11 Unit Multi Unit Loan, Where to go?

26 Replies

I'm having a tough time figuring out where to go for financing.  I have the opportunity to purchase an 11 Unit multiplex that all have 1 bedroom/1 bath in them and rent for $600 a month. It's an old motel that was fully converted about 10 years ago with all new plumbing, electrical, roofing, kitchens, etc. It is currently fully rented and has been for the last two years straight.  

The asking price is $275,000 and I have up to 25% of the amount through personal funds and private money. I'm assuming I need a commercial loan because of the amount of the loan. Problem is my DTI is only good for another loan up to $100k as my wife and I just purchased a new house last year and we're almost done clearing out all our other payments (Cars and student loans) Any help would be greatly appreciated. My first thought was to go interest only for two years and build up the financials but I'm not sure.

Purchase Price: $275,000

Down Payment:  $68,750

Financed Amount: $206,250

Monthly Cashflow: $6,600 ($600 Per Unit, could easily raise to $650 bringing cashflow to $7150 Per Month)

Taxes Per Year: $2950 ($245.84 Per Month)

Heating Per Year: $9,000 ($750 a Month)

Electric Per Month: $800

Insurance Per Month: $550 (Estimated at $50 a unit per month)

Repairs (5%): $330 Per Month

Property Management (10%): $660 Per Month

Capex (5%): $330 Per Month

Total Costs Per Month without Mortgage: $3665.84 

The repairs I estimate to be little and I'm more so banking that and capex into a fund to do some updates during turnover as well switch all the units to their own electrical meters.  

@Cody DeLong

I wonder if it is due to the lack of experience in the multifamily space. I am new to the multifamily space but the numbers seem good but maybe developing relationships with other banks and having a list of partners who you be utilizing to show you have a full proof plan.

Let me know if I can help in any way! Want to make sure you can close ASAP!

@Mike Taravella The numbers are good to me as well.  I also think I'm pulling out more then I need to for repairs but I'd rather be safe then sorry.  I agree on the relationships for sure, I'm speaking with Kevin above and am going to reach out to some local banks.  I don't have it under contract yet but want to get an idea of rates before I fully dive in.  At the very least get a rate from someone and then base my profit off that and see if its still worth it.

@Cody DeLong

Are these numbers estimated or actual from the owner?  You can request to get actual numbers and copies of 1-2 years of their bills to make sure the expenses are actual.  Never deal with projections.

I do see some expenses missing, don't forget about the Water bill and Trash bill.  Also since you are in Maine I'm sure you'll need some funds for snow shoveling or plowing.

I see that you are looking to individually meter the electric so your heating bill goes down.  Make sure you check what rental units go for with no heat.  You might find it harder to rent units with no heat and you actually might not be able to charge $600 but $550.  Its all what your market can handle.

 If the property makes positive cash flow I don't see why you would have any issues if you have 25% down.  The amount of the loan is not why you would need a commercial loan, its the amount of units.  1-4 is residential, 5+ is commercial. 

As far as lender, I find it much easier to deal with a small local bank that has less then 10 branches.  I've tried dealing with large banks like PNC, Chase, Northern Trust and they are not willing to fund as easily.

@Peter S. These numbers are actual from the owner, I'm getting the documentation this coming week from him.  All the heat is propane so I'd be doing the electrical to get my electric bill down.  But honestly I could raise the rent $50 and still be fine, the rent is under market rate right now.  The Trash you are right I am missing that.  The plowing and shoveling as well because the cashflow is so good I can deal with that on a monthly basis. If my profit goes down during the winter months, thats fine with me.

Thank you on this.  Im heading into this local branch tomorrow for some help.

As stated, add the water/trash/lawn/plowing.  A few more things to consider:

1. I would probably increase the cap ex estimate given the number of units.  It isn't like a single family home that has one family.  You will have many tenants, some of which will likely be harder on the place than others.  

2. You are not accounting for any vacancy.  It is not realistic to assume there will be none.  

3. If you plan to transfer the electric costs to the tenants, will the increase in rents and passing of electrical costs be supported in the area?

4. For property management, does the 10% include the cost of replacing a tenant?  If a place charges 10%, they might also charge 1/2 or a full month lease to replace the tenant as well.  Might want to factor that in with the estimated turnover you expect in a given year.

As far as financing goes, I doubt you will find a lender to do I/O for the first two years. Your DTI will not matter as much when going for a commercial loan either as they look at your DSCR. If your DTI is high, it can make your global DSCR look bad, but some lenders only look at the DSCR on a given property.

@Cody DeLong your DTI shouldn't really matter since you'll be getting a commercial loan. Have you talked to any local banks / brokers yet? Usually the best deals are with smaller credit unions / banks. I would just start calling around and see what programs they have.

Contact Gary at the Auburn branch of Camden National Bank.  If he can't help you, contact me and I might buy it and give you a finder's fee.

@James W. thanks for mentioning all these things.  There is no water/sewer since it's all well water and a septic.  The septic I'll have to account for eventually replacing I'm sure.  Note I haven't reached out to any property management places in that area yet so I'm not sure the rate so 10% is just a high guess.  I know with more units some places charge less % then like you said half first months rent when they place a tenant. 

