7 Unit Multi family as first investment property
Investor · Detroit MI · Member since 2020 · 9 posts · 1 vote
7 Unit Multi family as first investment property
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Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
6yHi @Roger Brogan, welcome to BP!
Commercial loans are different from conventional in several ways:
1) They are typically not fixed rate for the entire term of the loan. There will be a lock period up front where the interest rate won't change, and that can range anywhere from 1 - 10 years. The ones I typically see are 3, 5, or 7 years. The longer the lock, the higher the initial rate. But not much. Maybe 1% difference. After that, you can either refinance and lock it again or pay the new rate.
2) The rate itself isn't much higher than 15 or 30 year fixed rate conventional. Maybe 1-1.5%. Right now, I'm refinancing into 5% rates. Last month was 4.75%.
3) The term itself can vary as needed. I normally do 15-year notes because I want rapid principle pay down. But one time my banker's assistance goofed and thought it was the payment amount we wanted to be a round number, so we ended up setting the payment vs. the term. So I got a 157 month note at a nice round payment. Hey whatever...it's less than 15 years (180 months) but the payment wasn't much higher. We went with it. 20 years amortization is typically the max, though I have seen some go 25 year on occasion.
4) Less paperwork up front, but your bank may require you to submit yearly PFS (personal financial statements, pronounced "PIFFS") listing all of your assets, accounts, real estate owned, loans owed, etc. This is to ensure you are stable.
5) They may have "calls", meaning if the bank for whatever reason decides they no longer want to carry your note, they can "call" the entire loan due immediately. Avoid these like the plague. It's worse than a balloon. At least with a balloon note you know the day the call will happen and can prepare for it. I don't like any kind of note that can have the entire balance due in 30 days.
6) Down payment is typically 20%, but some lenders wanting to build up a book of business will go lower and/or allow the Seller to carry the 20%. Some will demand 20% of YOUR funds: they want you to have some skin in the game.
In summary, commercial lending is as flexible as you and your lender want it to be. It's not quite the "wild west" of lending, but it is open to a lot of creativity. I'm of the opinion that if your deal won't work with a 15 year term it's probably not a good enough deal, unless you get up into the non-recourse notes for medium and large apartments. Then the game totally changes, but that's another post.
15 Replies
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes6y
Hi @Roger Brogan, welcome to BP!
Commercial loans are different from conventional in several ways:
1) They are typically not fixed rate for the entire term of the loan. There will be a lock period up front where the interest rate won't change, and that can range anywhere from 1 - 10 years. The ones I typically see are 3, 5, or 7 years. The longer the lock, the higher the initial rate. But not much. Maybe 1% difference. After that, you can either refinance and lock it again or pay the new rate.
2) The rate itself isn't much higher than 15 or 30 year fixed rate conventional. Maybe 1-1.5%. Right now, I'm refinancing into 5% rates. Last month was 4.75%.
3) The term itself can vary as needed. I normally do 15-year notes because I want rapid principle pay down. But one time my banker's assistance goofed and thought it was the payment amount we wanted to be a round number, so we ended up setting the payment vs. the term. So I got a 157 month note at a nice round payment. Hey whatever...it's less than 15 years (180 months) but the payment wasn't much higher. We went with it. 20 years amortization is typically the max, though I have seen some go 25 year on occasion.
4) Less paperwork up front, but your bank may require you to submit yearly PFS (personal financial statements, pronounced "PIFFS") listing all of your assets, accounts, real estate owned, loans owed, etc. This is to ensure you are stable.
5) They may have "calls", meaning if the bank for whatever reason decides they no longer want to carry your note, they can "call" the entire loan due immediately. Avoid these like the plague. It's worse than a balloon. At least with a balloon note you know the day the call will happen and can prepare for it. I don't like any kind of note that can have the entire balance due in 30 days.
