Has anyone out there seen small - mid sized apartments being bought with 100% financing (ie 80% from a commercial bank loan, 20% from a home equity line of credit), and after all expenses, (including a property management, vacancy and repair reserves) and have good positive cash flow? If so, what area of the Country are you seeing this in? In my area it seems that unless its a rehab apartment project, you’ve got to put in some of you’re own cash to see positive ROI.
Thanks.
In most areas to pull that off like you said you are going to have to do some rehab, etc and pull the numbers up. You just aren’t going to find that many perfect rentals with no problems at a huge discount. They exist and you should keep an eye open for them but they aren’t common. Most of the time you’ll have to put in some elbow grease to make it work.
Rich is correct in everything he said. You should look for killer deals, but for the most part you will have to rehab the property to make a mid sized apartment be a great deal. Typically the more the units the worse the deal. There are so few mid sized apartments, so it’s difficult to find great deals.
You can use a HML to get 100% of the purchase price + rehab costs.
Example using a property with a ARV of $1,000,000
$400,000 purchase
$200,000 rehab
The HML will lend you 100% of the purchase and rehab expenses as long as it stays below around 65% of the ARV.
That’s what I figured. Thank you guys.
With a cap rate of 10, you should have a DCR of 1.25, depending on the interest rate. So then 100% would work.
1,000,000 Property
100,000 NOI
30 yr @ 7% w/ DCR of 1.25=1,002,050.45
At 8% you would need approx 11 cap.
Thanks again Mr Breeze. I have found one deal so far with an NOI cap above 10%, that didn’t need a complete rehab, but only minor updates. Its been under contract for 6 months as the owners have been non responsive. I’m going to take them to court to force them to comply with the contract.
Hi,
If I’m understanding you correctly, you are allowing for use of up to 20% from a Home Equity Loan. If that’s the case and you’re talking about something bigger than 20-30 units, you’ve got several options and lots of locations around the country.
As a former residential investor (now Commercial), I used to think that it would be easier and simpler to handle fewer units. However, as you noted, you can pay for property management and save on the headaches of having to do this personally. By getting hold of a great loan program, you can give yourself more flexibility – like long-term (35-40 year) financing, with low-interest, fixed-rates and NO personal guarantees at 85-95% LTV financing and then use your home equity line to button up the purchase.
However, I’d recommend a slightly different strategy from leaving the home equity line in place since they frequently don’t have fixed interest rates. That way you can better plan your structure for good, positive cash flows on a long-term basis. Let me know if you’ve got more questions.
Kelvin
I agree about the equity line. You may want to consider a 30yr fixed I/O. For the first 10 years the rate in the I/O doesn’t change. If for some reason you are still in the loan after 10 years the rate doesn’t change and it flips to a conv. am loan. The advantage to this program is anything you pay over the I/O payment goes to the principal and then it recasts. Now your I/O payment is lower so you pay the same amount and the additional goes to the principal. You wind up lowering your principal faster and the rate never changes.
Guys, thanks for the input. Kelvin, can you recommend a lender that can offer higher LTVs with low rates? Since I’ve started this thread, I’ve found good deals out there, that if highly leveraged (85-95 ltv) at a low interest rate would generate excellent cash flow. I found some programs out there that would do 95% ltv with a seller second, but the primary note rate rate was in high 9’s, as was the 90% ltv’s with no seller second.
Thanks.
Although cash flow is a determining factor for most commercial loan programs (and part of the recipe when calculating NOI, DSCR, etc.) but commercial has it’s version of a “NO RATIO” loan program (the loan program doesn’t quantify DSCR)…
A focus on rate in commercial transactions tends to take investors away from the all important number, ROI…if you get what you need/want from a deal, you can determine what I/R is needed.
Regards,
Scott Miller
What I think we ALL need to remember here is that we are in a FALLING market. The reason NOTHING cash flows is prices have risen at a rate that far outpaced rent increases. Think about it, did anyone here get a 200% pay raise at their jobs over the last 4 years? That’s how much MY home has appreciated in that time. The vast majority of Americans saw their REAL pay actually FALL. Anyone remember paying $1.50 for gas 3 years ago? When your income stays the same but the things you buy dramatically increase in price your taking a pay cut pal, whether you like it or not.
