Hi! I have been listening to the BP podcast for months. First time forums post. I have been (very) actively looking for a good deal on a 2/3/4plex home to househack. I'm watching an auction on a (fully leased) 6unit property and I want to be prepared to purchase it if it ends at a good price. First time looking into CRE. I've read and listened to podcasts for 10 days now and I have more questions than I started with.
- What's the best avenue for commercial lending? I got turned away by Bank of America today pretty quickly because they said "we don't work with businesses unless you've been doing this for a while." I'm looking to borrow about 50% of my target sale price. The options of agency, credit union, etc., are kind of overwhelming.
- Should I get an LLC for this kind of deal? Is it necessary/advantageous for securing a commercial real estate loan?
- If I sell a good portion of my money in stocks to pay for the property, are there any immediate CRE write-offs to balance the capital gains tax (how does depreciation factor in?)?
- Although it's fully leased, would there be a benefit to me owner occupying one of the units of this CRE property (I do want to live in that city)? In a BP podcast I heard of paying an existing tenant to move out, for an owner-occupant residential deal.. that win-win sounded nice.
Thank you all in advance. Reading these forum posts makes me realize there's an infinite amount of things to learn!!
No experience and want to buy a fully leased 6 unit apartment? That sounds like a recipe for disaster if you ask me. What's the property even worth? The way multi-family properties are selling now days I'd question why it's at auction. I think you're asking the wrong questions.
@Daniel Fang For this kind of deal (6-unit being considered commercial, buy from auction), it's better to get a business partner who has done similar thing unless you have done extensive research and know the whole process inside and out. Otherwise it will be very risky to you as 1) CRE values totally different from residential properties, financials, appraisal, etc; 2) property management also runs differently from one single residential rental; 3) auction buying has much more things involved than buying from regular market.
To get a loan, llc is necessary because it is commercial loan, lenders need to close to an entity. And it's also better for yourself, in case anything goes wrong, llc protect your personal asset.
Owner occupied 5+ unit is not an advantage unless you consider SBA loans. Because 5+ unit underwrites by rent income and expenses. If owner occupies one unit and not paying rent, the income decreases so as the value.
@Daniel Fang ... @Wenda Wang hit the nail on the head. Do you research on how commercial real estate is valued by a lender. They will take the NOI (you need to know this term inside and out) and calculate the valuation based off of that. If you are living in one of the units, that is 1/6 of the rent NOT coming in, and with most other expenses steady, that is a huge valuation loss. You will then get less of a loan and ultimately sell for less since the valuation of sale price is also based off of NOI.
I do think you are doing the right thing by speaking with banks already. Most banks will value a 4 unit or less (1-4 doors) against comparable houses / buildings. Anything with 5+ doors most of the time will be valued off of NOI.
I think your best bet, if you want to house hack, would be to look for a 4 or less door building and try to get a personal FHA loan against it. That will require much less money down (dont need to sell all/most of your stocks) and will at least pay for your mortgage, if not cash flow monthly. If you do get a residential loan, however, keep in mind that most banks will not allow you to put it into an LLC (especially if they plan to sell it to Fanny Mae or Freddie Mac). It will have to be in your sole name, against your own credit. We did this with a couple SFH, and just increased our umbrella insurance coverage with our broker to about $2 million dollars with 2 incidents max per year. We feel comfortable with that protection outside of an LLC.
Hope this helps! I would strongly recommend finding a partner or mentor through this before taking the plunge on anything bigger than a duplex.
Wow, thank you for all the responses.
- What's the best way of going about finding a mentor? I have several friends who own 1-4 unit rental properties but they say they don't feel qualified to advise on a 6unit commercial real estate property.
- This end-of-row 6unit, which is in a nice downtown area with many $400-700k single family homes, has a gross annual income of $90,300. The NOI is not listed, nor can I find enough info to properly calculate. I understand that NOI is crucial for understanding if its a fundamentally good deal and also for calculating cash flow, cap rate, ROI, etc. Say the NOI is $75,000, would $525k be a good target price for this auction?
- I will try to find out why the seller is auctioning the house. The rents are all average of slightly above. It's fully leased. 2-4plexes have been FLYING on the MLS in this market. But I mostly see 5+ unit apartments listed by auction. (I'm guessing a lot of commercial deals are made without involving the MLS)
@Daniel Fang - You're asking a lot of the right questions, and more importantly, you're asking them BEFORE you've decided to fall in love with this property.
In response to your specific questions:
- Find a local bank or credit union and go talk to one of their commercial loan officers. "Local" branches of Wells Fargo and Bank of America do not count. Find the "First National Bank of Your City".
- You should absolutely put a property like this in an LLC (my opinion, others may differ)
- You should talk to your CPA about tax write offs with this property. You can do a cost segregation study and accelerate the depreciation, but if you're not a "Real Estate Professional" as specifically defined by the IRS then it may not result in the deductions you're looking for.
- The benefit of house-hacking is to have access to lower rates and lower down payments of certain residential loan products. You won't be eligible for these at 5+ units.
The others who have responded all have good points. If it is at auction then it is distressed in some way. The bank is not likely to sell it under market value if they don't have to, so if it is a steep discount there is likely something else going on (extensive repairs, etc). This is not necessarily a problem, you just need to have a plan for that. The market for everything is hot right now, so even if it looks like a good deal, it's probably still over priced.
At the size and price point you're looking at, and if you are planning on putting 50% down you are in a financial position where you don't need a partner. You can take this down by yourself. If you really want to have the comfort of a partner with more experience than you in this deal, then that's ok. Just realize that splitting your equity is the most expensive way to find an acquire that expertise. If this were a multi million dollar complex and had hundreds of units, then the bank would probably require someone on your team to have experience operating this type of asset. A 6-plex is really just a 4-plex and a half with different lending rules and maybe a few different code requirements. Definitely something you can learn to handle.
Please pay attention to the fact that your friends, who actually own multiple units, do not feel qualified to even advise you.... Yet you, with zero experience, feel qualified to buy a 6 unit.
what kind of auction is this? Why is a fully leased building going to auction? Tenants are not paying? Huge deferred capex?
You mention nothing about the condition of the building.
There is so much complexity to buying at auction. So much complexity to 6 units. so much complexity inheriting leases and tenants you know nothing about. And you are doing all of them ... complexity cubed.
I'd look to a local bank to finance this type of purchase. But the thing is, if you've never owned a rental property they are smart to turn you down.
Definitely need an SPE for financing and liability. I think a fully leased 6 unit is okay, you have one less issue to deal with on leaseup. Gross is fine, but perhaps the expenses are very high and thats causing the auction/big unseen reaction. If you win, whats the down payment vs. termination rights?