Chance to buy LTR with 100% financing - good idea?

Question

I have an opportunity to buy 7 long term rental condos in a strong rental area. Broker said he can get me a loan for 70% of the purchase price at 5.99% and then pull the other 30% from 3 units I currently own free and clear thru a cash out loan also at 5.99%. After taking into account monthly expenses (HOA dues, taxes, insurance and both mortgage payments) the 7 new properties will only cash flow about $150 - $250/month total ($21-$36 each unit/month). The rents are currently under market by about $100 each unit and current leases expire in March and April 2023. My realtor (who is a personal friend) says it is a good idea as long as it cash flows anything positive. Purchase price is $1.25 million - so I am not sure if he is motivated by the commission or if his advice is sound. I am concerned about taking on 7 more units for such a small cash flow with the potential for 7 more headaches. I personally manage my properties (I own 6 other LTRs) but am self employed with a full time job in a profession unrelated to real estate. I was also concerned when I bought my 6 other LTRs in 2020 and early 2021 but they have turned out to be a great investment with about 50% appreciation in value and very strong rental income. As an aside the cap rate is 6.1%.

Is the 100% finance a good deal even with the minimal cash flow? Am I being too conservative or are my concerns valid? Any advice would be appreciated.

Is the 100% finance a good deal even with the minimal cash flow? Am I being too conservative or are my concerns valid?  Any advice would be appreciated.

Chris Svendsen · Answer

To me way to little cash flow for that kind of investment plus Condos can screw you bad if there are special assesments or mismanagement of funds.  I have only 4 rentals and bring in almost $2k a month in positive cash flow after expenses.  If was investng in that many units would want at least $2500 a month in cash flow to be comfortable with purchase.

Mike D'Arrigo · Answer

@Christian Anouge II I would hope that your friend isn't just interested in a commission but I would certainly ask him why he thinks it's a good idea as long as it has any positive cash flow. Is your goal cash flow or appreciation? Personally, I think it should be a combination of both. If your primary goal is appreciation, what market are these properties in? Is it a high growth market with high appreication? Keep in mind that most markets have had high appreciation the last couple of years but appreciation rates will start moderating across the country so you may not be able to count on appreciation so much. I can't imagine any scenario where spending $1.25M for $150-$250.mth cash flow would be a good idea. You can get that from just one SFR in markets. On a different note, it is not 100% financed. It's 70% financed with the remaining 30% coming from your own equity on other properties. Does it really matter whether that that 30% comes from cash of equity that you have? It's still an asset that you are putting in to it.

Christian Anouge II · Answer

Thank you for the input/advice.  The condo association has very strong reserves and recently redid the roofs - but both of your comments support my initial belief that the cash flow is way to small.  When I initially raised that concern with my broker and realtor they were pushing the proposition that I was buying an asset with no money out of pocket.  I tried to say that there was money out of pocket - the cash out to cover the 30% down payment as well as the earnest money deposit.  I was starting to think that I was "crazy" for not seeing their point of view - that this was a good deal since I was not coming out of pocket any monies.  Your comments reassured me that I was not crazy.

Taylor Dasch · Answer

The problem is that you are dong a cash out loan on the 3 units that you already own. So if you are losing some of the cash flow from those units, you wouldnt actually be cash flowing on this deal. For a 1.25 Million purchase price, I would expect to see significantly better cash flow than this. It sounds like you are doing exactly what I intend to do, leverage other properties to buy a large Multi Family Property. However, its so important to get a good deal with value add potential. If not, you are risking quite a bit of cash flow in the long run. Also, if you ran the numbers without PM then I would definitely pass on it.

Chance to buy LTR with 100% financing - good idea?

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