Right now in Southern New England you can rent a 3 bed 2 bath colonial, about 5 years old, in a great neighborhood, for about $1500 a month. To BUY that house it would cost you about $400,000, so let’s take a 10% down payment and go from there…
10% on $400,000 = $40,000 ( decent deposit for a family to save)
That leaves a balance or mortgage of $360,000 @ 7% for 30 years your payment is $2395/month
Add property taxes of about $300/month
and insurance of about $50/month and your total is…
$2745/month to buy the same house!!!
Now as a renter you have no maintainace costs, no property taxes and no insurance to pay. SO YOUR SPENDING 50% LESS renting vs. buying. And you still have your $40,000.
WHY WOULD ANYONE BUY???
ANSWER>>>>>>>>>>>>>>>
THEIR NOT!!!
My theory is we will see the price of homes drop until they revert to the mean, in other words, until they come inline with rents. This isn’t new thinking here, it’s what the ENTIRE real estate business is built on. People rent until they save enough money to buy because they end up with SLIGHTLY higher payments but own the property. The other way it can work is rents rise until people are spending as much to rent as buying would cost. THAT is not going to happen. The rental market is FLOODED with inventory, in my area rents are actually FALLING. There is so much to chose from tenants are MAKING OFFERS to landlords, AND THEY’RE BEING ACCEPTED!!!
None of this should surprise any of us. Property values rose to unsustainable levels because of absurdley low interest rates. When banks have to go back 40 YEARS to the last time rates where at those levels, something is wrong. If instead, rates had remained higher this BOOM (great word for it) would have been a gradual appreciation instead of a MANIA. And it WAS a mania, I had friends SLEEPING OUT on the front lawns of sales offices in Florida to buy pre-construction condo’s. They ALL still own 'em, and none of them are CLOSE to cash flowing but they can’t give them away so they own 'em.
This is going to get MUCH worse. I don’t think people realizes how bad things could actually become.
Nice article in AP today about the rental market in Florida. You can now rent a $300,000 home, brand new, never lived in, with a built in pool for…
$1100/month
Yea, that’s gonna turn around down there any day now. :banghead
It effects apt. buildings because potential tenants can now rent HOMES instead of apartments from landlords with NO experience who thought the gravy train would never end. They’ll take anyone with a check book and a heart beat because that “investment home” they bought is draining their savings every month and they owe the bank more than it’s now worth so they can’t sell it.
some folks just dont get it
lol hehe
my 2 cents
Robert A. Doncaster, Jr.
Import/Export Entrepreneur & Investor
*** DO YOUR HOMEWORK ***
Chicago Illinois USA
& sometimes Salzburg, Austria
100% financing?
can be done easily if the apts are price low enough i.e below mkt value.
You can even walk away with cash at closing.
example
Apt asking 200K
mkt valua 230K
Pay mkt price get 30K at closing( deal with seller)
23K = downpayment
7K in your pocket.
Best way to do this type of stuff is to deal with a mortgage broker who is also an investor, who is also an investor with knowledge about creative fanancing AND who is willing to break the rules just a little 
BTW I’m looking at a deal similar to that where I can get 100K back at closing on a 20 unit apt.
BTW apt building deals are a dime a dozen in my metro area. If u are not afraid of low income neighbourhoods.
Not to be too technical or critical, but you are walking the line with your business approach—receiving cash back at closing in the absense of the 1st lien holder’s approval/awareness isn’t creative, it’s fraud.
If this mortage broker cum investor cum investor with an understanding of fraud based lending (I assume that is what you mean by “breaking the rules”) isn’t an imaginery character, I’d like remind them of his/her fiduciary responsibilities.
This is the way I see it as a lender—I won’t do it this way and I can’t compete against those that do—rather then “join them”, I’d much prefer to “beat” them (as in shut them down).
Regards,
Scott Miller
Robert,
What’s your day job? I owned/operated a offshore procurement company in my previous life…