Has downpayment on Commerical always been 70% ish??

Question

I have been looking into small MFH, like 5-6 units....But everywhere I looked (in Bay Area and LA), downpayment needs to be 70% ish for the property to cash flow... My one friend bought a C- MFH for $2.4M in Phoenix and he had to put 45% down to cash flow....

Is this how things already are? why do some guru on BP keep saying 25% downpayment? Where and when was that? Lol

Is this how things already are? why do some guru on BP keep saying 25% downpayment?  Where and when was that?   Lol

Arlen Chou · Answer

@Diane G. I don't consider myself a guru, but last time for me was February 2016: 6 plex (all 1/1) in the Fruitvale district of Oakland, 10 min walk to BART.  Purchase price was $678k rents at time of purchase a little above $6000.  No down payment... 100% leveraged.  It cash flows like a king!

The secret is in the financing...  In this market you have to have a tight relationship with your financial institution and your documentation has to be rock solid and you got to be creative like a wizard.

Ian Tudor · Answer

@Diane G. - Not sure I understand what you are suggesting. The more leverage you put on a property the higher the potential return usually. The situation where it hurts you is if your loan constant is higher than cap rate. This is negative leverage. It works both ways.

If the deal is good in multi-family, it isn't uncommon to only put 25% down or 75% loan to value. If you have to put 70% down in order to cash flow, you are looking at properties that are extremely highly priced and compressed cap rates.

Joe Hughis · Answer

@Diane G. - Sales prices are definitely higher and cap rates are lower in many major metro areas across the country (especially in CA).  You would definitely have to calculate your returns versus alternative opportunities with such a hefty down payment amount to see if it is a good deal for you.

That being said, there are still opportunities (even in LA), albeit rarer these days. But don't lose heart. I get the privilege of looking at and funding a variety of deals across the country.  Commercial deals with 20-25% down are out there.

Good luck to you in your investment endeavors. Cheers!

Account Closed · Answer

DCSR of 1.25 is required only to get max leverage of 80%.

If leverage is lower than 80% LTC the lower DCSR might be accepted.

Account Closed · Answer

Diane,

In order to get FNMA commercial loan, it needs to be real multifamily above 6 units property

and the loan amount also needs to be above 1M.

Besides, that the borrower needs to have previous multifamily experience on several deals.

If the borrower and the property meet the requirements FNMA will lend up to 80% LTC and even

allow rolling rehab $$ into the loan.

If you want to learn more about multifamily feel free to check out this meet up:

meetup.com/Los-Gatos-Real-Estate-Networking-Meetup/

Phil Trietsch · Answer

If the Cap Rate is at or below your cost of capital (interest rate and upfront costs), it will likely be the case tha your return on investment will be lower when using leverage than when buying all cash.  This is a very dangerous investment in my opinion.  If Cap Rates move up (and they typically will if interest rates rise), then the value of the property will go down (assuming NOI stays constant).  This is exaggerated when dealing with small properties because most of your potential buyers (should you want or need to exit the deal) will likely be looking for higher returns than say a large REIT, hedge fund or insurance company that might buy a large class A property as a bond alternative.

If you want to consider higher Cap Rate deals in TX, let me know.

Phil

Chris Martin · Answer

Also the net worth of the borrower(s) must be at or greater than the loan amount. And DSCR at 1.25 or better for Fannie Mae MF Small Loan Program.

Jonathan Twombly · Answer

@Diane G.  What you're seeing is what has happened in a lot of major markets.  I see it here in Brooklyn, too, which is why I don't invest here.  With only a 25% down payment, the typical deal will be cash flow negative.  But with down payments of 40-50%, your cash on cash returns are very low, and you are essentially betting on appreciation - which, at this point in the cycle, may be many, many years off.

Adam Shelley · Answer

Hi Arlen, How were you able to get 100LTV on a commercial? Thanks!

Has downpayment on Commerical always been 70% ish??

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