1st MF Purchase Financing Strategy Question
Hi Everyone,
I'm selling a investment condo in Oakland and looking to purchase out-of-state. I'll 1031 the property (owned F&C) but looking to see what others have done in terms of financing and how much to purchase. My overall goals are to cash flow as much as possible in the short term (2ish years) for personal reasons, keep the property and expand the portfolio greatly in the longterm.
My first thought was to buy 1 commercial property all cash with maybe a small loan/HELOC to cover the difference between the cost and 1031 min. and get my commercial feet wet. Now I'm thinking maybe I should purchase with 60-70% cash and purchase a bigger property or potentially 2 properties. I have a primary with mortgage and a getting a HELOC on the primary as we speak.
Again, I'd love to hear the communities thoughts and what others have done. If you have questions, by all means ask away.
Thanks,
Chris
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#1 Real Estate Events & Meetups Contributor
- Rental Property Investor
- Oakland, CA
What states/cities are you thinking about?
There may be some benefits to buying a larger property, but you're also putting more eggs in one basket when it sounds like you don't have experience in that asset class (commercial property), or the location (out of state). (if that is the case).
As long as you're comfortable with the overall leverage, you might want to think more about the location and team you'll be using than exactly what LTV you're going to go into the next deal with. As long as you roll the total amount from your sale into the 1031 purchase, and don't have to pay taxes on "the boot," you can maintain some flexibility to buy more when you want - since you're not under the gun to deploy a larger amount of capital to avoid taxes.
Just some food for thought... Good luck Chris!
Hopefully will meet you at one of the local meetups..
@Chris Strasser you could try leveraging and getting a bigger property. If it's big enough to to qualify for agency debt you could try and get a loan that has 1-3 years interest only at the beginning which will increase your cashflow in the next couple of years.
Hi Chris. To complete the exchange you will need to reinvest all your equity from the sale into the new property. If you keep any cash out, you will pay tax on that 'boot'.
You can split the equity into more than one property and pair that with debt to diversify. An exchange can be from one property into several. Depending on how much equity you have and what you can qualify for, that might be something to think about.
@Chris Strasser Many investors will leverage high to maximize there buying power and potential return. Also they tend to seek appreciating properties to gain future equity. What type of assets are you seeking? How aggressively to you plan to expand?
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Buying real estate with cash or low leverage right now is expensive. Current prices are inflated due to low rates and you end up paying a higher price but do not get the benefits of the low rates when you purchase for cash or low leverage. Maybe modest leverage is the compromise.
Thanks for the responses everyone. I am planning on reinvesting the total amount.
@J. Martin - I hear you on the concerns of out of state and eggs in one basket. Since I'm rolling the total amount l was trying to have it focused on one property with good cash flow so I wasn't biting off more than I could chew. As for size of property, I'm looking at 7-8 units not anything bigger. So whether it's 2 fourplexes (residential) or (1) 8 unit building (commercial) I figured I'd keep it commercial for future lending experience. Make sense? Why start in residential and trade up to commercial when I can get into smaller commercial now. I guess I could buy a nicer 4plex to gain the experience.
I have the markets narrow down to 4 (Phoenix, Columbus OH, Salt Lake City and Boise). I completely agree that getting the team set up is very important. I'm actually taking Neal Bawa's bootcamp this Saturday so will have the market settled by next week and then dive in.
@Joseph Gozlan While I don't think the loan would be big enough that could be a good strategy. Thanks
@Account Closed 's point interest rates are low.
Chris
I helped a Client who sold a large apartment complex in northern california who since moved to UT, He owned it F&C, and netted about 1MM. He then bought 6 SFR's in SLC with the 1031 money. I believe he was about 60% LTV on all the purchases. we were able to get slightly under the 1% rule. (this is now much more difficult in salt lake city)
When I Asked him why he didn't just buy three properties free and clear, He wanted to add an acceptable amount of leverage to get more properties. I believe he pays on them as if they were 15 year notes.
Chris Strasser
Hi Chris, best of luck to you. I recently closed on my first multifamily deal as well. I closed on another one before the first was stabilized enough. In hind sight, I would have took a slower route and wait for the first to full stabilize before moving onto the next one. Just wanted to share with you my experience.
@Jordy Clark See that's what I'm thinking about but just not leveraged as much. If I can find a deal or two, a little bit bigger than just the cash I'll have (maybe 30% LTV), that will bring the same amount of cash flow then I'll have more equity the down the road besides the appreciation.
I can understand why your Client didn't want to buy free and clear. That makes sense if you're trying to expand. I wonder why your Client didn't purchase three bigger properties with the same LTV?
@Tim W. Congratulations! That's great to hear and thanks for sharing. I'd love to hear more about your experience. Mind if we chat for 30 min?
Originally posted by @Chris Strasser:
Hi Everyone,
I'm selling a investment condo in Oakland and looking to purchase out-of-state. I'll 1031 the property (owned F&C) but looking to see what others have done in terms of financing and how much to purchase. My overall goals are to cash flow as much as possible in the short term (2ish years) for personal reasons, keep the property and expand the portfolio greatly in the longterm.
My first thought was to buy 1 commercial property all cash with maybe a small loan/HELOC to cover the difference between the cost and 1031 min. and get my commercial feet wet. Now I'm thinking maybe I should purchase with 60-70% cash and purchase a bigger property or potentially 2 properties. I have a primary with mortgage and a getting a HELOC on the primary as we speak.
Again, I'd love to hear the communities thoughts and what others have done. If you have questions, by all means ask away.
Thanks,
Chris
How big of a property are you looking to buy? like price range?
Tim Wong
I'm a SD investor. I have been chatting with some locals about starting up and getting a REIA mastermind group together. Would you be interested?
@Robert Afra I would definitely be interested.
Hi Chris - I sell multifam in Florida. 99% of my clients are from overseas & out of state.
This week, I'm in the due diligence period with a couple from San Jose, selling a 4plex and 1031-ing a 12 unit in Orlando, and I just met another couple from Sacramento who are looking to 1031into a 12-16 unit here in Florida.
Have you considered the Florida market?
I'd love to chat & see if I can share any information on their experiences so far, to give you a real world idea of what it's like, whether you buy here, or not. I like to make myself available to people that are interested in learning about the business. Never a 'hard sell' - not my style.
Let's connect on the phone this week, if you like?
Thanks!
Alim