Second Fourplex - 14 days after our first property.

93 Replies

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Machesney Park.

Purchase price: $240,000
Cash invested: $63,500

Contributors:
@Tara Shedden

Self-managed fourplex; landlord pays water, sewer, trash, landscaping, snow removal.

What made you interested in investing in this type of deal?

This was the second property we purchased; closing just 14 days after our first property.

How did you find this deal and how did you negotiate it?

It was listed at $250,000 and the owners were selling another fourplex on the same street. We offered $240,000 each for both.

How did you finance this deal?

5-year loan with a balloon payment at 5.555%, 25% down.

How did you add value to the deal?

It was our first deal and has cashed-flowed since day one. It is also gave us experience with property management.

What was the outcome?

We are still cash-flowing and looking to scale our business.

Lessons learned? Challenges?

We attempted to renovate a vacant unit. But it took too long and cost too much. We would have been better off just renting as is and getting a bit less in rent. However, it was an invaluable learning experience. I would love to post that everything went awesome... but that wouldn't really benefit anybody.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

We worked with the owner of Key Realty, John Murray on this deal. He was instrumental in getting us to jump into real estate investing.

I would think an investor and even homeowners would avoid anything with a balloon payment. 

What will you do when that time comes? 

If you sell before then what will happen? Will you still be hit with a huge balloon?

I'll have to be another person wonder why in the world would you do a balloon payment on a small MF, especially on after 5 years. The interest rate isnt even good. On top of doing a 25% DP.

Curious about the rent amounts collected per unit. Proud of you guys for jumping out there. As far as the balloon, I am sure that the bank will refi if it goes well. I have used the same strategy before. Small community bank, balloon after 5 years. They allowed us to refi for $700. All went well!

@Henry, yes what is his exit strategy should the lender not want to renew it. 

However, as other's have stated, this type of property should qualify for a longer term, lower rate loan.
It's not a 500 unit complex, were you might find that type of financing.

Originally posted by @David Tambellini :

Why a 5 year balloon loan?  What's your plan down the road?

We are investing to buy and hold; we plan to refinance before the balloon payment. The bank that gave us this commercial loan looks at the debt-service cover ratio (DSCR) and didn't care that the down payment was a gift from a family member. As long as we are managing the property and getting rent, they will refinance the loan. It is a modest fee of $400 to do this, if we keep the loan with them. We will also look for a 30-year fixed rate if possible. The property is held by our LLC so I do not believe we can qualify for Fannie or Freddie backed loans.

Originally posted by @Henry Kaldenbaugh :

@Robert Shedden , I disagree with @Nik Moushon and @Jason R.   If they are cash flow positive at 1.3 rent to loan or better, your lender will have no problem renewing your mortgage.  Lenders want the option to review the history of the properties before they commit again.  Lenders love to renew with good history.

 Thats assuming you can predict the future and maintain a good rental history. 

But lets assume he has perfect rental history in 5 years and they want to renew. Why would you get a loan for 25% down at 5.55%? That is NOT a good deal considering this is not a mandatory commercial loan.

Maybe it will make sense once the OP explains his thinking. But from my perspective right now the financing is suspect to me.

EDIT: Since posting the OP has replied. He has a plan. Not something I would personally pursue but at least he has a plan to refi. If your numbers work with this then more power to you. Best of luck.

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This post has been removed.

Originally posted by @Henry Kaldenbaugh :

@Nik Moushon,  if you can do better than 5.5% for 5 years go for it.  That's a great rate here in the southwest.

 I wasnt arguing for better rates at 5 year. My whole argument was why do that type of financing at all. You can easily get a 30 yr fixed for well under 5% for this type of rental. I never understood, and still dont, why he would even bother with the 5yr balloon to begin with when this rental qualifies for a more traditional loan.

Originally posted by @Nik Moushon :

I'll have to be another person wonder why in the world would you do a balloon payment on a small MF, especially on after 5 years. The interest rate isnt even good. On top of doing a 25% DP.

We went with a commercial loan from a local bank. The down payment was a gift from a family member and we purchased it using our LLC. This was our second purchase in our real estate investing journey. It is not a home run deal, but it did get us in the game. Now we are cash flowing, getting invaluable experience managing 8 units, and on the hunt for a BRRRR deal. If I had to do it again, I would have changed a few things... but at least I didn't suffer from analysis paralysis. I have spoken to a few local investors and they have congratulated me on jumping in. They know several other folks that have been talking about pulling the trigger for years, but have never actually went through with it...

Hi Robert! Thank you for posting your experience. It is awesome reading that you purchased the second unit from the same seller. We actually had the same experience here in Cincy so now we always ask sellers if they have more RE that they would consider selling. I wonder how often this happens in real estate. 

Originally posted by @Robert Shedden :
Originally posted by @Nik Moushon:

I'll have to be another person wonder why in the world would you do a balloon payment on a small MF, especially on after 5 years. The interest rate isnt even good. On top of doing a 25% DP.

We went with a commercial loan from a local bank. The down payment was a gift from a family member and we purchased it using our LLC. This was our second purchase in our real estate investing journey. It is not a home run deal, but it did get us in the game. Now we are cash flowing, getting invaluable experience managing 8 units, and on the hunt for a BRRRR deal. If I had to do it again, I would have changed a few things... but at least I didn't suffer from analysis paralysis. I have spoken to a few local investors and they have congratulated me on jumping in. They know several other folks that have been talking about pulling the trigger for years, but have never actually went through with it...

 Really, congrats! Great to see people moving forward. I just found the financing a bit out of the ordinary and wondered why. I'm glad it still all works for you though and hearing that you plan to refi soon-ish. Best of luck!

Originally posted by @Barbara Stapleton :

I would think an investor and even homeowners would avoid anything with a balloon payment. 

What will you do when that time comes? 

If you sell before then what will happen? Will you still be hit with a huge balloon?

It's a commercial loan and we will definitely refinance before the balloon payment. We can easily refinance with the same bank, or shop around for a better rate. We will have roughly 48% LTV in 5 years and may even pull some money out...

Originally posted by @CARLOS ESPINOZA :

when you looking to buy a multi family home  where you look or find them ?

 We found this one just by talking about real estate to our friends and at social gatherings. My wife and I were at a school fundraiser and we were telling an acquaintance about our plans for real estate. I had been on BP for several months are gave her a very brief description about our plan to buy and hold and keep adding cash flow so we can reach financial freedom. Our acquaintance said knew some else that talked about real estate the same way I did. She introduced use to a broker who owns his own firm. He happened to have two fourplexes just hitting the market. He took us under his wing and now we own 8 units...

One option in the future people use as a "loop hole" is to purchase the property in your personal name using a residential loan then quit claim deed it into the LLC after purchase. Technically, other members please correct me if I'm wrong, the bank is able to pull the loan if it is switched to an LLC but in my lawyers 20+ years of experience he has never seen a bank search for this once the loan is originated. Worth a chat at least.

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