Without too long of an intro, I’ve been on the forum for a while and have been listening to the Podcasts longer. One of my best friends and I are actively looking for a 4-plex to purchase as our first deal together. We both have experience in the single family realm having bought and sold several single family houses each on our own using conventional financing. I’ve got a few questions about what we are seeking to do and hoping to get some advice.
1. What is the best way for the two of us to go on this deal together (we plan on doing the BRRRR strategy)? I’ve been getting some conflicting information about this… We would prefer to use a conventional financing (non commercial loan) to obtain the 4-plex. We are planning on putting 20-25% down (preferably 20%) with a 15yr mortgage. Someone was advising us that we should start and LLC but I am under the impression that anything bought through an LLC would exclude us from conventional financing and push us into the commercial loan zone. Basically wondering how others in similar situations (seeking conventional financing) have structured partnerships with a close friend. Should the mortgage/loan be in one persons name, both names, etc. I understand that there is typically a max number of mortgages/loans that any given person can have (around 10 per person), so would it be best to have the loan in one persons name and on the next purchase it goes in the other persons name (if so are both parties on the deed)?
2. I understand that 1-4 unit properties are considered non-commercial properties. I’ve been getting some conflicting information with regards to the Refi aspect of the BRRRR method on these 1-4 unit properties. When the time for the Refi comes around on a 1-4 unit property, I was under the impression that the appraisal is not based on how much you have increased the rent during your hold but rather just the typical appraised values of other similar properties in the area (whether it be other 1-4 unit properties or single families in the area) and that the increasing of the rents while holding the property only comes into play when the asset is a 5+ unit property - is this correct?
3. One of the 4-plexes we are looking into was last sold/bought as a 4 unit property and is currently designated/listed as a 4 unit property. We have spoken to one of the previous owners who advised that there is an unfinished upper area (somewhat described as an attic) that could potentially be turned into a 5th unit if one desired (apparently the hook-ups for water and everything needed to make it into a sep unit is there but was never done). Would we run into any potential issues if we moved on this property, bought it with conventional financing, Refi’d on it and then later turned the unfinished area into a 5th rentable unit?
I know some (if not all of this) could be answered by the lender but I'm eager for a heads up prior to meeting with the lender(s). Looking forward to hearing anyone’s input, we are both eager to further our real-estate investing and glad to be here on BP!
How did this turn out for you? Did you guys move on this?
Let me preface with the fact I am certainly no expert on any of this.
Based on advice from our lawyer and hearing some horror stories on BP, I setup an LLC and we've always been required to do 20%, but that doesn't necessarily mean you need to bring all 20%. We had some private money help from family, but I'm not sure if that's an option for you. For our first one, it was a friend selling it and he gave us an amazing deal and I realize very few people could luck into the deal we got. He sold it to us for $59k, we did about $8k in repairs and a year later it appraised for $97k. Mortgage is $374 and rents are $1350, so we took that equity and bought our second duplex. Wash, rinse, repeat with the 2nd one (BRRRR) and we're about to settle on our 3rd in about 2 weeks.
You could try a HELOC from some of the existing properties you and your partner already have. I would try this, but we're right around 79% in our home, so I don't know that our HELOC would be for much.
Are you or your partner willing to house-hack and live in the property? If so, you could do a 203k loan. A 203k is what I used on our personal home and let me tell you, it was a MISERABLE experience, but at the time, it was our only option as I had just started a new job and had to do a 90-day "trial" as a contractor. I was fortunate, again, to have my father co-sign on most everything, but Bank of America got so granular, I had to explain a $300 deposit in my account for selling a couch on Craigslist along with every SINGLE transaction over about 3 month period. I remember spending hours looking into where a $17 deposit came from!! Yea, it was a nightmare, BUT, it got us into the house we have now and we now have around $45k in equity, so in the long run, it was a good plan.
Just throwing out ideas and perhaps you guys have already looked at these options. Best of luck.