16 unit analysis with 25yr or 15yr amortization?

Question

My long term investing goal is to continue to move up into larger apartment complexes which I will eventually buy and hold. This would be my first apartment complex and I want to get opinions on whether I should amortize over 15 (less cash flow but less money tied up) or 25 years (more cash flow and more money tied up) knowing my goals. It appears my net profit would roughly be the same amount if I sold after 4 years...

Attached is the sames analysis of the apartment building with the 2 different financing terms.

15 year amortization

25 year amortization

https://www.biggerpockets.com/calculators/shared/4...

Attached is the sames analysis of the apartment building with the 2 different financing terms.

15 year amortization

25 year amortization

https://www.biggerpockets.com/calculators/shared/4...

Mike Dymski · Answer

The 25 year amortization gives you more flexibility at exit should you choose to pivot your strategy in 3-5 years or if the market dictates what you should or can do.

Are you comfortable that your lender will will do 15% down with 15 year amortization?  That is not common in my market.  DSC = 1.27 using your underwriting and $2,900 per unit in expenses and lenders in my market would underwrite to a more conservative expense per unit and drive the DSC below their acceptable requirements.

On a personal level, at $800/mo cash flow, it would not take much (a couple of vacancies, HVAC replacement, economic downturn, etc.) to have to rely on alternative sources of income to support the property and debt service; so, the bank's ratios and their interest lines up with yours as well.

Good luck and keep us posted.

Account Closed · Answer

I would focus more on the month to month cashflow.  You may have to put more down, but the margin for error is significantly larger.  I looked at your numbers, and I would expect you know the market and the property better than anyone else ever will, but I would be more conservative with the vacancy number.

Also the inspection report should factor into the decision making - it would uncover any issues that might blow up on you after you buy the property.

Amber Koontz · Answer

@Taylor Witt Have a look at Chris Tracy's post: Need Help Underwriting An Apartment Deal?... No problem!

This may be of some help.

Neal Collins · Answer

Your banker gave you the choice between a 15 and 25 year amortization and can go full term in those? What are the difference in rates?

The loan products I've been seeing for that size of property is a 3, 5, or 7 year ARM between 3.5-3.8% and then going up to LIBOR plus 2%. 30 year AM but the term is only 10-15 years.

Taylor Witt · Answer

Thanks for both your replies and advice.

Ed, my goal with this property would be to hold for 3-5 years and roll my gains into a larger apartment complex.  So what I'm looking to maximize is my net profit upon the sale in 3-5 years, correct?  Or should I focus more on the month to month cash flow?

Ed Matson · Answer

Depends on what your long term goals are for the property, and what your income needs are.  You say you want to buy and hold, but your analysis speaks to your position at end of year 4.  I'm not sure what your goal is with this property.  However, my primary objective with multi family is cash on cash return.  So, barring special circumstances, I would go with the 25 year amortization loan and maximize cash flow.

Juan Vargas · Answer

Most investors would probably prefer the one that provides a higher COC return.

16 unit analysis with 25yr or 15yr amortization?

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