Purchasing $2-3mil Property w/ ~10% Down Payment?

Question

I've listed for sale my current four-family property with the hopes of doing a 1031 exchange for a MUCH larger property.  I would like to attain the largest size property I possibly can 50-75 units or $2-3 million.  However, I think I'm dreaming a little to big in regards to what I can afford to buy.

If I were to sale my current property, I would profit about $225 after paying the balance on my mortgage.  I also I have a 100k HELOC on the current property.  However, I'm assuming any balance would be due upon selling the property.  I also have about $75-100k in available cash for a total of about $300k for a down payment on my next property.  What are my options for attaining the desired 2-3 million dollar multifamily property?

Are there commercial lenders that would finance a deal like this with 10% down?  I look nearly perfect one paper, -ie, 800+ credit score, high income, great loan payment history, ~$250k in retirement funds I'm hoping to show at reserves, etc.

I've heard of bridge/ gap loans. Although my understanding of them is limited, it sounds like these are similar to hard money loans.  High interest rates and really intended for short periods of time.  These don't sound ideal for what I would need to do.

Seller financing sounds like it might be possible.  However, it's largely depended on the lender and what they would allow.  Also, the new Dodd-Frank rules may restrict these transactions.

Any other ideas?  I really in the information gathering and due dilegence stages.  If I were to sale my current property I would really like to have my best lending options lined up so I can plan ahead.

Joel Owens · Answer

Complete seller financing on  a deal with some down is very tough to find these days.

Back in 2009,2010 it was easier as banks were not lending much and if sellers wanting to sell they had to do things out of the norm.

You can still find owner financed deals but it's more of older people retiring and they do not want a tax event or it's a harder to financed property like a mobile home park etc.

Do not expect super high quality assets to be owner financed. The best you can hope for in that case is a seller held second. In really hot markets the sellers will not even hold a second.

The key with owner finance or holding a second is that you still have to get  a deal. You might pay a little more for the property than paying cash or taking the seller out completely with some cash and the rest financed by a bank.

What you can't do is overpay by a wide margin to get the seller financing or the second. I see sellers try to pull this a lot. They say I will do this and this if the price is much higher. That defeats the whole purpose because you are buying into bad leverage or a complete owner finance deal where you stand to lose money.

it's a dance between seller and buyer wants to see if a deal can be had that works for both parties and many times it does not. It's kind if like the show Pawn Stars where sellers will come in and give all the reasons they want XX for the object. The buyer the pawn shop responds they can only pay Y because of this, this , and this. Only so many deals maybe 2 or 3 happen and the rest walk out. By the pawn shop buying right they win more times then they lose and it keeps them in business and profitable. It's the same with real estate investments.

Joel Owens · Answer

When going for the second  a 10 year term fixed is ideal with a low fixed interest rate and 25 to 30 year amort.

Of course the seller wants the opposite with a 3 year balloon. In my opinion anything for a seller held second for 1 to 3 years is a horrible deal unless you know you are stabilizing and reselling then it might work.

The reason is one to three years simply isn't enough time to pay down the second. The minimum I would take is 5 years and better to push the seller to 7 years fixed. A seller holding for only 12 months just to get you leveraged for only a short term is a recipe for a disaster.

There are many various ways to partner. Usually you have ownership of so much equity, along with the payment income stream based on your contribution. The exit plans and how decisions are made regarding the entity is spelled out in your attorney created operating agreement.

You can partner to buy multifamily, triple net, office ( whatever). With triple net you are more protected with a credit rated tenant paying the rent. You do not do anything with the property versus multifamily the partnership has to watch over the management company and review the reports to make sure the investment is performing as anticipated.

Jon Holdman · Answer

@Rick L. you could potentially bring your family member on as an equity investor.  The two of your form an entity, each puts in their own cash and the LLC buys the property.  If you're in 50/50, say, you would split profits 50/50.  You may be able to collect a management fee as a cost, so it would come out before profit is calculated.

Lots of potential downside to bringing on a partner.  Maybe it would be better to buy a smaller property.  Income properties really are a cash on cash game, so your returns may not be much higher on a bigger property with a partner than on a smaller property.

Joel Owens · Answer

Hi Rick,

I get this asked when people call me wanting a large multifamily at a 10 cap.

After we go over that it will be a C property and work through the discussion I tell them going after a B property and location for an 8 cap with a seller held second will yield the cash on cash return they are seeking.

Not every lender will allow the seller held second and interest rates are rising.

If you buy a value add needing some turn around there are loans at low rate around 5 for short term financing that is interest only payments. This allows the lowest debt service while stabilizing and gives off the most cash flow to turn around.

Large properties 75% ltv with a seller held second of 10% for 85% cltv.

If you take 2 million at 15% that is 300k so you do not have enough to take down that range. Might look at 1 mill to 1.5 million. Problem is at that level a bunch of lenders go away with the best loans. I have a couple of clients now looking at pooling similar funds to go after a much larger apartment building with shared ownership. The loans and terms are much better and the higher purchase price allows a better building in a better area. Some people do not want to partner so that is something you have to answer yourself.

Jay Hinrichs · Answer

Rick L.

Dodd Frank would not come into play with what you want to buy those are strictly commercial bizz purpose loans.. I am no commercial property expert but from what I know most lenders require 25 to 40% down.. Not sure your retirement funds would be counted as reserves as you may not have ready access to them.. Not sure on that one.. but you should check.

I think you could easily buy seller carry back deal with a lower class property anyone with A class or solid B will just sell to a qualified buyer.. But those that have hard to manage C class will look at those deals for sure.

Just be careful don't lose your money on something that looks great on paper but is a bitch to manage and you end up losing your cash and the property.. happens all the time in low end tough to manage inner city C class properties.. Just drive around Memphis one day you will see boarded up apartments.. You will not see anything like that in 95% of the west coast for example.

Rick L. · Answer

Thanks for the suggestions @Joel Owens  Realistically, it sounds like seller financing is my best approach.  I know a low, long term fixed interest rate is ideal; but what is coinsidered a fair interest rate to pay for seller financing.

Rick L. · Answer

Thanks for all the great responses.  I would also consider just taking the capital gains tax hit and implementing the cash in other ways.  @Joel Owens I don't know much about shared ownership.  Where could I learn more about this and what are the usual minimum funds needed?

Rick L. · Answer

Thanks for your response @Jay Hinrichs   I figured the retirement funds were a long shot, but wanted to provide as much financial information as possible.

The properties I'm interested in are B class areas.  Places I would feel comfortable living in.

I have a family member that has a fully paid for single family rental home in California that would probably appraise at $500-600k.  I'm wondering I could get them to do a HELOC on the property and use those funds to bridge my down payment shortfall?

Purchasing $2-3mil Property w/ ~10% Down Payment?

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