Expected rate of return if using 100% financing?

8 Replies

I am about to start looking for an 8-12 unit in a A-B+ area and will be using equity in other properties as the down payment(including closing costs) zero out of pocket. 

What type of return would most of you be looking for in a scenario like this?

Originally posted by @Russell Brazil :

Well if you have zero into the property, even a $1 return produces an infinite return.

 Fair enough. 

Let me rephrase it. 

What % above repair/vacancy etc would you be looking for?  

This may be a difficult question to answer without the actual numbers. 

Just trying to get an idea what people do that buy with 100% financing

You're using equity from existing properties and cross collateralizing it into the new property. This is technically zero down, but in reality, it's not. You should run the numbers with whatever actual down payment your lender requires and assume you're using your own cash to make the deal happen. Once you do that, you'll be able to see an actual COC ROI that makes some sense.

If you really are buying into a solid neighborhood like that, you can justify a lower rate of return with better quality tenants. For me personally, if I can get at or better than historic stock market rates on my money then it's a no-brainer. This might seem low for some people when they consider their returns, but if it's really in a quality area, then lower returns are OK with me.

The calculation becomes a bit more complex as you have to calculate the cost of two loans now. What sort of rate you looking at for both loans. Also does the loan against your first property impact your debt to income ratio which will determine you ability to get the second loan. 

Originally posted by @Matt Motil :

You're using equity from existing properties and cross collateralizing it into the new property. This is technically zero down, but in reality, it's not. You should run the numbers with whatever actual down payment your lender requires and assume you're using your own cash to make the deal happen. Once you do that, you'll be able to see an actual COC ROI that makes some sense.

If you really are buying into a solid neighborhood like that, you can justify a lower rate of return with better quality tenants. For me personally, if I can get at or better than historic stock market rates on my money then it's a no-brainer. This might seem low for some people when they consider their returns, but if it's really in a quality area, then lower returns are OK with me.

Thanks for the reply. That's what I was thinking as far as figuring out ROI. I also agree with a little lower return based on the area.

Originally posted by @Peter Fokas :

The calculation becomes a bit more complex as you have to calculate the cost of two loans now. What sort of rate you looking at for both loans. Also does the loan against your first property impact your debt to income ratio which will determine you ability to get the second loan. 

I do commercial financing so amount of loans is not an issue.  rate will be 4.5-5%

I agree with @Matt Motil even if you are buying this property with equity from another property it isn't necessarily no money down. The equity you are using for the loan has an opportunity cost which should be considered. That being said I would calculate what the return would be if you are putting money down and see if it works. I would also be looking for at least $100 per door per month minimum if you are calculating 100% financing.

Originally posted by @Joseph Weisenbloom :

I agree with @Matt Motil even if you are buying this property with equity from another property it isn't necessarily no money down. The equity you are using for the loan has an opportunity cost which should be considered. That being said I would calculate what the return would be if you are putting money down and see if it works. I would also be looking for at least $100 per door per month minimum if you are calculating 100% financing.

Thanks Joe.

I agree with at least getting the $100/door in a real quality area.  That $100 needs to go up as the area declines