Buying small multi-family at 20% discount

11 Replies

Hi All!

I read the 7 years to 7 figures from Brandon Turner, and one of the things that he states is that we need to buy at 20% discount. I would like to ask to the BP community to hear any experiences you guys might have with this strategy.

Have any of you tried this out? How's the likelihood to get an offer accepted in the current bullish RE market?

I have found deals that are good deals without the 20% discount, like a 4-plex, that cashflows 800+ a month ($200 per unit) and an ROI of more than 12%, so on these cases I am afraid that by being strict with this strategy I might lose a good deal.

Any suggestions or ideas would be highly appreciated :)

Thanks!

Hi Victor,

In most of areas of my  state (Wisconsin) 20% discount won't get your offer looked at by the seller.  The only people getting 15-20% discount here are usually paying cash and/or waiving various contingencies (or dealing with an inexperienced seller).  

My thought is if you are 100% confident in your property calculations you don't want to pass up a good deal because you are falling short of 20% discount. With Quads we can do more to affect ROI down the road thus reducing the affect of not getting the 20% discount on the property.

Brandon's "rule" per say is good ear mark but it's really more of a guideline.  If you're market it is very competitive start with a discount between 15 and 10% see if the seller counters.  

if you are paying cash or getting fixed full term financing its ok to pay closer to market but you wont get that equity you need to weather a storm if your note needs to be renewed in a down market cycle. this is why the right financing is key.  Personally im pretty much watching and will buy if a good deal shows up but I will not over pay, and preparing to buy like mad when the market tanks again.   Just my thoughts

Originally posted by @Corina Eufinger :

Hi Victor,

In most of areas of my  state (Wisconsin) 20% discount won't get your offer looked at by the seller.  The only people getting 15-20% discount here are usually paying cash and/or waiving various contingencies (or dealing with an inexperienced seller).  

My thought is if you are 100% confident in your property calculations you don't want to pass up a good deal because you are falling short of 20% discount. With Quads we can do more to affect ROI down the road thus reducing the affect of not getting the 20% discount on the property.

Brandon's "rule" per say is good ear mark but it's really more of a guideline.  If you're market it is very competitive start with a discount between 15 and 10% see if the seller counters.  

 Hi Corina! Thanks a lot for your response! It does make a lot of sense, and I really appreciate :) We will try to apply common sense and use Brandon's "rule" as a guideline. 

Good to see you are from Wisconsin. Last week a met with an engineer, from a partner of my 9-5 job, and he lives in the Vancouver area. He is now selling his house and going north. He bought a piece of land for $40000 and he built a house in it. He mentioned that house property taxes are increasing there.

You mentioned that with quads we can do more to affect ROI. Is that because with quads we get more cash flow?

Thanks :)

Originally posted by @Scott Schultz :

if you are paying cash or getting fixed full term financing its ok to pay closer to market but you wont get that equity you need to weather a storm if your note needs to be renewed in a down market cycle. this is why the right financing is key.  Personally im pretty much watching and will buy if a good deal shows up but I will not over pay, and preparing to buy like mad when the market tanks again.   Just my thoughts

 Hi Scott, thanks for your input! When you say "the right financing", you mean as low interest as possible, no? I agree that if we get into a deal expecting to do a refinance, right now with interest rates not moving or even going up, it is a risky scenario. We are only looking at cash flowing quads though, without investors right now. I guess if we end up needing investors at some point, then we will need to have the re-finance or even the selling of the property in mind, which means that a down market is risky.

Thanks again!

