4 PLEX investing - Big down payment limits you ?

Question

Hello Everyone..

I am new to bigger pockets! Very excited to be here! I am starting my real estate journey with my husband. We are thinking of a 4 plex to buy. Where are the best affordable cities? And more than anything my concern is, if we buy one in the range of 500 k, now a down payment comes down to about 120 k.. because you have to put 25% down, then how do you buy a few more, without having to put down such big down payments? This limits you from investing more at once?

Would really appreciate your help here !

Thanks

Sashika

Stacy Raskin · Answer

There are DSCR investment property loans that are 20% down with a 720 middle FICO credit score for a 2-4 unit. These are 30 year fixed options and a minimum of a $100K loan amount.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. They don't consider borrower income.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. Market rents from the appraisal and/or the actual rents need to cover the mortgage payment, property insurance, taxes and HOA (if applicable).

4. Prepayment penalties range from 1-5 years and you get to decide the length of the term. The longer the term, the less of an impact on the rate.I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350 Insurance = $100 Association Dues = $50

Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100 Association Dues = $25

Total PITIA = $1875

Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR loans can be used for purchases and for cash out refinances. Most lenders allow you to vest individually or as an LLC.

Jason Wray · Answer

Sashika,

If you go with a Portfolio loan you only have to put down 15% which helps save a ton of money.  Portfolio allows you to go up to 85% LTV even on any 2-4 unit multifamily rentals with just 15% down and No prepays.  You cannot really beat that unless you are going FHA primary with 3.5% down but have to occupy as a unit as a primary.

If you are open to out of state I would check out Indiana, Ohio, Tennessee, Florida, for some good options for 2-4 unit rentals.  The price ranges are very attractive and rents are still solid enough to cash flow even with higher rates and 15% down.

Robert Pritchett · Answer

I am in New Jersey and also looking for out of state multifamily properties in the range of $100K-$200K. I have in the past focused on fix and flip but now transitioning into buy and hold. What do you think of the Virginia market, I have seen a few properties in the middle of the state with low cost? Thanks for any info.

Alfath Ahmed · Answer

I would look into the Columbus market for it's strong appreciation factor, low taxes, and also because it is a land-lord friendly state. I can connect you with a lender that can do 15% investment loan.

The fastest way to scale in multi-family investing is to know a property's true value and buying it under-market. Once you buy a few properties and re-finance out of the property in a year or so (keeping in to mind that you do not over-leverage), you will be left with strong capital to re-invest.

You should aim to buy properties with operational inefficiencies. Fix those issues and you can raise rents which would increase a property's NOI and overall cap-rate. That is what the property will be assessed on.

Jason Wray · Answer

Texas is also a great spot you can reach out to @Lucia Rushton that's her area!

Bill B. · Answer

@Sashika De Silva you can respond to multiple people in ken post to save yourself time and effort.

@user1 you want a local Managment company for each property. It shouldn’t cost more to have 5 property managers for 5 different locations than 1 PM for 5 properties in one location.

@user2 this an example of another reply in same post.

Sashika De Silva · Answer

@Remington Lyman Do you have any good options ? anything between the range of 100 -200 k?

Sashika De Silva · Answer

@Alfath Ahmed thanks! Yes makes sense ! can look into some of the houses with minor issues.. not big..

Remington Lyman · Answer

Yup! I will reach out to you

4 PLEX investing - Big down payment limits you ?

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