How to finance a loan for a 5 unit Duplex

15 Replies

My girlfriend's dad approached her the other day and asked her if we would be interested in being partners with him and being the property managers for a 5 unit duplex. I have been wanting to get in the real estate rental business for a while now and have been looking through the forums here, listening to the podcast, researching strategies, and have read several books to expand my knowledge on real estate and the does and don'ts. Her dad has been in the real estate game for 30+ years and has units all over town and has built 40+ houses throughout his career so he knows the game. 

He already has the plans approved and owns the land so we just need to get a loan, which all of our names will be own. We will split the deal with 60% to him, 20% to my girlfriend (his daughter), and 20% to me. He said we would need to obtain a 1 million dollar loan to finance the deal and the interest rate would be 6%. He wants it financed for 15 years and use the money we make to pay off the loan ASAP. I'm worried that the payments would be too much and was looking at more of a 22-25 year loan so he could pay off the principal faster but I'm not educated enough on this to know what the best way to go about it would be.

I'm just curious what the best way to finance the loan and for how many years would be best. Do we need to refinance the deal after a certain amount of years? How can we pay off the loan and start getting cash flow the quickest? Any questions and/or suggested are much appreciated.

I am guessing you mean 5-unit apartment complex. A duplex is only two units. Which means you need commercial financing and will probably have a balloon payment. You will have more cash flow with a longer loan term (30 over 15). It sounds like he is the guy you would want to partner with on a deal this size with a resume like that. 

You will probably struggle to find financing if you don't use a lender he has a good relationship with and a large amount of capital to throw in as a downpayment. You aren't required to refinance anything. Only if you want to. If you performed a value add play, you may want to REFI down the road and pull some of that cash out.

He has a great relationship with a lender he has been using throughout the years. It was my understanding he wasn't planning on making a down payment but I could be wrong on that. We are all going to sit down and go over the details this weekend. This is all very early in the making. 

@Patrick Zane McLure since you will be the PM figure our what the total rents will be-you need to know that anyway. Propose doing the PM work for 10% of total rents and applying that amount to financing your and your girlfriends portion. Work out what that is and your shortfall. Make sure you master those numbers and pitch that to him. Use his lender and his connections. Obviously this is his test to see if his daughter's boyfriend is worthwhile, so don't disappoint! ;<))

@Patrick Zane McLure There are some missing details for most to give a specific answer, but in general sounds like it *could* be a good opportunity! 

A 60/40 split seems reasonable if his extra value is the land he brings to the table and the ability to get the deal done. 

You get 40% ownership for $0? Infinite cash flow? 

I think the main issue(s) could be; 1. Going into business with family. 2. Does it actually cash flow on a 15 year note? 3. If if it doesn't, how do your cover shortages? 4. If he dies, who gets the 60%? (more a question that an inherent issue)

@Bjorn Ahlblad Rent will be $1,000 for each unit and since there will be 10 units (5 duplexes so 5 x 2) the total income will be $10,000 monthly, before expenses. He is doing most of heavy lifting and we are not expected to provide a down payment. She and I are going to be Property Managers. Do you still think we should ask for 10% of the total rent? That would make it 50%, to 25% and 25% split. 

@Justin Robert  It's split 60% to him, 20% to me and 20% to my girlfriend (his daughter). When he dies my girlfriend would get his 60%. I did the math and with a 15-year note, the payment is around $8,600. With $10,000 monthly income this doesn't give much room to work with so I'm thinking about pushing for a 30-year note which would be around $6,100. We want to make the payments and then pay off the principal for the next month or two each time to help avoid the interest paid. I'm thinking this gives us more money to do that and be able to put money in an account for future repairs and vacancy. He wants the loan to be paid off before he dies and he doesn't like long term loans so it will take some convincing to do.

I would finance as long as you can... you will need the cash, especially upfront for unexpected expenses.  Also, you can always apply more towards the principal if the goal is to pay of the debt quickly.   You don't want to be in a position where you can pay and that extra 2K a month will come in handy at times. 

@Patrick Zane McLure you would exhaust yourself too fast because in this short term there isn’t much income.

I would take a 30 year loan, work on the terms when you resell the property too so every person gets its cut.

Take a c or b- building that are a bit run down, multi units are very easy to increase value fast when you fix them up (lot of multi units that are worth 700k when they were bough were sold for double after 1-2 years - read about the repositioning multi unit strategy)

Read books about it before diving in, some multi unit that look renovated and brand new are usually not a good investment because theres no value to add to them and increase rent)

@Mario Am We are talking about building the units. Her dad has built several houses throughout the years and already has paid an engineer for the site plans. I think a 25 or 30-year loan is what we are going to go with now. We just got finished talking about it and he agrees that 15-years payments would be too high.

@Patrick Zane McLure Ok so thats not my profession.

However isn’t it the same price as buying an existing building?

I would think buying an existing one will be better since you have income to cover the expenses while fixing it up isnt it?

I'm not really sure. I can see it being better both ways depending on how you look at it. On one hand, you would get income to cover your expenses if you bought an existing building. On the other hand, if you built it, you would have a brand new building and wouldn't have to put as much away to pay for capital expenditures and other repairs. 

Since he will be doing the building we won't have to pay a contractor so I imagine it will cost us much less than it would traditionally. I really just depends on the deal you find for an existing building you want to fix up.

@Patrick Zane McLure % ownership and money distribution are not necessarily in lock step. You guys are borrowing one million.........where is that money going? Is it enough? Too much? Answer-nobody knows. What if Dad never finishes the job? 60-20-20 is the ownership breakdown; and the liability for the loan; but it is not how the money gets handed out when expenses start. Is he 'selling' the land to the Entity?

Dad is using his company to do the construction and getting paid. You will be doing the PM work-lots of getting ready until it is time to rent, should you not get paid when your work starts? You getting paid does not affect the ownership %. Y'all need an Operating Agreement-whether you like it or not-remember you are still just a 'boyfriend' and as such you have some privileges but no rights! LOL 

In any event you and your girlfriend should both consider joining your State LL Association; they can be a tremendous resource with state specific laws, leases, help with evictions (heaven forbid), networking etc. In my state we pay 55 dollars per year-bargain! I use them for all things landlord. All the best!

@Patrick Zane McLure , I can be wrong on this, but typically you won't be able to attract a 22-25 yr loan term on a 5 unit. Most community savings and loans banks won't go out as far as 7yrs. If was a HUD project you can potentially go out 15-20 yrs, but don't quote me on this. Is there another way you can get this funded? Do you have a network of individuals that have a decent networth that may be interested in partnering? Can they lend funds on the project? Something to think about. Good luck