Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
Hello, I am about to purchase my first investment property but I am slightly wary on which loan I should use. My plan is to acquire an empire as I am sure is many others. Having this goal in mind, I created an LLC and started searching for someone to finance my first property. I quickly realized obtaining a commercial loan with no history is near impossible. After talking to a few banks, I searched for residential loans instead based on not having the 5yr bullet, higher down pay etc. Today I received a call back from one of the commercial lenders saying they would do the loan. The terms are along the lines of 6%int, 20% down, 5yr fix over 20 years total. This is the only offer I have received yet. To make it a bit more complicated, I am 21 years old and therefore have barely any substantial income. I am looking for advice if this is a good deal, and will benefit me or if this is a dangerous path (The loan type). Thank you so much.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Cole Farrell, those terms aren't terrible for a commercial loan, given your new to the game.
If you find a good deal that will cash flow appropriately with those loan terms, then get to it. You should keep in mind that most commercial lenders will want to see 6 months of reserves at the time of closing.
Why not take a different route and try house-hacking a multi-family? Something like this, purchased with a FHA 203(k).
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Cole Farrell, those terms aren't terrible for a commercial loan, given your new to the game.
If you find a good deal that will cash flow appropriately with those loan terms, then get to it. You should keep in mind that most commercial lenders will want to see 6 months of reserves at the time of closing.
Why not take a different route and try house-hacking a multi-family? Something like this, purchased with a FHA 203(k).
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
@Jaysen Medhurst Thank you for the response. I have thought about an FHA, however the cashflow with the current two tenants is too good to pass up. Although I would pay less down with the FHA, I figured paying more down and keeping both tenants for the higher cash flow would be more beneficial. Do you think that is reasonable?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Cole Farrell, "more beneficial..." as with so many things, it depends. Do you have the cash for a down payment and reserves? Is it best to use that cash on one property or do a FHA here and potentially pick up a second property? Lots of moving pieces. You have to run the numbers and see what they tell you.
What are the actual numbers on the property you're considering?
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
@Jaysen Medhurst The purchase price is $80K, after all expenses it would have a cashflow of $600. I was considering an FHA however current tenants are great, would it be worth losing one?
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Cole Farrell, that's a 36% cash-on-cash return. Not many investors would turn that down.
This makes me a little nervous, frankly. $600/month cash flow on a $80k duplex sounds too good to be true. If you want to share your numbers, I'm happy to take a look and double check your math.
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
Okay I used the calculator which is actually amazing. The report was very cool and useful. Anyways, it would not let me post it here unless I upgraded so I took some crude photos but can add numbers if they are not easily read.
I have heard of rules such as the 2% and then similar things such as saving a percentage of rent each month for repairs/maintenance/vacancy but am not versed on them. If you have information on them I would love to know more.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@Cole Farrell, what about water/sewer? That's probably $60/month, unless it's sub-metered back to the tenants.
I show this cash flowing ~$80/month after all expenses. This is much lower than I'd like from a duplex (I like $150-200/unit/month). The cash-on-cash return is <5%, which also isn't great.
If you can squeeze another $200-250/month, this would be a winner, though. Look at your insurance cost. Get an estimate from an insurance agent. What's the $21 electric bill covering? That's unusual for a duplex. Is there any room to push the rents? What's the market?
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
@Jaysen Medhurst All utilities are tenant paid. The only expense I have is insurance at 86$, new quote as of today, and a landlord meter for the electricity at 21$ a month. Taxes and insurance added 266 and 443 respectively, I should have all expenses to be $805. I’m confused where you have these numbers from.
Rental Property Investor · North Attleboro, MA · Member since 2016 · 5 posts · 5 votes
7y
@Cole Farrell Looks like you are possibly leaving out Vacancy, Repairs, CapEx, and Property Management. I wouldn't recommend ignoring these when you analyze a property. You should be putting money aside every month to cover these costs. If you are planning on managing the property yourself you could pay yourself but it's always a good idea to include it incase you decide being a landlord isn't for you. That way you'll be able to afford not to manage it yourself. You are basically building that into your plan.
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
@Jaysen Medhurst I understand, I see what you’re saying now. I suppose with all that included it is much much lower. I will manage the property myself so I can save that which is nice. Thank you so much for teaching me and helping me with this. And that’s a great idea, I think I could raise rents a bit to raise cashflow.
Lender · Easton, PA · Member since 2019 · 90 posts · 32 votes
7y
@Jon Duperron You’re right that’s really smart. Is it a bad idea to pay yourself in your opinion? I do plan on managing it myself but I think I would rather have the higher cash flow and keep myself out of it.
Rental Property Investor · North Attleboro, MA · Member since 2016 · 5 posts · 5 votes
7y
@Cole Farrell in my opinion it doesn’t matter if you view it as paying yourself or not. What it really comes down to is that you include property management in your original analysis of the property. That way you are looking at the big picture when it comes down to determining if you are getting a good deal or not. If you are only positive cash flow because you are managing yourself, you may end up negative if for some reason you have to switch over to a professional. It’s better to factor that in from the start to determine if it’s a good investment. Every analysis I do I figure 10% of rent for PM.
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Cole Farrell you could start with a 2-4 units either FHA with 3.5% downpayment or Freddie with 5% down and build your closing costs as seller concession
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Cole Farrell FreddieMac HomePossible allows for 5% downpayment on a MF, seller concession is when you build part or all closing costs as seller credit, FHA allows max 6% seller credit and conventional allows for 3% max seller credit. Lets say you find a MF for $350K and you agree with seller on final price at $340K, you then ask to increase the price back to $350K and use the $10K for the closing costs
Lender · Chicago, IL · Member since 2018 · 352 posts · 147 votes
7y
@Cole Farrell you can’t call FreddieMac. All conventional market is backed up by Fannie and Freddie. You miss understood. All conventional loans from all banks are Fannie and Freddie and each bank might have other overlays on top