Multi Family Unit Down Payment

14 Replies

I came across a 4 unit property listed at 189,000. It’s under contract but I saw a 7 unit for 555,000. The cap rate is 8.17. What amount down would you say should be ok? I know it’s commercial and banks look at the Rental income. I like this property and want it. What should I do this is my first purchase.

@Kevin Olson there is a lot more than just a down payment that goes into underwriting, but to answer your question, being that it is your first property, I would imagine a bank would require a higher down payment than normal. Typically, 20-25% can be done, but again, with it being your first property you may need to build that "relationship" so don't be surprised if they ask for 30%+ down on the property.

This is a great question. I have too been looking at buying a multi-unit property about the same size and many of the lenders I have run across have wanted 25% PLUS closing costs. 

Hey Kevin, I'm going to stay as close as I can to the points in your question: You're just starting out (for context, I only have a couple doors, so look for more opinions than mine). So you likely don't have a system in place. You say a 4 door is under contract, but is it under your contract...or are you the "safety offer" if another investor falls through? I'm going to assume its your contract. What are your current and projected numbers? Are you BRRR'ing this, or only downpaying it? How much buffer have you put into your projections? I ask because doing this will always cost more and take more time than the projections...and these are the things you have input in. What about the pending completion of the macro-credit cycle? A recession is objectively due? Will you still be cash flow positive in a 20% lower valuation?

Maybe you don't care about the value dropping as you'll be a "buy and landlord."  But your banker will.  

Commercial is a different beast, altogether.  It's definitely a different system.  Do you have that in place?

My advice?  Answer these questions (and many more)!  If you have built buffers and contingencies into your systems, then consult an old dog and ask if what you're planning makes sense.  

As you're doing your first deal, it's what you don't know that can either suck, or knock you out of the game. The only actionable advice I'd give is to partner, partner, partner- with someone successfully experienced. That way, you'll still be moving forward, and the lower personal ROI is more accurately perceived as either tuition or ****-hit-the-fan insurance. That way, a homerun deal doesn't become a one-hit wonder.

I'm hoping others can add in their opinions...or better, best practices!

Clint

It really depends on the economics of the deal. Personally, I always do a 20% down commercial loan on my apartments. But, that's because they will cash flow with that amount of debt service. A lot of lenders may require a larger amount down these days. Also, my bank will use a 1.3 debt coverage ratio in their underwriting. So, they will only loan an amount that keeps the DCR (Debt Service/NOI=DCR) at 1.3 or above.

Originally posted by @Kevin Olson :

I came across a 4 unit property listed at 189,000. It’s under contract but I saw a 7 unit for 555,000. The cap rate is 8.17. What amount down would you say should be ok? I know it’s commercial and banks look at the Rental income. I like this property and want it. What should I do this is my first purchase.

I think I know exactly what property you are talking about. Unless you already have that under contract that particular property is under contract as well.  At least if it is the one local to us.  I actually contacted the realtor about that one. Their idea of an 8 cap was a huge overstatement, it was more like a 4.5-5 cap with no upside.



As far as a loan down payment, you would want 20% at least. If you can do 25% that would possibly adjust the rate a little bit, But possibly not enough to tie that amount of money up.
  

@Kevin Olson , I think you should come to the table with 30%+, but 30% should be good. You don't want to over leverage in this market regardless if the bank says 80/20 or 75/25. You need that extra leverage to stay steady if the market concedes. Take care. Stay blessed

It’s obvious I am way off in my estimation.

Account Closed I am not the one who has it under contract. I pulled the property up on LoopNet and it lists it as Under Contract  

@Daniel Krueger In your best estimation should I be looking for something under 200k? Where I can come up with a reasonable down, or should I look for a single family home and flip it, take the profit and use that as a down payment? 

Originally posted by @Clint LeClair :

Hey Kevin, I'm going to stay as close as I can to the points in your question: You're just starting out (for context, I only have a couple doors, so look for more opinions than mine). So you likely don't have a system in place. You say a 4 door is under contract, but is it under your contract...or are you the "safety offer" if another investor falls through? I'm going to assume its your contract. What are your current and projected numbers? Are you BRRR'ing this, or only downpaying it? How much buffer have you put into your projections? I ask because doing this will always cost more and take more time than the projections...and these are the things you have input in. What about the pending completion of the macro-credit cycle? A recession is objectively due? Will you still be cash flow positive in a 20% lower valuation?

Maybe you don't care about the value dropping as you'll be a "buy and landlord."  But your banker will.  

Commercial is a different beast, altogether.  It's definitely a different system.  Do you have that in place?

My advice?  Answer these questions (and many more)!  If you have built buffers and contingencies into your systems, then consult an old dog and ask if what you're planning makes sense.  

As you're doing your first deal, it's what you don't know that can either suck, or knock you out of the game. The only actionable advice I'd give is to partner, partner, partner- with someone successfully experienced. That way, you'll still be moving forward, and the lower personal ROI is more accurately perceived as either tuition or ****-hit-the-fan insurance. That way, a homerun deal doesn't become a one-hit wonder.

I'm hoping others can add in their opinions...or better, best practices!

Clint

 

@Clint LeClair Thank you for replying. I’ll be honest some of your questions you asked I’m not entirely sure what you mean. I am new to this space. I have come across BiggerPockets bc I was searching for real estate investment content. I want to learn bc I want to become an investor. To answer your question I am not the one who has this under contract. LoopNet says it’s under contract. I think I might be looking too big too soon. As a first time buyer what would you suggest? A single family home to flip and rake the profits and purchase a multi family or look for a  2 unit or 4 unit under 200 K? 

