How to Finance Buy and Hold Multi-Families?

[bcap]

Hi,

When analyzing a deal, specifically a buy and hold multi-family, how do you factor financing?

I have been advised to seek deals that will bring in a minimum passive income of $100 a month per unit (after all expenses).  Therefore, if it is a (6) unit building, the goal is to have a positive income of $600 each month.

Being a newbie in Commerical Real Estate I need a stronger understanding of Financing.  By nature, I want to base my numbers off of a 30 year loan.  However, I am seeing many experienced investors say they like to do 10-15 year loans to be able to own the property outright faster.

Is it realistic to find a deal that will be paid off in 15 years that will generate $100 per unit a month?

Can anyone make suggestions on common strategies to best finance buy and hold multi-families and/or recommend a Boot Camp/material that would help be better understand?

Thank you in advance.

[justin0419]

Ok.  Here's a rule of thumb for buy and hold investing.  Low income cheaper properties generally produce really good cash flow, but are also generally more management intensive and will probably have lower price appreciation.  Higher end properties cost more to get into and probably won't cash flow as well, but can have good price appreciation. 
I'm part of the group who wants to own their properties outright faster.  Our apartment building is on a 15 yr loan.  Most of the SFHs are 10 yrs or less.  When I'm looking at properties, I look at what they'll rent for based on a 10 yr loan.  Why?  Because my bank doesn't want to extend financing over a longer period for an investment property...and I don't need them to.  If I was looking at buying a medium to large complex, I would look at the numbers for 15, 20, and 30 yrs to see where everything falls.  Most investment loans are going to carry a higher interest rate than owner occupied loans.  Factor that in too.  To find a complex generating $100/door on a 15 yr loan, you're going to have to buy at a steep discount when you factor in all of the expenses with owning a complex. 
From what I've seen, banks are generally going to look for you to have 25-30% down for an apartment complex deal. 
Loans for 4 units or less can still fall under standard financing.  5 units or more falls under commercial rules which are completely different than regular financing.  Expect commercial loans to have a higher interest rate, more required for down payment, and be amortized over a shorter term.  There can also be mandatory inspections for buying complexes whereas it would be optional if you were purchasing a SFH.  If the bank is laying a lot of money on the line, you can expect them to want you to have a certified inspector check out the complex.

[bcap]

Hi Justin,

Thank you very much for the in-depth feedback.  Very much appreciated. 

I can definately see the benefit in the shorter terms of financing.  However, what kind of cashflow do you aim for for a 10-15 year loan?  Is the cashflow positive, break even, or negative?

Also, when you own the propertyin 10-15 years to enjoy the NOI or sell?

Thanks again.

[justin0419]

Right now our monthly rent runs right at 2.5x the amount of the mortgage payments.  I want to get deals where the rent will be at least double the monthly payment.  It's a crude and basic screening criteria, but it works for me.  Getting deals like this means the cash flow is good and having multiple houses spreads the risk when something goes wrong with one or two.  There have been times where we've had to loan the business some money, but it was when we were buying properties at a rapid rate and needed a little more money in the account for some repairs.  But there have been several months where we've been able to draw a good amount of money from the business too. 
Our plan for now is to hold these properties for a very long time.  We've been doing this for well over four years.  We're far from burned out, but I do have a more negative outlook on society than I had a few years ago.  If all continues to go how it has so far, we plan on just live off the business and work it full time. 

[mscott]

Im curious what city you can get 2.5 times the mortgage. Im looking at the vegas area and I can see 2 times for SFH. 

Right now our monthly rent runs right at 2.5x the amount of the mortgage payments.  I want to get deals where the rent will be at least double the monthly payment.  It's a crude and basic screening criteria, but it works for me.  Getting deals like this means the cash flow is good and having multiple houses spreads the risk when something goes wrong with one or two.  There have been times where we've had to loan the business some money, but it was when we were buying properties at a rapid rate and needed a little more money in the account for some repairs.  But there have been several months where we've been able to draw a good amount of money from the business too. 
Our plan for now is to hold these properties for a very long time.  We've been doing this for well over four years.  We're far from burned out, but I do have a more negative outlook on society than I had a few years ago.  If all continues to go how it has so far, we plan on just live off the business and work it full time. 

[justin0419]

There are many areas of the mid-west and south where you can find numbers like this. 

[nemmert]

2.5:1 is pretty low... most look for closer to 3:1 or if they're conservative, 4:1.

Duplex I'm buying should rent for about $1,400 a month and the payment is $389 (with not the best terms).  I can do a cash out refi this July and I'll keep the payment right around $400 while pulling out almost my entire investment.

[justin0419]

2.5:1 is pretty low... most look for closer to 3:1 or if they're conservative, 4:1.

It would be more of a spread if I wanted to prolong my payments.  I'm trying to get them free and clear asap...thus the 2.5 to 1 ratio

[Bushman68]

There are deals out there.  Sometimes you have to be patient.  Make sure you are constantly searching and networking.  I'm relatively new to the game, and just bought my 8th property and have never bought with worse than 3:1 rent to mortgage.  I've never looked at it that way before as I am usually looking at straight cashflow.  Minimum 300/house or 100/unit in apartments.

[jass]

In order to truly assess the return for any investment, the prudent investor considers the inflows and outflows of money at all times. In the real world, it is rare that money is placed into an investment at the beginning, and then money is returned at the end, without any flows in the middle. In the case of a leveraged real estate investor, this certainly is the case.