6) Down payment is typically 20%, but some lenders wanting to build up a book of business will go lower and/or allow the Seller to carry the 20%. Some will demand 20% of YOUR funds: they want you to have some skin in the game.
In summary, commercial lending is as flexible as you and your lender want it to be. It's not quite the "wild west" of lending, but it is open to a lot of creativity. I'm of the opinion that if your deal won't work with a 15 year term it's probably not a good enough deal, unless you get up into the non-recourse notes for medium and large apartments. Then the game totally changes, but that's another post.
- Investor · Detroit MI · Member since 2020 · 9 posts · 1 vote6y
Thanks Erik! That was very helpful and put me a little at ease. I will run the new numbers on a 5% 15 year loan to see if the numbers still look appealing. Is there a way to figure out what the tenants currently pay for rent? I have been estimating that with comparable properties in the area. Should I target a local credit union from my hometown for financing? I think I have an old account with them but I have yet to be there in years.. I have read a lot about the importance of building a relationship with a local bank.
- Member since 2018 · 21 posts · 8 votes6y
Because my experience is primarily with larger, institutional-quality MF real estate, I cannot provide a lot of guidance on what to expect regarding typical loan structure on such a deal. However, don't let your lack of familiarity with the commercial loan process hold you back IF THE DEAL MAKES SENSE.
1) I agree with @Erik Whiting in regards to a few simple ideas. The rate will be higher and the term shorter because you are purchasing commercial investment property, and it sounds like it's probably not institutional quality based on the number of units. Nothing wrong with that if the deal fits your investment criteria. Understand any provisions within the docs that impact how and when the interest rate can change.
2) You do not want a note that can be called for anything other than standard, typical events of default. Make sure you read your loan agreement and have a closing legal counsel review it as well. It's worth the legal fees. Usually commercial loan docs include multiple default provisions that allow the bank to call a note. But the bank doesn't want to do that. It's a hassle. Just understand your default provisions.
3) Regarding rents, any local broker should have a reasonable idea on rents in the neighborhood. In addition, your bank should require an appraisal of the property that will include an assumption of rents. Usually during the appraisal process the appraiser will ask for a rent roll for the property and then compare it to local market rents, too. You can also just ask for a rent roll yourself during due diligence.
It sounds like you are starting to expand and scale your investing portfolio. Good luck!
- Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes6y
Quick tip: when you want to call my attention to a post, be sure to precede my name with an "@" symbol. That's how we "tag" each other on BP, and it send me an email saying someone is talking to me. Otherwise, it's just dumb luck if I ever click back on this post to see your response.
To be clear, I'm not saying there is never a reason to buy a property if it takes more than a 15 year note: but if you're able to do that and still cash flow then in my view it is very likely to be a successful deal that will make you smile. I've been in the business 15 years now, and if I had started out with nothing but 15 year notes, I'd be almost 100% debt free in a few years and making a pile of cash flow. *sigh. I started with 30 years notes, but have been aggressively paying them down.
I have had good luck with local community banks wanting to do these kinds of loans. Closing costs are usually very cheap ($100), and they can do them fast. Think 5-10 days to close vs. 30-45 days. Does that create value for a motivated Seller who needs money yesterday? You bet!
Your local bank will also most likely portfolio the loan in house, so it's not getting sold every 1-2 years. Not a biggie when that happens, but it is kind of a hassle to reset all your payments to a new lender.
Rent: Try Zillow. There is a filter you can use to see what other rental in the area are listed for. I don't use the "Zestimate" for values or rents: they are typically inaccurate in my area. Another way is drive around for about 3-4 blocks in every direction from the property you are considering, and call any "For Rent" signs. Ask what they are renting for. Eventually, you'll get good enough to keep a "pulse" on what the rents are just by looking at where a house is and how many beds, baths, and schools. Btw, I also set up a search filter on Zillow that has criteria similar to my rentals, so it emails me whenever new properties are listed with those criteria. It's a good way to keep informed on what other LLs are asking for rent. You can also try Trulia, one of Zillow's "family" of rental sites. They have Crime stats, which are useful.
