Is this 8-plex worth the risk? - Posted by Nate-WI

Real Estate Investing Apartments
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Posted by Nate-WI on April 21, 2006 at 18:05:27:

Wow I’m suprised that more don’t know about this. Then again I wouldn’t know about either. I have a very good realtor, who is an investor, and a very good mortgage broker who gets deals done. The lenders I’m using are local and I really thinks this helps. They are in my area, know the properties, and understand the values in my area.

Wes is correct in that duplexe’s or SFR’s are easier to get and you usually get better rates. However with this nothing down deal I’m looking at 8% interest rate on a 2-3 yr note. This is fine with me as I will re-fi in a year or perhaps even earlier to pull money out. Then I can start putting down 10 or 20%. But then again…why when I can still cashflow with none of my money into them :slight_smile: I didn’t know about this technique but since I know of it I’m hunting for rentals now that are good, good buys and I can cashflow with. It’s my opinion that rentals in my area are starting to come back and now just might be a good time to start buying. Higher interest rates just might push people into rentals again. My two cents of course.

My FICO should be fine. There is no reason why it should go down. Other than a few inquiries my report should be fine as long as I keep making payments. As far as maxing out loans that’s a good question. I would speculate that as long as my rentals are cashflowing very well and are covering all my expenses then who knows? If I can do say 10 rentals using this technique and they are cashflowing say 500 bucks a piece then I should be sitting ok. Plus if I run into a snag with the loans and lenders then I’m gonna have to change my strategy and look for owners who want to owner finance the entire transaction which is not impossible. Plus I know many note investors who buy carried back notes so I could help the noteholder sell their paper. Anyways I’m babbling.

Nate-WI

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Is this 8-plex worth the risk? - Posted by Nate-WI

Posted by Nate-WI on April 20, 2006 at 21:16:36:

Hey all,

I found an 8-plex thru my realtor (also an investor) that I have been working with on my REI. This 8-plex is about 25 minutes away from me in a smaller city. As it sits this deal looks pretty crummy.

Sales price is 229.9K
5 out of 8 units are rented
Rents total $2285.00
Mortgage payment at 30 yr fixed at 8% with zero down is 1614.28
Insurance is $85 a month
Taxes are $350.00 a month
Total net right now is $235.72
This does not include any vacany, maintenance, and whatever else you would like to factor in.

This property is totally mismanaged. The previous owner (20 yrs owned) sold it to his son who has not done anything but collect checks. He’s had it for a year. The property itself is in good shape with a brand new roof a few weeks back thanks to some storms that passed thru. My realtor also said that this guy needs OUT now. He won’t carry a second so that’s out of the question.

If I can get those 3 units that are vacant rented for $420 a pop (very doable) then my net cash flow would be alot better. This property will appraise at 285-290K which would put me well within my LTV ratio so I can get into this deal with nothing down. I’m buying an 8-plex here in town and it should appraise in the $330-$340K range which I got for $263K.

The property is made of brick and tenants pay utilities. There also an adjacent lot that comes with the property. Not sure on the size of that as I’m working on those details. Could be nice to sell off or do whatever with. The property also has coin-ops that come with the property. If the building is filled it will make about 100 bucks a month. Right now its barely squeezing out $65 a month. The coin-ops come with the place. All units are 2 bed, 1 bath, and in decent shape. Minor things to be done as tenants come and go. Nothing major.

So with all this said what can offer for suggestions or if this is even a viable deal. I can answer more question that you have so blast away. Looking forward to your replies,

Nate-WI

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Re: Is this 8-plex worth the risk? - Posted by wes

Posted by wes on April 22, 2006 at 15:12:56:

Guess you have a problem letting anyone else know who the lender is you say will finance your 8 unit at zero down based on the higher appraised value.

Therefore I wish you the best of luck in this transaction.

However you should not be leading others here to believe this is a technique that can be employed anywhere.
Commercial lenders will seldom allow a zero down loan no matter what the appraised value.

On the other hand, if you are saying you have a (technique) for purchasing multi-units for zero down. That is something else altogether and I fully agree there are a number of ways to structure a deal with zero down on the buyers part.

Owner financing or taking on a (money) partner are two common methods.

