Northern NJ Multi-Family Advice - Creative Financing?

Question

Have an opportunity to purchase my first multi-family property off-market in a highly sought after area in northern New Jersey.

Property is a legal two family property with a third floor "border" apartment. 2 units are 3 BR 1 Bath and top floor is 1 BR 1 Bath.

Price for property is $900k. Rents are a little under market at $2,850, $2,850 and $1,300. Property taxes are $22,500 a year.

I am potentially looking to go into the deal with a partner and owner occupy both legal units while renting out the third border apartment. Would be looking to put 5% to 10% max down on property. My vision for property for both business partner and I would be to live there for 3 or so years and then rent out property full time. With my calculation, property would be net zero for cash flow and then flowing cash in 2nd year. I have no problem with this as I am currently renting and would rather be gaining equity than paying rent.

My question is regarding financing. It would be considered a "jumbo" loan because high amount. Conventional loan is looking for 15% down which leaves FHA route. Conventional requires the 15% because I exceed income threshold. FHA I can put less down but the PMI is killer. PMI for loan that amount would be around 1% (approx. $700 a month). That leaves a few option. 1) Go piggyback loan route and have 15% to 20% equity upfront 2) Go private financing route. Pay a higher interest fee but not deal with PMI. 3) Parents have offered to provide loan to me of $100k at approx 2% interest but then in turn gift me the interest every year (making it a 0% interest loan). I could put that into the down payment and then lessen PMI. In essence it would be a piggyback loan with a private lender for "second" mortgage.

Reason I want to go into property with partner is due to better/qualifying for financing on property this large and owner occupy both legal units.

Any thoughts?

Shawn Mcenteer · Answer

@Ben Trageser Low money down conventional is the way that makes most sense the majority of the time with house hacks...   How under market value are the rents?  3/1's getting above 3k/month can be rare, normally they require an extra bath but not out of the question.

Caroline Gerardo · Answer

#3  have every possible outcome - death, disaster, decline in value, loss of income... in your agreement, this is a marriage commitment to mingle your money and future.

Fannie Freddie FHA won't allow you to vest in LLC. SOME non-government private loans will.

Sprout will not do duplex or triplex on a 90 LTV

Angel Oak will at 6.125 plus big cost load this is not a rate quote or commitment to lend assuming your lowest middle score of the two is 760  They review and approve your LLC if they like it with to many conditions to type here

The third unit has zero value in a residential appraisal. The appraiser will write it as a duplex. Depending on what type of loan you try you may be able to rent it at closing BUT HOWEVER If it's not legal and you have a fire, or tenant complains to city, or the roof leaks... no permits... you can't rebuild... the city red tags the building. Lots of cities have granny flats, grandfathered in extra unit which are workable for conventional loans. You did not send a photo so it sounds like owner made a basement or attic and added gas lines and tied into the electric of other units and its funky, no?

The lender you spoke with is mixing up programs, the ins and outs do not mesh into one deal.

Ben Trageser · Answer

@Caroline Gerardo What do you mean by your third point? Can't take vesting into LLC? The third floor unit has comps listed on the street very similar in MLS (non-legal units). Lender was saying how appraiser would see these and could be considered in loan. Is that incorrect? I may be misunderstanding.

@Jonathan Greene Thanks Jonathan! Lender was stating how could go Sprouts or Angel Oak route and they could potentially provide around a 4.5% rate. If I could get this rate and no PMI then the cash flow really works.

Jonathan Greene · Answer

Who is willing to do financing like that off-market? You won't get the numbers correct if your only income on the property is the illegal unit which will not count so you will be looking at a much different loan product than you think. The rental numbers are actually pretty solid for NJ against the list price so there may be a deal in there somewhere, especially if it's in Montclair, but I am not sure who is presenting you the opportunity and why.

Caroline Gerardo · Answer

A number of layers to peel in your question.

1. Will a conventional or FHA lender use the 3rd unit as value? No.

2. Is the third unit to code? unknown

3. What is your long term relationship with partner? Who will be the controlling decision maker partner? You need one person to be 51% who can decide when to sell and how the money goes or you will have a disaster. Who pays for what ongoing. Would you marry the partner? ( meaning this in the long term commitment that you are undertaking needs to be more than money buds ).

4. Can't take vesting in LLC so you need to plan that.

5. FHA lender might make you rip out 3rd unit if there is any health or safety code violations and seller will not be doing you any favors or work in this hot market

6. There are conventional loans with 10% down and 10% HELOC IF both your middle FICOS exceed 721.

7. $720000 max first for most of New Jersey with $900000 sale price

8. Can't use rents on 3rd unit to qualify if not legal conforming- what does the 3rd unit look like, vital to know this to see if there is any wiggle room.

9 I have a 90% loan BUT rate NOT conventional  and no PMI, this would allow 3rd unit as is as long as no hazards.

I think FHA is your best starter point, depending on what the 3rd unit looks like. You will be stuck with 1.75% PMI not 1 until you can refinance. What are the possibilities city/county planning would let you convert 3rd unit to legal?   Then refinance conventional when you get to 79.99% LTV or ask parents to keep gifting annually to pay it down (what about partner?)