- Member since 2018 · 21 posts · 8 votes6y
Add what @Erik Whiting posted above about researching rents to what I mentioned. I need to remember that I work in a world where rent rolls as presented are for the most part close to actual, and market information sources are widely available to verify reported rents.
- 6yJonathan GreeneBusiness MemberReal Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
I think you are glossing over the bigger issue if just focusing on how to close the deal. Why do you want to start with a 7-unit property? As a new investor, you are setting yourself up with 7x the problems. Biting off more than one can chew in a first deal just because the numbers seem to work is a classic, tried and true, error.
Have you ever been a landlord? Do you plan on using Property Management and have you accounted for those costs? Have you accounted for the excessive repair holding costs that you will need for a 7-unit multi? I would say you need at least 50k in repair funding to be safe.
You are jumping from investing in a single-family home, easy and doable, to 7 units, 7+ tenants, 7+ heating systems, 7x the plumbing, 7x the electric. Step back and take a breath and decide if you even want that responsibility as a first investment.
Zen and the Art of Real Estate Investing59 Reviews - Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes6y
Call you local community banks and credit unions and ask for a commercial real estate lender. They will be able to provide you accurate pricing. Near me, we are getting 4%-5% interest on a 20-30 year Amortization and fixed for 5-10 years. The variation will depend on how large your downpayment is (20% minimum), your experience, quality of the asset, your overall net worth and income and the appetite of the lender.
As for being an hour away - can you find quality people for the day to day maintenance and management?
- 6yRick MartinPro MemberRental Property Investor · Redondo Beach, CA · Member since 2017 · 411 posts · 477 votes
@Roger Brogan I am all for taking action, but to self manage a property an hour away could be a tough way to learn some lessons. How are the population and job trends in the area? Analyze the historical vacancy, but maybe above all, write property management into the deal. If you can find a reputable property management company, that has extensive market knowledge, they will be worth their weight in gold. True, they take a bight out of your profits, but poor self management can lead to greater losses. They are also the best way to verify rent projections.
- Investor · Detroit MI · Member since 2020 · 9 posts · 1 vote6y
@Erik W. @Thomas Loggins @Jonathan Greene @Todd Dexheimer @Rick Martin
I cannot thank you guys enough for all this great advise!1. Is it possible to find a 15-30 year fixed commercial loan or is that a unicorn?
2. I looked up rents in the area and there wasn't much close by because it is 15 min from the small downtown that have comparable rents around the 650 range for a 1 bedroom. So I figured I could get maybe 550 for my 1 bedroom and 700-750 for the two bedrooms. Does that seem fair?
3. @Jonathan Greene Ive thought about it a lot, because I am with you. I would like to find an easy SF home in my city and start small, test the waters on being a landlord, learn property management on a smaller scale with less risk, but I feel somewhat at ease because it is my hometown. I am familiar with the people and the area. A huge bonus is that my wifes dad lives there and has some experience as a landlord and property management.
4. @Todd Dexheimer Thank you! I did some research and found that my wifes local credit union does commercial loans so I will reach out to them soon.
5. @Rick Martin That is one of my main concerns. I am not sure how the population trends are since I left. When I lived there it was a nice small town, but the opioid epidemic hit it hard I feel like so I will ensure to research those trends and also write the property management into the deal to make sure it still cash flows.
- 6yCalvin OzanickBusiness MemberProperty Manager · Janesville, WI · Member since 2017 · 707 posts · 297 votes
I would say as part of your due diligence is to reach out to a few lenders and have them let you know the difference. People on BP can give advice and much of it will be sound, but your lender can let you know exactly what you qualify for and how much your payment would be down to the penny. If the numbers work after that, you have no reason to worry. Take the leap!