Best Regards,

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Re: Is this 8-plex worth the risk? - Posted by Nancy

Posted by Nancy on April 20, 2006 at 21:48:14:

I think it is a doable deal… I own a 9 plex in Dallas, purchase price is cheaper but our expense on tax and Insurance is a lot higher… so $85 / month insurance is really low… and you got tenants pay utilities also… if you can keep them rented 90% I think it’s got some decent cash flow… but I don’t know if I’d finance 100%… may be with some down payment will help in preventing a negative cash flow when the occupancy is down…
I’m not an expert in apartment purchase, this is just my thought looking at the expense and income.

good luck!
nancy

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Re: Is this 8-plex worth the risk? - Posted by Nate-WI

Posted by Nate-WI on April 22, 2006 at 17:15:26:

Sore sport bud? Easy my man. Who is leading in my posts? Read them again. Where did I say these could be employed anywhere? If commercial lenders seldom do this type of creative financing then why am I doing these types of deals? All I am telling anyone is how I’m doing them and how I’m getting my deals with no money. If any of my posts have rubbed you the wrong way I apologize.

Nate-WI

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Re: Is this 8-plex worth the risk? - Posted by Nate-WI

Posted by Nate-WI on April 20, 2006 at 21:52:55:

Thanks Nancy. My goal is to continue to buy properties without using a dime of my own. So far I’ve bought a duplex and have an accepted offer on another 8-plex. I have used none of my money and they will both still cash flow and have lots of equity in both. Until I have a year under my belt to where I can start pulling equity then I’m gonna keep doing these zero down deals. Maybe not the best road to success but its a start since money is tight with 4 kids and wife!

Nate-WI

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Re: Is this 8-plex worth the risk? - Posted by wes

Posted by wes on April 23, 2006 at 11:31:51:

Not sore at all. And because I did read your post, I am just trying to understand your 2nd financing “technique”.

Tell me where I am missing the boat!!!

You said you are closing on a duplex next week using owner financing and a “forgivable second”.

This is done all the time. And though there can be several issues with this method such as tax implecations for the seller or mortgage fraud, if done correctly there is nothing wrong with it…

In addition, when it comes to any 1-4 unit property, I am not concerned with how you purchase with Zero Down because there are many lenders and programs available for 100% financing of these properties in addition to owner financing and other methods.

It is your 8 unit that I am having a bit of an issue.
And, it is your second method of financing I do not understand.

You said earlier: “The other way is to buy at 80% LTV”.
80% LTV is not a Zero Down loan so where is the remaining 20% coming from???

Then you go on to explain an example of purchasing at 80% of (appraised) value.

My question is, how your example of an 80% LTV loan results in a Zero Down deal?
Since most lenders (with the exception of some Hard Money lenders) use the purchase price or appraised value (whichever is LOWER), I just simply wanted to know what lender you were using that would do this loan scenario. Not sure why this should be such a big secret.

Oh by the way, Stating that by obtaining an 80% LTV loan you pay no PMI is fine for your duplex.
It’s irrelevant with the 8 unit.

Since commercial lenders rarely loan more than 80% to start with (if they do it is usually using a 1st and 2nd), they do not charge PMI. And since FHA insurance is only available for 1-4 units, it would not be an issue for 5 or more units.

The point I am trying to make is that there are different rules for financing anything over 4 units, because in most cases once you hit 5 units you are dealing with a commercial vs residential loan/lender.

If you have a LENDER that will allow 100% financing for multi units (5+ units), then great. You have found what typically does not exist in the industry.

Since I have been doing this for a number of years, I was just trying to understand your 8 unit deal, not the Duplex.

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Re: Is this 8-plex worth the risk? - Posted by Bill HIcks

Posted by Bill HIcks on April 25, 2006 at 16:54:15:

Dear Nate,

You have found the true secret of No Money Down real estate. If we have no Money we Have to find a way to buy no money down. LOL
Sounds like you are getting super deals. That last one is a definite buy if it’s in a decent area.
Keep up the good work and just ignore WES and the rest of the naysayers. Just because THEY don’t know how to buy no money down DOES NOT mean it can’t be done.
Good Luck in the future and take those kids of yours to a major league baseball game with sme of that cash flow. LOL There is nothing like it for a family outing. Just stop at Burger King before you enter the park. You need to save on food with
kids so you can go to more games!