@Victor Gomez The terms of your financing matters, interest rate is less important than terms, everyone only talks about full term fixed (I.E. 30 or 15 year secondary market) that fine if you qualify, have the required reserves, ect. but in the real world or when you have more than 10 mortgages or have your money deployed instead of sitting in a bank account, many of us choose commercial financing (aka in-house or portfolio loans) they are usually lower cost to close, slightly higher interest, and terms of 3-5-or 7 years with amm of 15-25 years depending on the bank. my morgages ar $50K and below each its hard to spend $3500 to close a note for $50K for a 15 year fixed on the secondary market, when it costs me $600-700 to close a commercial loan I dont need the reserves and the income from rent is what qualifies me for the loan. BUT the risk of needing to renew as markets change are real, I never borrow more than 60% LTV (thats where im comfortable my banker will give me 75-80% if i want it) lets say the market starts tanking this year and I have notes due to renew next spring, and values drop, there is a risk my loan to value will not be adequate to renew the loan if I borrowed at 80% but at 60% i have some insulation from that. I also have rate risk at renewal, as it adjusts to market. Sounds risky right? Maybe a little BUT you can borrow in your LLC's name, and the loan can be done quickly, and I dont need massive cash reserves on top of my down payment in the bank for each purchase. and in my case, I buy with cash (or line of credit) rehab and then do the final loan using the additional equity as my downpayment. here is an example, I buy at $30K do a $15K rehab (all in $45K) it appraises at $85K I take a loan for $50K (59% LTV) pay my line back and pocked an extra $5K. now with the 4 units you are looking at this will be harder to do, and the numbers will be bigger, but its still an option. my point is "the bset loan" is not all about rate, terms matter as well. if you can get the long term fixed loans, get them, but just know there are may other options that may work for you as well.

Markets are very effective to correct prices both ways - overpriced or underpriced. As everyone is aware we are currently in a sellers market with 2-3 times more buyers than sellers (just my observation, not based on stats), short days one market (often under 7), almost no expireds - why would a seller take 20% less than FMV?

It is still possible to get some discount. Even on MLS. Typically there are circumstances around the property or the seller that will provide an angle. But it's not a deal served on a silver platter, you will have to work for it. Listings with poor pictures are always worth a closer look. Properties with flaws that are less relevant to a renter than a buyer or easy to correct. Combine that with a strong offer, negotiate well and you will pick up a few % below FMV - probably not 20%, but some. The good news is that in a market like we have right now appreciation may help you close the gap in a couple years (as long as you don't get caught at the peak). This is the flip side to a market where you can negotiate 20% you will probably not see much of appreciation. In a way the market is like the wind, much easier to sail with it than up against.

Originally posted by @Scott Schultz :

@Victor Gomez The terms of your financing matters, interest rate is less important than terms, everyone only talks about full term fixed (I.E. 30 or 15 year secondary market) that fine if you qualify, have the required reserves, ect. but in the real world or when you have more than 10 mortgages or have your money deployed instead of sitting in a bank account, many of us choose commercial financing (aka in-house or portfolio loans) they are usually lower cost to close, slightly higher interest, and terms of 3-5-or 7 years with amm of 15-25 years depending on the bank. my morgages ar $50K and below each its hard to spend $3500 to close a note for $50K for a 15 year fixed on the secondary market, when it costs me $600-700 to close a commercial loan I dont need the reserves and the income from rent is what qualifies me for the loan. BUT the risk of needing to renew as markets change are real, I never borrow more than 60% LTV (thats where im comfortable my banker will give me 75-80% if i want it) lets say the market starts tanking this year and I have notes due to renew next spring, and values drop, there is a risk my loan to value will not be adequate to renew the loan if I borrowed at 80% but at 60% i have some insulation from that. I also have rate risk at renewal, as it adjusts to market. Sounds risky right? Maybe a little BUT you can borrow in your LLC's name, and the loan can be done quickly, and I dont need massive cash reserves on top of my down payment in the bank for each purchase. and in my case, I buy with cash (or line of credit) rehab and then do the final loan using the additional equity as my downpayment. here is an example, I buy at $30K do a $15K rehab (all in $45K) it appraises at $85K I take a loan for $50K (59% LTV) pay my line back and pocked an extra $5K. now with the 4 units you are looking at this will be harder to do, and the numbers will be bigger, but its still an option. my point is "the bset loan" is not all about rate, terms matter as well. if you can get the long term fixed loans, get them, but just know there are may other options that may work for you as well.

