Buying 2-4 unit properties, when is a package deal worth it?

Question

I'm about to have ~100k in HELOC funds.  My plan for awhile has been to buy cash flowing 2-4 units one at a time with my HELOC, turn around and do delayed financing, finance 100% of the purchase price, and do it again, and again, and again till I run out of conventional mortgages.

Then I listened to the second Grant Cardone podcast, podcast 250.  He says go big or go home!  Don't let your budget limit your buying, go BIG BIG BIG!!!  This got me to thinking, why not commercial?

Right now I'm looking at a couple larger portfolios of buildings, both of which have several 2-4 unit properties.  Some of them seem solid and like they'll cash flow.  Both sellers have mentioned they will break up the portfolio.  Assuming that:

• I find a few cash flowing 2-4 units in the same portfolio I'm interested in
• I believe cash flow can be increased in these properties, and expenses can be decreased

At what point am I better off taking my HELOC funds and using them as a downpayment on a commercial loan instead of getting them one at a time through delayed financing?  I know conventional loans offer better terms, but if I'm buying in bulk I'll likely be able to get better deals.  Also at some point not paying the closing costs on each conventional loan will be a fund saver.

I'm happy to elaborate, but in short, at what point should one try to buy numerous units at once with a commercial loan instead of one at a time with conventional mortgages?

Pat Jackson · Answer

Great idea, looking into it now!

Matt K. · Answer

Didn't say deals don't exist, but the reality is it's going to be extremely difficult to find MFH (which everyone wants) at below appraisal costs. What makes you special that you're getting a 25% (likely more) discount.

Maxime Tremblay · Answer

Soooo true. the larger companies will have people they can sell to without hitting the market in many areas

Pat Jackson · Answer

Come on man, this is BP!  You can't say that all of the US = the current market.  There are deals to be had!

Matt K. · Answer

In theory this works, but in the current market it's HIGHLY unlikely it'll work out like this at all. If you do actually find something and are able to buy it for about 75% of appraised value chances are it's going to be in rough shape and in need of repairs OR it's going be in a rough area so it'll be harder to manage. Then you have to account for closing costs probably to the tune of couple grand each time, then costs to get the unit rent ready, and carrying costs... probably going to eat up more then you'd think.Now to go on the commercial side it's probably even worse. Unless you're networked you're getting leftovers (or you get lucky and find someone retiring). Cap rates are pretty low right now and the higher cap rates come with more risk... and if you're just starting out that could be bad.Not trying to talk you out of anything... deals do exist, but it's likely going to move much much slower than you'd expect. You'd probably be best served by sitting down with a investor friendly loan officer/broker and coming up w/ a plan. See what your max limit is for lending and go from there...

Cara Lonsdale · Answer

I don't think either strategy is better than the other as they set out to accomplish different things, but here are a few questions/thoughts to consider....

Regarding getting a better deal in bulk - this isn't always true.  Sometimes it's just an investor liquidating a portfolio, but not discounting.  So that isn't a given.

The conventional method will give you more flexibility when it comes time to sell.  If you have them bundled, it is somewhat of a process to untie 1 or 2 units to sell them.  So, you may want to consider how you would handle a sale.

Conventional is generally (if not always) going to give you better rates and terms.  With that said.....have you considered purchasing the whole portfolio, but obtaining separate conventional loans on each of the 1-4s?  As long as any 1 parcel is 1-4 unit, you could close them simultaneously, or in short succession.

This would allow you to obtain the portfolio at a discount (if one is offered), AND receive the conventional financing.  Regarding higher closing costs, many title companies can put you on an investor rate for doing multiple deals, and many of the other fees associated are loan amount specific, so whether you do them all at once, or individually, it's the same.  (IE 1 point on $1MM is the same on 1 property as it is on 10 $100K properties.)  Your prorates should all be the same too.  So, really it would just be about the title fees (and title insurance).

Mike Hottinga · Answer

I am in a similar situation as you in that I am looking for a 2-4 unit property in my city to house hack, but I would be more than willing to buy a commercial level property like 4 duplexes. The way I see it commercial deals are easier to buy and less headache, 1 deal vs 4-6. I also like how commercial deals are based off of property income, not on the duplex around the corner (comps) that someone paid to much for and is banking on appreciation.

The real question is what is your personal end goal in all of this? Is it to own 25+ units to quit your job this year or is it to build mostly passive income in addition to your job for the next few years and have 10 units in 5-10 years? IMO there is no right for wrong answer, it is what ever you feel comfortable with. If I were you, I would build a relationship with a commercial lender and have this option in your tool box if an opportunity arises.

Conventional: 2+4+2+4=12

Commercial: 8+4=12 or 12=12

BTW podcast 250 was awesome for the reason you stated, thanks BP!