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Re: Is this 8-plex worth the risk? - Posted by Prashant

Posted by Prashant on April 21, 2006 at 01:00:24:

Nate,
I thought 100% financing for investment properties was very difficult. How did you manage to buy the properties with zero down? Can you please explain? Thanks.

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Re: Is this 8-plex worth the risk? - Posted by Nate-WI

Posted by Nate-WI on April 25, 2006 at 17:13:31:

Thanks Bill. I have 3 things that I have to have in order to buy a rental. No money down, no pmi, and it must cashflow at least 150-200 a month. Hard to do? You bet. This one would cashflow roughly 1700 a month. Of course there are expenses but still cashflow is cashflow. Good call on stopping at BK before the game. I have 4 kids plus the wife so that would be expensive. Good thing Brewer tickets are still cheap :slight_smile:

Nate-WI

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Re: Is this 8-plex worth the risk? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on April 21, 2006 at 14:04:59:

I would assume that a fair bit of seller financing must be involved…

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Re: Is this 8-plex worth the risk? - Posted by Nate-WI

Posted by Nate-WI on April 21, 2006 at 15:25:16:

Hey all,

There are two ways I’m purchasing properties without any of my money. Like Mark said there is owner financing where maybe the seller would be willing to take back a second lien to help me get into the building and still cash flow. This is what I did for my duplex that I’m closing on next week. The seller is taking back a forgiveable second lien. With his second lien it puts me at 80% LTV. I pay no pmi, I get a good rate, and my bank likes their position.

The other way is to buy at 80% LTV. For example I have an accepted offer on an 8-plex set to close on May 30th. I’m buying it for 271K with the sellers kicking in 8K towards my closing. It should appraise at 340K. This meets my 80% LTV that the bank is looking for so again no pmi, lots of equity, and the bank feels warm and fuzzy. Another 8-plex that I’m looking at has the same deal. Buy it for maybe 220K and it should easily appraise at 285-290K based on comps and recent sales. Again no pmi, lots of equity, and the bank likes their position. Thus…

With that much spread in the deal I don’t have to bring ANY money to the table. My plan is to buy properties without any of my money, pay no pmi, and it still has to cash flow. If I can’t get those then I’m passing on the deal. So far its working great. Again you have to find the property to do so. The realtor that I’m working with found these on the MLS and is very good at digging for info on the sellers and the property itself. i.e. schedule E, rent rolls, maintenance, etc. Also I look up to see when it was sold last and for how much it was sold for. Gives you a good idea of what type of situation your looking at. Hope this helps,

Nate-WI

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Re: Is this 8-plex worth the risk? - Posted by JC(CA)

Posted by JC(CA) on April 21, 2006 at 17:43:11:

Good info Nate & strategy and congrats.
So you basically buy 20% below appraisal so that satisfies 80% LTV and pay pmi. It also seems like you have a pretty good agent.

I am looking to buy duplex/multi-unit in TX and maybe other states. Might want to use the same criteria as yours and put zero down.
Thanks

Just curious, how many properties do you think you can buy zero down without affecting your FICO, or reaching the max of getting more loans?

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Re: Is this 8-plex worth the risk? - Posted by wes

Posted by wes on April 21, 2006 at 17:12:17:

So what you are saying here is that you have a bank that will lend based on the Appraised Value.

Please list the name of this bank for others here to contact and use.

Since most lenders base their loan on the purchase price or appraised value (Whichever is LOWER), what you have is somewhat unique and I am sure many here would really like to utilize this lender.

Most lenders take a more conservative position that just because someone says a property is worth a certain amount (lets say $340,000). The fact someone might be able to buy it for 80% of that value (lets say $272,000) might in fact be a better representation of the actual value of the property. Thus if the lender usually lends only 80% they base that 80% on the purchase price as opposed to the higher appraised value.

Best Regards,
By the way, 100% investment loans on duplex, triplex and quads are available from many lenders. It is only when you reach the 5 or more units (commercial loans) where high LTV loans are more difficult to find if at all available.