Hey, there, I'm currently getting approved for a single family loan to convert a large square footage Single family Into a 4 unit, then 5 units apartment building.
cash out refi later and put that cash into a bigger building deal.
also say a hud multifamily loan requires 10% down and 10% in the bank ( of purchase price )
but do i have to do this?
How much of this cash can be taken in loan format?
I mean can I take a 600k loan to meet a 3 million dollar building's down payment and cash on hand requirements?
if the building cashflows really well ... it wouldn't be a big deal to use a loan for dp right...
at 10% down for lower income housing
I don't have much money and I think that this is the best way to get multi-family management experience to meet hud loan requirements in the future which Have the lowest Down payment options.
Am I overthinking it?
Is there a way I can really get into Say 20 to 40 unit building other than of course sellar financing. I want to do a straight finance since I find the other options to risky.
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
2y
Sounds a little confusing because you cannot use any single family loan to convert a home into a 4 unit. If you mean you are using a "Construction loan" to add onto a SFH adding 3 units that could work but you still need a down payment. When you get approved for a home purchase it must be used to buy the home and not as a down payment on any other homes.
You cannot take out a loan to use as a down payment unless you take out a HELOC on your primary home or do a cash out refinance. When you say take out a $600K loan for a $3M building you cannot use a loan as a downpayment. Again unless its from a Heloc or cash out refinance from another property.
If you do not have a commercial loan as of yet and do not own multiple rentals you are not getting approved for a $3M commercial loan. Unless you have 20% and have additional assets for reserves and PITI Reserves, on top of a strong PFS. Plus the building itself must show receivables as a business or in rents to underwrite the NOI of the business, Rent rolls, and occupancy ratio if rented
Have you thought about starting small and simply buying some single family homes or 2-4 units and transition into commercial? You might already have some real estate the thread did nto mention but if not focus on that first. Commercial is very tough compared to residential to get into with limited funds/assets.
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
2y
Sounds a little confusing because you cannot use any single family loan to convert a home into a 4 unit. If you mean you are using a "Construction loan" to add onto a SFH adding 3 units that could work but you still need a down payment. When you get approved for a home purchase it must be used to buy the home and not as a down payment on any other homes.
You cannot take out a loan to use as a down payment unless you take out a HELOC on your primary home or do a cash out refinance. When you say take out a $600K loan for a $3M building you cannot use a loan as a downpayment. Again unless its from a Heloc or cash out refinance from another property.
If you do not have a commercial loan as of yet and do not own multiple rentals you are not getting approved for a $3M commercial loan. Unless you have 20% and have additional assets for reserves and PITI Reserves, on top of a strong PFS. Plus the building itself must show receivables as a business or in rents to underwrite the NOI of the business, Rent rolls, and occupancy ratio if rented
Have you thought about starting small and simply buying some single family homes or 2-4 units and transition into commercial? You might already have some real estate the thread did nto mention but if not focus on that first. Commercial is very tough compared to residential to get into with limited funds/assets.
Yes. I'm looking to either transform single family with high Sq footage to 3-4 units. Then add adu
or buy a 2-4 unit that has value acomparable that has value add potential.
Ultimately I need 5 units to have experience with lenders.
Then refi and pull cash out.
I need like 600k as a down-payment. I figure I'll get mayhe 250k from the refi based on 5plex noi and comparables.
I'd like to take a loan for the other 350k for example to meet the 10% down payment on a low income building hud loan.
Is there an easier way to get into A higher unit commercial building?
Adding 5th unit is likely to cost much more than value added due to worse finance options available.
You cannot borrow the 20% required.
I suspect due to DSCR, once 5 unit you are likely looking at max LTV of ~70%.
The way many buyers get to larger apartment buildings is by being GP in a syndication. Very tough to do without good track record or being world’s best salesperson,
in general there are not short cuts. You have to put in the effort, demonstrate the skills, and spend the time to scale up.
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
2y
I hear you on the goal, and will answer your question... after complaining about it.
The question you are asking, and what your post indicates that you want... makes you a ripe target for a high priced guru to sell you their expensive mastermind or tribe membership.
The goal should not be "20-40 unit building". Many people with the goal of growing their unit count brag about their hundreds of millions or billions of dollars in real estate. I know one guy who brags about $1B in AUM. Well... he BOUGHT $1B in assets... that are now worth closer to $600M, destroying the life savings of many of his investors in the process. He will face an increasing amount of pain and pressure for many years before he digs himself out of THAT hole.
How do you get into a 20-40 deal with no money? By using other people's money, raising debt and equity capital. That path has some success stories, but also many horror stories.
The goal SHOULD be... money. Real estate equity, and/or cash flow.
10% as GP of 300 units is no better (and in a lot of ways is far worse) than 100% of 30 units that you own. It'll probably take you about the same amount of time to achieve either goal. But, one goal leads to freedom, and the other to pain.
To get a couple dozen units that you own personally... save your pennies, buy right, be patient and let a few years pass. You have a great shot at compounding rewards, and even if you buy at a bad time, the next purchase, and the one after that, will take advantage of lower prices in a system that can't help but make you rich over time.
To buy a BIG property today, you will need to take on extreme leverage, make a big bet, convince mulitple other people to hand you hundreds of thousands or millions of dollars, and then you have to be right, inside of a 3-5 year timebox, about your projections, supply, demand, expenses, and cap rates.
If you really want to go down that path, I suggest that you apply to work for a syndicator or RE Private Equity shop as an analyst or operator for a year or two, and browse through 100+ deals over that time period, underwriting each one, and trying to figure out, over that time, which ones you were "right" about, and which ones you were "wrong" about, as best you can. A few years into that, and you will have a very convincing case to raise for your first moderately sized apartment purchase.
And, as it relates to your plan, you probably know the optics of your market better than I, but I find that five unit properties are often slightly less desirable than four unit properties, simply because buyers can no longer use conventional financing for five units. Doesn't mean that you aren't right with this particular thesis, but often that last unit doesn't have the right juice/squeeze ratio. Especially if you want to refi it with a conventional mortgage using the BRRRR strategy to buy more real estate.
Lender · Member since 2022 · 6k+ posts · 1k+ votes
2y
I think what most borrowers fail to recognize is that real estate is a long play. The earlier you start the more time you have to increase your education, experience, net worth, and portfolio. You have to graduate into CRE financing as most lenders will not finance inexperienced borrowers. Start with 1-4 Unit properties and gradually get into 5 plexes and beyond. You will have an easier time getting approved for a 5 unit deal if you have several 1-4 Unit properties owned, substantial reserves, and good credit. Once you have a 5 plex for more than a year you can get another, and then another until you get into bigger unit types.
Don't rush it. Take your time. Be calculated and look for good deals. Just because some random guy on the internet is scamming people for real estate multifamily courses, and looks successful doesn't mean you should hop into it with no experience. You need experience, time, and reserves.
