Let’s talk about multi-family housing that needs rehab work. Obtaining a multi-family that needs work gives the investor a variety of options for both financing the property as well as deciding to flip, buy and hold or buy and hold for a period of time then flip.
METHODS OF PURCHASING MULTI-FAMILY HOUSING
You can always take the conventional route when buying multi-family properties. By that I mean you can get a mortgage from a lender. If the property has enough units to be considered a commercial real estate deal (generally more than four units is considered commercial) you can usually get a mortgage based on the income the property generates on its own, without having to prove your own personal income. If you are buying the property that is in disrepair or has vacancies you will probably not be looking at conventional financing. If you are not sure if you want to flip or buy and hold, this may not the best way to go. The expenses of appraisal and closing costs are far too high to consider this economically feasible. In addition, you may find that a conventional lender will insert a prepayment clause which will make a quick turnaround prohibitive.
There are some hard money lenders who will be willing to finance multi-family properties whether you decide to flip them or hold them. Again, the rates on these loans may make it prohibitive. The best sources of funds for buying these properties then boils down to your own cash, private lenders or OWNER FINANCING.
You can often sell your idea of owner financing by simply putting the right information in front of the current owner. For example, you can make a cash offer at the low end of the spectrum. You can make an offer subject to obtaining a mortgage at a little higher amount. Finally, you can make an offer that cannot be refused, by offering asking price or higher, but that offer is on the condition that the owner finance a major portion of the purchase. You can show the owner how the interest rate you are offering is better than most investment returns he will get elsewhere. He will have a first position mortgage on the property that will allow him to take back the building in the event of default, and you can have the owner give you a long-term repayment schedule (say 20, 25 or 30 years) with a balloon payoff to the owner after five or ten years of payments. Show that information to the owner on paper. Let them see that, in fact, he or she will be making more than what the actual purchase price is because of the interest being collected over the five or ten years of repayment. If you decide to flip the property there is nothing lost in the transaction, and you have minimized your cash outlay by getting the owner financing in place.
Of course, all of this is predicated on running numbers for both flipping and buying and holding before you even get into the idea of buying the property. So, we have previously discussed some things about running numbers in the event of flipping. In a future blog we will look at some numbers and calculations you must be aware of in order to make a decision on a possible buy and hold option.
There are a number of additional and traditional calculations to take into account when considering a buy and hold option on a multi-family rehab project. I personally do not give the same amount of weight to the importance of some of these numbers as others often do, and I will try to cover that as I discuss each item and the importance of each calculation in my next blog.
You are already ahead of the game by purchasing a multi-family property below market. The planning for this rehab should generally be a bit different than what you would do for a single-family home that you would be selling to homeowners. Rental property generally should be viewed with a bit different perspective. For example, do you put in granite countertops? It is not likely that you would do that. Likewise, you may want to use linoleum where you might otherwise tile, or use a variety of flooring instead of hardwood if the hardwood is not already there.