Wisconsin Property Managers4.7410 Reviews - Investor · Detroit, MI · Member since 2019 · 3 posts · 1 vote6y
Hi Roger,
So I came across this thread and was curious because I am from Detroit too. So I did some digging. I recently moved back to Detroit from Chicago. Growing up I used to hang out in Monroe, Michigan. I think I see the deal you are talking about. I am going to make some assumptions here. It is 9 beds so it's probably 2beds (two) 1beds (five). A good tip and way for you to check rents in the area is Craigslist. Just check out the map. It looks like Monroe 2 beds are in the range of 700-800 and 1beds are 600+ this property is even further outside of Monroe in an even smaller town to the south called La Salle which could mean lesser demand for the apts. Lets do some quick math with the 50 percent rule. Assume conservatively 2beds(2) ($700/mo) and 1beds(5) ($500/mo) = $3,900/mo close to what the MLS says approx $4,000 of income. It has been on MLS for 135 days with a list price of $300k lets assume you can get it for $280k. Say you have the units all rented out and are getting $3,900*12= $46,800/$280,000 = Gross Cap 16.7% cut it in half with 50% rule (includes vacany, capex (repairs), insurance, property tax, etc. etc.) makes your net return 8.35% based on simple 50% rule. Again your expenses may be less I am just doing this for example sake and back of napkin math. I am not sure credit qualities in La Salle, Michigan are the best so you may have people that are late on rent etc. as well. I am sure others may have other opinions on how to do the math I was just simplifying it.
I will tell you just recently in the last month we picked up a property in Wayne County, Michigan a 3 bed 1 bath for under a $100k with a gross cap of 17.1% using 50% rule net return of 8.55% there are still good deals out there they are just harder and harder to come by. I would pick the Wayne County metro pick with lesser risk (lesser capital needed as well) and it's closer to you if you reside in Detroit. Just my 2 cents. Hope you can get your feet wet in investing soon. You will learn a lot after executing your first deal. After I did my first one I did 5 more in the span of a couple years. Good luck and private message me if you have any questions always happy to help anyone.
- Member since 2018 · 21 posts · 8 votes6y
@Roger Brogan, just a question. If you are having a hard time finding sufficient rent comps 15 mins outside of the downtown area of a smaller, secondary / tertiary market (correct me if I am wrong), should you be calling agents / brokers to better understand the dynamics of the neighborhood? Do you know any other real estate experts in your home town that might know the neighborhood. Just asking. I am an newbie, too.
- Real Estate Agent · Murfreesboro, TN · Member since 2019 · 194 posts · 181 votes6y
@Jonathan Greene
I agree with Johnathan on most points. With one caveat I dont tend to view it as 7x times the problems. It seems to be to be 6x easier as the liability split is better. Spreading out the load but under one roof is a solid idea.
As for whether or not its a solid idea for your first property, there's so much to ask before anyone could know. I say jump in and get going, but that's how I am... maybe your personality would better suited to a SFH.
- Investor · Tacoma, WA · Member since 2016 · 120 posts · 112 votes6y
@Roger Brogan I just closed on 8 units. Commercial loan through my local credit union. 4.25% amortized over 30 years, adjusts in 5, no prepayment penalty. 25% down and I paid all loan fees out of pocket (approx. 13k). Be prepared to pay inspection and appraisal upfront and commercial appraisal aren’t cheap.
I like CU’s since they’re local and will work outside the box if it makes sense. Will likely be a full recourse loan.
Good luck.
- 6yStephanie P.Pro MemberWashington, DC Mortgage Lender/Broker · Member since 2016 · 4k+ posts · 2k+ votes
I think a 7 unit is an excellent idea. If you need commercial financing, there is plenty out there, particularly commercial financing that's based on the property's cash flow rather than your income.
Banks and Credit Unions are the first place to look, but commercial brokers are out there as well with some innovative products. Michigan is tough with their foreclosure laws, so be sure about your financing first.
Best of luck
Stephanie
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