Alexandria, VA · Member since 2016 · 22 posts · 3 votes
Hey everyone! I wanted to ask the group a question that has been baffling me. You see, I have been looking for a small multifamily in Pittsburgh. I am familiar with the different financing vehicles involved and was set on something in the 2-3 units range. However I stumbled upon a five-unit property, which puts it out of range for residential conforming loans. Is there any way to get an idea of what the financing would look like and what the debt service would be on the property? I don't really want to waste time on it if it doesn't work for me but I am intrigued.
Any thoughts on how to estimate debt service on this type of loan? Or any Pittsburgh-specific resources (or people) out there I can have a more casual conversation with about this before I get too serious?
Lately I've been doing 80% LTV loans - that means either putting 20% cash down, having the seller hold 20%, or buying with enough equity to satisfy the 20% spread.
Fixed 4.75-5% for 5 years, then prime + whatever after that.
Even if the buildings will support debt service with 10, 15, or 20yr amorts I've been structuring them with 25yr amorts in order to keep my DTI as low as possible on paper - gives me a little more borrowing power later on down the road. Doesn't mean I don't throw some extra cash at the principal every so often but it's nice to be able to decide each month whether to do that or use the cash elsewhere.
This would be a commercial loan.
Most commonly:
75% LTV loan to value. 20 year amortization.
Probably in the range of 6% (for 3 years).
Plug it into a loan calculator.
You'd need to find a way to come up with 25% down payment.
@Andrew Medici 20-25% down. More like 25% in your case since its your first deal. 7-10 yr mortgage with balloon payment at the end. Interest rate between 5 and 6%. Amortization over 30 yrs.
@Chinmay J. So its not so much the down payment that bothers me (I can cover that) its the amortization which eats away at the cash flow. On a standard commercial that @John Baughman spoke of it would be 20, and you mention 30. I assume the 30-year lowers the overall principal and interest paid every month?
And is there a difference between using a commercial lender and a portfolio lender in this regard or does it not matter much? Does using a mortgage broker help?
@Chinmay J. So its not so much the down payment that bothers me (I can cover that) its the amortization which eats away at the cash flow. On a standard commercial that @John Baughman spoke of it would be 20, and you mention 30. I assume the 30-year lowers the overall principal and interest paid every month?
I don't believe he 20 or 30 is set in stone. It can change from to lender to lender. I have also seen 25 yr amortization. I am not at all expert in this, but thought you had a simple question. You might want to shop around. Everything lowers the overall P&I paid every month, but 30 yr mortgage would lower it at slower rate than 20 yr old mortgage.
@Johnny Wahba I would definitely refinance into something new. Hopefully by that time i would have added to my overall portfolio size too, which would hopefully give me options. I feel like you have some thoughts to share?
I am in the process of buying an 8-unit. Here are the terms I got:
25% down
4.875% for 5 years
25-year amortization
Not sure how it compares to what other people get so interested in hearing what other people get for commercial deals.
Patrick
I'll just chime it but it will seem pretty similar:
25% down
5-7 year fixed rate w/ a balloon
20-25 year amortization schedule
~5% interest rate
6-9 months worth of reserves
Full recourse
Requirements, rate, terms, etc. will vary a little from bank-to-bank. In my experience, they really want to see that you "pencil out" (meaning you're cash-flow positive on your own) and that the property "pencils out" (the property is cash-flow positive on it's own). If you have those two things covered you're probably in luck. They will also have requirements around insurance but that's last on the list (in my opinion).
Thanks everyone! This is all very helpful. @Stephanie P. the are asking $190k for 5 units with a 3,300 monthly rent total. Which is perhaps just a touch conservative but in range. I have been doing calculations but honestly it might not be a good deal (I am still trying to work out what would be in the commercial loan space).
I would check out the local (non-national) lenders note area. You should also call any credit unions. I have found they often run a hybrid product, that is technically a commercial loan but has some elements of a conventional loan.
Lately I've been doing 80% LTV loans - that means either putting 20% cash down, having the seller hold 20%, or buying with enough equity to satisfy the 20% spread.
Fixed 4.75-5% for 5 years, then prime + whatever after that.
Even if the buildings will support debt service with 10, 15, or 20yr amorts I've been structuring them with 25yr amorts in order to keep my DTI as low as possible on paper - gives me a little more borrowing power later on down the road. Doesn't mean I don't throw some extra cash at the principal every so often but it's nice to be able to decide each month whether to do that or use the cash elsewhere.
I am a newby trying to read everything possible but reading this forum, I realized I am still lost on the different amounts of loans there are and how they work and all the different aspects they have. Does anyone have any books/articles I could read that would help me with my knowledge of loans?
@Ryan Murdock Do you use a local lender for that or a national lender? Also if i understand what you are saying, if you get the property for a good deal (lower than the total value) that counts toward the LTV ratio?
I'm being told by most banks I've spoke with that they will require a minimum 15% down by the buyer. Say they want some skin in the game by the buyer. Just a heads up.
@Andrew Medici In a nutshell, yes. Let's say I buy a building for $50k and it appraises for $100k - I can borrow up to $80k. The $30k surplus either goes back into the building for repairs, is a cash disbursement into my pocket, an LOC to be used at a later date, or a combination of all these things. And I use only local lenders. Personal relationships with loan officers you can sit face-to-face with are exponentially more valuable than the 1/4 point savings you thought was such a great score from the national lender. See where that national lender is when you need them on your next creative deal....
The last several months I have been told from local banks, (as Rick Roberson posted), investment loans require 15% down with an amortization of only 20 years... unless you reside in a unit on the property. Some of the local banks set a minimal cash flow they expect per unit (which is a good thing for us newbies). One example I was given.... Total Tax Reported Rent - 25% of rent for expenses - $125 cash flow per unit = the mortgage payment they are willing to finance ....with good credit and a minimal of 15% down. "" So you have some skin in the race" was the quote I was also given. Example I was looking at a 5 unit that had monthly rent $2975. Formula from bank
$2975.00 Monthly Rent
-$743.75 (25% of rent for expenses) I am more conservative than 25%
-$625.00 ($125 cash flow per unit)
= $1606.25 Mortgage payment they approved for me ...
after a minimal of 15% down and a investment mortgage rate of 5.25% with a maximum amortization of 20 years. The total loan amount they approved with a down payment of 15% or more was $238,371. Which would have worked if the asking price was approx. $280,400. I was asked $360,000. The bank approved the loan as long as my out of pocket was 15% ( $42,060) OR MORE. My more would have been $121,170 out of pocket.
This may be a newbies unrealistic expectations but My idea analysis $225,000-$33,750 down (15%)= $191,250. I didn't realize banks in this area don't like to amortize over 20 years on investment mortgages . I was looking 4.75% @ 30years.
$2975 Monthly Rent
- $998 Mortgage 4.75 @ 30 years
- $130 Water
- $300 Insurance
- $175 Taxes
- $872 approx. 29% repair, cap x, property manager, and newbie overlooked expense
= Cash Flow of $500
I was comfortable with my numbers as a "trying to be" newbie landlord. My husband and I both have great credit, my husband is the W2 employee, my company is 20+ year, consistent profit producing, tax paying company, with decent DTI in our personal finances. Is investment mortgage rates and length of amortization based on real estate experience? Is it based on individual banks digression? Are they based on location of property or the location of the bank? Does personal finances, good credit, good DTI, and stable w2 tax paying jobs play a role in investment mortgages? What can I do to get the 30 year amortization without house hacking? What can I do to obtain the lowest rates on investment mortgages?