@Kevin Olson  

Since you are new to this, from what I am reading in your replies, go to a meetup or a local REI group in your area, find a mentor you click with and you can learn a lot from them.

I haven't seen a bank do anything for less than 20% down, most I've seen is 25%. but don't forget your closing cost's! Now lets say if you were to "live" in the property for a year or 2? might get into it for around 5-10% a lady I know just bought a 3unit for 3.5% down.. 

Good luck

@Kevin Olson, I second what @Matthew Couto is saying about heading to a meetup!  On the tail end of your last response, you threw a few options out for reply.

Single Family home (1 door) to flip "and rake in the profits"....but taxes will eat that up- even if you do everything right in the flip (which has a low probability).  Or go for a multifam. (2, 3, or 4 door)?  So let me answer a question with a question...are you willing to house hack (aka, living in one of the unit while repairing the others or living in a single family home and renting out the other bedrooms)?  That's the lowest risk decision, as you need to personally pay for shelter, yourself.  So it might as well be paying down the mortgage for your investment property.  Frankly, my best advice is to take a network with other investors in real life.  And if you feel comfortable learning under one or two of them, offer to help in whatever their pain points are, so you can see the inside of their operation.  Build trust.  Build value.  These guys aren't your competitors- they are just in the same marathon as you.  And no matter how big their operation is, they have their eye on the guy or gal doing it better and bigger than them.  And listen to the podcasts...start from episode 1 and go all the way through.  They're free.  And all of those guests are here on the forum.  So you can ask them questions to what you didn't understand.

Lastly, get the books. Likely, you've already read "Rich Dad, Poor Dad." It's almost a baptism into real estate, to do so. But Brandon Turner's books are excellent for just starting out and beyond. Right now, I'm getting through the BRRR audiobook as I'm literally swinging the hammer on my latest rehab (I don't need to physically do the rehab...its just my happy place!) and am gathering nuggets that I'd rather not gain through hard knocks.

Frankly, I would not start this race with a sprint to the first door under your belt, unless you were house hacking.  And even then, keeping an eye on the credit cycle, unless a deal was just a no brainer, I'd work on building my credit to be the best it could be and pay down high percentage credit as much as possible.  Right now, you could throw a stone anywhere and hit a lender.  And while they aren't titled as such, they might as well be calling their loans "ninja's" as in "we don't bother to look to hard at your income or job history or credit history"...and we all now know that those loans were really sub-prime or usery loans.  My point is that a good credit rating and liquidity will be much more valuable in the next year or two, than it is now.  So why not invest in the thing that isn't valued as much (as in the mantra of buy low and sell high), by investing in yourself (education) and learning how to make a real estate business operation or system.  

So, that's my 2 cents.  As always, consult ppl smarter than me!

@Kevin Olson

Educate yourself first and foremost. Keep in mind that CAP rate is not everything. Run the numbers yourself after looking at the actual financials from the deal (P&Ls etc).

The down payment amount is whatever makes sense on the deal for debt coverage. I figure a 70%LTV on all of my proformas. Get a good deal under contract and you will figure out the money.

Originally posted by @Clint LeClair :

@Kevin Olson, I second what @Matthew Couto is saying about heading to a meetup!  On the tail end of your last response, you threw a few options out for reply.

Single Family home (1 door) to flip "and rake in the profits"....but taxes will eat that up- even if you do everything right in the flip (which has a low probability).  Or go for a multifam. (2, 3, or 4 door)?  So let me answer a question with a question...are you willing to house hack (aka, living in one of the unit while repairing the others or living in a single family home and renting out the other bedrooms)?  That's the lowest risk decision, as you need to personally pay for shelter, yourself.  So it might as well be paying down the mortgage for your investment property.  Frankly, my best advice is to take a network with other investors in real life.  And if you feel comfortable learning under one or two of them, offer to help in whatever their pain points are, so you can see the inside of their operation.  Build trust.  Build value.  These guys aren't your competitors- they are just in the same marathon as you.  And no matter how big their operation is, they have their eye on the guy or gal doing it better and bigger than them.  And listen to the podcasts...start from episode 1 and go all the way through.  They're free.  And all of those guests are here on the forum.  So you can ask them questions to what you didn't understand.

Lastly, get the books. Likely, you've already read "Rich Dad, Poor Dad." It's almost a baptism into real estate, to do so. But Brandon Turner's books are excellent for just starting out and beyond. Right now, I'm getting through the BRRR audiobook as I'm literally swinging the hammer on my latest rehab (I don't need to physically do the rehab...its just my happy place!) and am gathering nuggets that I'd rather not gain through hard knocks.

Frankly, I would not start this race with a sprint to the first door under your belt, unless you were house hacking.  And even then, keeping an eye on the credit cycle, unless a deal was just a no brainer, I'd work on building my credit to be the best it could be and pay down high percentage credit as much as possible.  Right now, you could throw a stone anywhere and hit a lender.  And while they aren't titled as such, they might as well be calling their loans "ninja's" as in "we don't bother to look to hard at your income or job history or credit history"...and we all now know that those loans were really sub-prime or usery loans.  My point is that a good credit rating and liquidity will be much more valuable in the next year or two, than it is now.  So why not invest in the thing that isn't valued as much (as in the mantra of buy low and sell high), by investing in yourself (education) and learning how to make a real estate business operation or system.  

So, that's my 2 cents.  As always, consult ppl smarter than me!

 That’s very good advice. I wouldn’t mind house hacking it’s most likely going to happen. I really appreciate the help so far. Thank you. I’m trying to get on with the gentleman up in Atlanta who has been investing in real estate for the last 25 years but it’s hard for me and him to meet up. But I see your point on surrounding yourself with others that are doing what you want to do.