complex in? Are the units rented? And if you don't mind me asking what cap rate would you be buying at? I've noticed in this area MF are selling at very low cap rates right now. So I'd just caution you on that front. You may be at risk of buying on the high end of the cycle. You're crystal ball is probably better than mine.

But let's say you're confidant it's a good buy. One idea I've used for properties that are a little run down and need a decent rehab (but nothing too drastic) is to get a rehab loan with the same bank with interest only (with as long of a term as they'll give you). Some banks will lend you 85% of repair budget. So you could take the highest bid/estimate you get but then rehab for the actual lowest bid/estimate. This in turn allows you create 90% LTV or even in some case on smaller deals 100% financing. Just make sure to use this strategy with your eyes wide open. My banker actually recommended the strategy and he was aware of what I was doing. So no funny business or fraudulent documentation with falsified quotes. Just estimate high and execute low. You'll have to really shop banks to do this.

Another way to accomplish a similar goal is to negotiate a repair credit into the sell price. Your sell price would stay the same but the seller would agree to credit you an amount, say $30K-$50K in your example. An investor friend of mine did this on a recent deal (albeit much smaller one -- SFR) and was able to net some cash to use for his operating cash reserves.

And of course seller financing is really the best idea of all (provided the property is free and clear or has a very small mortgage). If the seller is open you get to negotiate whatever works with any specific requirements of LTV.

@Jeremy Pace made a great suggestion to use private lenders. You will likely have to give up a portion of equity. If you have private lending setup you might suggest they pay the 10-20% down payment with an option for 1/2 interest in the property. Then the plan is for you both to hold the property for 10 or so years. You enjoy the pleasure of management and cash flow. The investor will benefit from the appreciation and monthly payments required (say 5%). Hold it for 10 and sell it for cash or 1031 exchange into something else.

With any strategy do remember leverage cuts both ways. The LTV ratio requirements are in place to provide you a margin of error and protect the lender. So just make sure you're buying right and have some safety valve for cash reserves when (not if) something doesn't go to plan. I like to keep as much cash back for emergencies as possible and use creative financing that allows me to acquire a cashflowing asset.

If you want any local info shoot me a line and I'll offer whatever help I can. I'm not a MF investor but I have been shopping them for a while. Best of luck...

Paul