 
Hi Scott! Your message was an eye-opener for me. It took me some time to understand because I had no experience with commercial loans, but now I am aware of them, the requirements such as max loan=net worth guarantors, recourse vs non-recourse, 5-years term vs 10-years terms with the ballon payments, and all of that.

What I did not quite understand is when you said "my morgages ar $50K and below each its hard to spend $3500 to close a note for $50K for a 15 year fixed on the secondary market, when it costs me $600-700 to close a commercial loan I dont need the reserves and the income from rent is what qualifies me for the loan." What makes you qualify for the loan?

Also, how can you get commercial loans for 30K loans? Aren't commercial loans for 5-unit or more apartment buildings?

Thanks a lot for your example, it was really cool. I am just trying to make the same eaxmple in my mind with a 60+ unit building.

Thanks a lot for the awesome help :)
Victor.

Originally posted by @Marcus Auerbach :

Markets are very effective to correct prices both ways - overpriced or underpriced. As everyone is aware we are currently in a sellers market with 2-3 times more buyers than sellers (just my observation, not based on stats), short days one market (often under 7), almost no expireds - why would a seller take 20% less than FMV?

It is still possible to get some discount. Even on MLS. Typically there are circumstances around the property or the seller that will provide an angle. But it's not a deal served on a silver platter, you will have to work for it. Listings with poor pictures are always worth a closer look. Properties with flaws that are less relevant to a renter than a buyer or easy to correct. Combine that with a strong offer, negotiate well and you will pick up a few % below FMV - probably not 20%, but some. The good news is that in a market like we have right now appreciation may help you close the gap in a couple years (as long as you don't get caught at the peak). This is the flip side to a market where you can negotiate 20% you will probably not see much of appreciation. In a way the market is like the wind, much easier to sail with it than up against.

Hey Marcus,

Thanks for the insights and the suggestions. I can tell the experience you have. Thanks for sharing the knowledge. I will make sure to hit you up if I ever go to Wisconsin to invite you for a beer ;)

Best,
Victor

@Victor Gomez When I say Commercial Loan, I am working with the "Commercial Banker" at the bank, they work with Businesses of all sizes and loans of all sizes, my Business is Single Family Homes, they will do any loan amount as long as the collateral is there, and your DSCR is adequate for their guidelines. By working with the commercial banker i can buy in my LLC and dont need all the red tape and qualifiers required by the secondary market.

regarding secondary market loans, I have asked many bankers about secondary market financing of rental property, there are some universal requirements, on a cash out (what i would be doing)  I would need to have the property in my personal name for 6 months ore more, I would need cash reserves in the bank to cover in the event of vacancy,  would be limited to generally 10 loans. and the cost to do the loan is about $3500 so when i need small dollar loans, spending that much just to close a deal, i can absorb some rate risk over a shorter term deal. I hope that explains things a little better.

Circling back to original question, is it possible to get 20% off deals in this market? I think so its just really hard and sometimes its ok to take a deal with a good return if your cant find one with a great return. I do try to buy at a discount whenever I can. One way to do it is to buy a fixer upper and create equity by fixing it up, which is essential what Brandon does with BRRRR. If you buy a property that needs 10K work for 70K and it has an ARV of 100K you have 80K in a 100K property (20% discount) Another way is paying cash as noted above, Another way is by aggressive marketing ie yellow letters to find deals where other people arent competing with you. I am sure there are plenty of other options as well.

With Quads because its larger multifamily you could do some things that would increase your income more easily than a SFR or duplex. I.e. Extra locked storage units for a fee per month; charge for off street parking, laundry facility on site, charge premium for first floor units, etc. That's just off the top of my head.

There are a lot of creative ways to increase your income on a Quad you just have to think outside the box a little.  

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