Over the last couple months i was looking into purchasing a college real estate investment in my area. At first I was only looking to do a single house with maybe 2-3 apartments. However there werent many good deals available considering the properties on the market, I was looking to either purchase or put most of the money down with $100,000 set aside. Recently a huge apt complex in the town i was looking into was put up, it has 18 units and 40 bedrooms for 800,000. I was immediately interested and even went to check the place out, and considering the prices for student housing the profits would easily cover the cost of the mortgage payments. The property is located 8 minutes walking from the campus and right in the heart of the downtown area.
My question is however mostly wherever i see you have to put 25% down and obviously my 100k wont do that on this 800k property. Do lenders vary on the necessary money down if I show them the profit/loss statements on the property or are they very strict on that 25%? The owner says he is willing to do partial owner financing of sorts, so any creative ideas on this would be greatly appreciated.
Any info on college housing would be appreciated. Although I have done the research and talked to numerous college landlords on the whole behavior of college students so please spare the lectures on college students destructive habits.
Why should a lender reduce the down payment? Yes, a bit of a philosophical question to highlight a point.
The down payment is to show you have skin in the game. The idea that you should be able to put down less implies a few things to the lender.
You do not have the cash so you could get into trouble later if you start to have some issues.
Businesses do not go out of business from having too many assets. They close because of a cash flow problem. They can not service the debt. From that point of view the income stream is the primary thing the lender will be concerned with as that is there to pay the bills.
If you raise the LTV you are shifting more of the risk to the lender. If something happens and the lender takes the building back they need a big cushion so they can deal with the costs associated with foreclosure, interim management and the cost of sale when they bank disposes of the building. If there is a foreclosure there is likely deferred maintenance as the prior borrower cut back on anything they could cut back on. That will further reduce the value of the asset.
You are talking about a commercial building and it is unlikely you will be able to earn enough from a day job to fund the monthly payment. The lender will know this and they will want to make sure the building funds itself. As this is a commercial loan the LTV will be lower and the interest rate higher and the term shorter than a residential loan. The lender will either not be able to sell the loan on or the buyers for commercial loans will expect a yield that reduces what a lander can do. In other words, expect to pay more for the financing or to have more cash in the deal or a repayment plan that is more expensive than a traditional residential loan.
Just because the bigger building looks attractive, it is not really comparing apples to apples given all the ways the two are different (property and financing).
(Note: I answered this post over on the Commercial Forum as well)
John, as usual you bring up good points, especially the peek inside the mind of lenders.
Your comments also reminded me of some advice I read recently and wrote down;
“Leverage reduces the investor’s most valuable asset, patience.”
One of the most highly read articles I’ve ever written is “100% Financing: Feeding the Desire to Acquire” . I still get emails from people telling me the article opened their eyes to the danger of over-leverage.
Thanks for the link to the article. Based on how we are both online today I would think Good Friday is a slower day.
If you get some new folks reading the article it could be because I just shared it on Google+, Facebook, LinkedIn and Twitter. Good work deserves to be shared widely.