We currently have a SFR portfolio of 12 houses. I am looking into a multi-family deal in middle TN. Right now the complex is 24 doors and seems to be suffering from mismanagement and neglect as the owners are out of state. There is room for expansion and significant cost cutting based on the expenses the broker sent me. I am looking for ideas for financing. Most of my capital I have tied up buying and remodeling our SFRs. What options are out there for low or no money down deals? Syndication, syndicating, Fannie Mae, Freddie Mac? Asking price is $725,000. I think they would take less since its been on the market awhile, but I'd like to have money to do improvements and cost saving measures. Any recommended reading for Multi-family or syndicating? Thanks!
@Chad P. I made several mistakes going from 2-4 family to mfam. One big one was under estimating expenses needed to run the assets successfully. Want to take one guess who conveniently left out some expenses? Hint: it starts with "B" and rhymes with "joker."
If you haven't looked at 100 apartment deals and spoken to property management companies on running scattered site mfam (apartments that aren't big enough to support onsite staff) chances are you're in for some surprises.
Don't be arrogant and in a hurry like I was. Be better than me! :)
Fannie/Freddie won’t touch loans under $1M. Owner finance or bank loan. There’s a reason it’s been sitting on the market for awhile.
Find a partner who can put in the capital or There are private/hard money lender that will let you put 10% down payment and they will finance 100% rehab cost. keep in mind the rate will be a lot higher and they charge point (2%) but they can close fast and you might be able to negotiate the purchase price even lower. Like Mark Allen said there are a reason why is sitting on the market for a while. Please do your due diligence and call reputable property management company and contractors as a second set of eye.
@Chad P. Syndication would be the worst possible route you could take. The legal and accounting fees alone would eat you up. Agency debt is also not going to be possible under $1M (as pointed out by @Mark Allen ).
Best bet: Either find additional capital partners, tap into bridge loans for short-term financing (while you sort out your liquidity position) or pass on this deal.
As @Ivan Barratt has pointed out that running scattered site multifamily is a PITA. You will get minimal, if any, economies of scale and operational efficiencies at the unit size you're thinking about.
What did the broker base their expenses off of? Usually they under estimate mosts costs and miss line items all together.
If the sellers have significant equity see about seller financing. They may also have an assumable loan. Find a debt partner to provide the capital needed and pay them once you can refinance the stabilized asset. Given the size of the property you may consider providing discounted rent to a resident to handle some of the on-site management tasks that @Omar Khan and @Ivan Barratt mentioned.
@Ivan Barrat, Broker.
@Chad P. Unless you go over 1M loan size and over 90% occupied stabilized building you cannot get a Fannie or Freddie non recourse loan. I think that zone is the worse lending terms as well as the most competition. When I was looking at 20-40 units it was night and day how much better the pricing was for over 60 units.
@Chad P. Just to directly answer your question - I think you would be best with that size property, finding a partner to JV with whose got the money and assets to get the loan and pay the down payment. Then you'll need to add value to the partnership. Are you capable of putting together a good business plan for the property and carrying out the business plan? What value can you bring to a potential partner? I don't ask those questions in a negative way, just things to think about. The link in my signature has a TON of good reading and listening sorted by category if you want to check it out.
We had 40+ Sfr plus 15 or so in commercial buildings and duplexes and a quad. I thought now it's time for multifamiliy. I was ready. Or was I. I found a seller. We contracted to by 32 units, basically a complex with 8 4 unit buildings, each two story. My purchase was 10% my money, 20% seller financing, 70% local bank financing.
Sounds great, right? Well it was for a while, all units came rented, times were good, but the management is a nightmare. We self manage because of loan payments until the seller financing gets paid off(5 year term, tough).
In 2017 we probably averaged 12-15% vacancy. Barely cash flowed.
Class C-D tenants are hard to manage, slow pay, pot smokers, trash, it's always something
2018 back to full occupancy, almost, at the end of May, now for the end of June, 5 open units
Did I mention tenants can't hit the dumpster
And when they leave they fill the dumpsters with you name it.
And my units have a lot of deferred maintenance
At the end of next year the seller financing will be done, and an extra $4000/month will ease the pain.
I think I will survive it, but in hindsight, life was great without them, ok with them but make sure you can let someone else manage them. Also , it would be nice to have been able to afford at least a Class B complex with a lot less deferred maintenance. I could use a half a million to upgrade them to get better tenants, but it will be a while before I am comfortable for that.
The moral of the story---Single Family Homes are a dream compared to Class C or D apartments.