If I increased rents I wouldn't switch the electrical over, maybe I'd look at solar to help offset the costs.  It's 7 acres of open field land it sits on.

Vacancy I can count on being really low and I will deal with it when it happens.  However there is always a signs outside that says renting now and I was told he gets at least 5 calls a week by people just driving by needing a place even though he is completely full.

@Amy A. Thanks for the contact.  I'l let you know if I don't do it.  BTW I saw a place yesterday off market at 57 Pitt Street in Portland.  Right next to USM.  It needs more work then I want to put into it but it's a two unit 1/1 downstairs and 4/1 upstairs with a 3 car garage.  Old 1900 building with amazing woodwork.  If you're interested I can give you the contacts number.  They have two people that are interested but they are unsure what they want to do as the sisters who inherited it are emotionally attached but it has to go (Taxes are $5900 a year).  Anyways check the address and I can connect you with the husband of the wife I got ahold of and showed it to me.

@Amy A. Also Gary left Camden.  Just tried to get his email and couldn't find him on the site and looked and his Linked In says he's looking for a new opportunity.

Cody:  I've moved out of the area but did do business with both Kennebec Savings Bank and Norway Savings...Never spoke to them but I have heard from several right in your area the commercial group at Gorham Savings was a good one.

I'd make sure you do extra research on being able to raise the rents as you discuss:

1) If you break up the electric that in affect raises the rent

2) In many areas 1 br suffer from a lot of tenant turnover which is the most expensive part of this business...the current landlord may have rents where they are for that reason...trying to mitigate vacancy loss by leasing slightly under market and screening for long term tenants (Hopeful)

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@Cody DeLong Hey Cody, I'm surprised to see that no one has even mentioned how amazing this deal is! 😲

Its a 13 cap and CoCR is 28% using a 55% Expense Ratio. 

Oh, I got too excited for you and forgot to answer your question.

Yea, as for the loan, get on the phone with some commercial banks and/or even get a mortgage broker (I can refer you to one). And if these numbers are accurate, I'm sure you won't have much of an issue in terms of getting financing. 

Please keep us updated! Goodluck. Thanks! - Ola 

@Ola Dantis i don't know if I would talk about how amazing the deal is until he is able to add in the missing pieces and gets solid numbers.  The numbers are stated by the owner which can be completely wrong, so he needs to do more due diligence on the deal.  

I am looking at a place that is somewhat similar that is is not at all what it seems as the utilities are $2,100/mo and are paid by the landlord.  The only way the place I am looking at would be a deal is if it would be possible to pass back roughly half of the costs to the tenants in the form of increased rents or splitting utilities.  

@Cody DeLong call your local banks and credit unions and ask for a commercial real estate lender. You will want to pin down those numbers a bit better than what you have and get together a business plan for the property as well as you financial statements, including tax returns, personal financial statement and a schedule of real estate owned. The bank will look at you DTI, but will be looking closely at the property itself. Check out the article that I wrote: https://www.biggerpockets.com/blogs/10145/72001-ge...

@James W. There are no missing pieces.  Just got everything I needed and reran the numbers.  What he said was correct.  And I also have no factored in $150 a month for plowing and mowing.  I may actually save the $$ and go mow it myself.  The deal is pretty solid and I'm seeing it again Sunday and if all is good we're dong a bill of sale.

Everyone else I've reached out to 4 different banks and once I have the bill of sale will dive in deeper.

When shopping around commercial loans inquire about a construction loan. Smaller banks that are portfolio lenders will probably be your best bet. This way you can include repair costs with the purchase and have them financed all together. Since you seem to be worried about potential repairs this can cover any unforeseen expenses that creep up in the first 6-12 months of ownership. These loans are usually used for new construction so they almost always have a provision for interest only payments while you are taking draws on the repair money. It can be a lifesaver if a big expense comes up but you can always pay the full payment to pay down principle. 

If you don't use the repair funds by the allotted time it simply comes of your loan amount. Get bids for everything you can think of needing or wanting to be done and as long as you still have 20% of the total (purchase price plus repairs), the bank should give you the loan. I even got closing costs rolled into this type of loan when I did a refi last year. Just make sure you over-estimate all of the repairs. The bank won't care if you don't use their money but you will care if you run out before finishing the work. Of course this also will depend on an apprasial so keep that in mind. 

Seems like a good deal from the numbers you provided by the way. Hope it works out. 

@Cody DeLong Oh crap, Gary was my go-to guy.  I did 5 commercial loans with him.  Just emailed him last month.  I'm sure somebody will snatch him up and I'll go wherever he's hired.  It's time to refinance anyway.

You 11 unit wouldn't by any chance be in Windham?  

@Cody DeLong this is a great deal on paper, 28% gross income, 18% cap rate... I PM you.

Hi Cody —

Call Jere Shaw at Evergreen Credit Union. He is a commercial loan officer and they can get you an 80% LTV loan.

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