subject: It's Easier to buy a $5,000,000 Apartment Building That A Single Family Investment Property by:Joe Florentine [print this page] Top 10 Reasons Why It's Easier To Buy A $5,000,000 Apartment Building Than A Single Family Investment Property.
The day my life changed forever. It started with a phone from my good friend and banker of 15 plus years Joe, I cant believe that Im going to say this, but your mortgage application has been denied. (I had done hundreds of residential deals, had an 800 credit score and 25 on their projects.
Here is why I, and you probably should too, move from residential to large multi family projects (commercial)
1. Funds are available for large multi family properties, but not for residential investment homes.
President Obama said during his Economic Recovery Act Speech, "there is no money available for you speculators" and he meant it. Try to get a loan for a residential (1-4 family) non-owner occupied property and see the results for yourself. The days of stated income loans for residential investors are over. If you have been in the residential investment game for a while, you already know it, if you are just starting out; you will experience this problem on your first residential investment deal. Its cash, hard money at 12 LTV or youre done.
The good news is that government backed funds are plentiful for larger, multi-family properties. This presents tremendous opportunities for those who know how to access the funding sources.
2. You don't have to personally qualify for the loan, the properties qualify.
Imagine that! Anyone who has ever attempted to purchase a residential investment property (1-4 family) has encountered the issue of personally qualifying. Sure the rents may cover part or the entire mortgage, but the lender only considers a percentage of that income toward your ability to pay the new mortgage. You need, tax returns, financial statements, proof of funds for down payment, etc. Not only that, but of course your FICO score becomes a big factor. Get through all of this and every time you buy another residential property your FICO score drops and you are viewed as more of a risk to the lenders. The more successful you become in this arena, the harder it gets......
With commercial financing, the properties qualify for the loan, not you. It's not on your credit report, etc. The more successful you become, the easier it gets.....
3. Loans on large multi family properties are fully assumable.
Ever try to assume a residential loan without having to qualify for it? Not happening, at least not since the early 80's when FHA and VA loans went from "fully assumable" to "qualifying assumable". It's the same as having to secure a new purchase money mortgage, so unless the interest rate is very attractive, it's never done.
The first home I ever purchased was a little bungalow for $25,000. It was 1980, I was 20 years old and didn't qualify for a $200 limit MasterCard, but I assumed a $23,000 VA loan, no questions asked.
The same criteria hold true to this date for large multi family projects, but very few know about it.
With the financing on large multi family buildings, the loans are fully assumable. Remember, the properties qualify not the buyer. You can buy 100 + unit apartment complexes without qualifying, no verification of funds, no credit report, no tax returns, just knowledge on how to properly structure the deal.
Click here for an Insiders Look at High Leverage Financing, by Durante Parks
4. You ARE NOT personally obligated to repay the loan.
Try getting a residential mortgage and tell the lender that you don't want to personally guarantee the loan. Not happening! We have been conditioned that all loans have to carry a personal guarantee. It's incorporated into every residential mortgage, by every lender in the country. Of course they want recourse if you default, they get the property and then have the right to a default judgment for any balance that may be due after they liquidate the property. Residential loans carry "FULL RECOURSE" to the mortgagee.
Larger commercial loans are "NON RECOURSE" to the borrower. The property and its ability to generate cash flow is the lenders security, not you personally.
5. Multi Family Properties are built to CASH FLOW, single family homes are not.
Single family homes are designed, built and priced for owner occupants, not for cash flow. Study the numbers on almost any single family home and you will discover that after you pay the mortgage, taxes. Insurance, utilities, maintenance, etc, you will lose money every month. Single family homes are terrible for cash flow despite what the residential guru's on TV tell you.
Multi family properties are designed, built and priced to do one thing and one thing only, "make money". Lenders lend based on the fact that there are sufficient funds to cover the debt obligations, not on what your credit score is, or what the house down the block sold for or what your personal income was last year, etc......
6. The value of the property is magnified by a slight increase in rents.
The value of residential property is determined strictly by recent comparable sales in the immediate area. There are really only 2 ways for residential homes to increase in value; a) you add value by physically improving the property or b) you own it long enough for the area to appreciate. So you either spend some time and a considerable amount of money to make the improvements, or wait, lose money every month and justify it by saying that "I have a good tax write off".
Large multi family properties are valued by the capitalization rate (cap rate). This is easily determined by multiplying the net operating income (NOI) by the standard cap rate in the area. Without getting into too much detail, if you had a 100 unit complex with rents at $700 per month and expenses at 35 per year for 2 years, the property would now be worth $5,300,000. Thats an increase in value of $700,000 in just 2 years. No rehab, no improvements, no headaches, etc. Easy to refi or cash out if you choose.
7. No tenants and toilets to deal with - Professionals manage the property.
With residential investment property YOU generally have to manage it. The property can't cash flow to begin with; there probably is no budget to hire a management company to run it. You go from watching the guru on TV sitting by the pool telling you how great your new lifestyle is going to be once you buy a couple of homes, to fielding leaking roof calls and clogged drain problems on Saturday nights.
With the larger properties a professional management company handles all of that for you. It's budgeted in just like taxes and maintenance. The lenders require a professional management contract be in place at closing. They handle all the problems; they are staffed for it and deal with repairs, collecting rents, renting vacant units, etc. They send the funds to you. You never have to deal with a single tenant, yet you reap the rewards. Now you have a lifestyle.
8. Distressed residential properties will distress you while larger multi family properties will provide a lifestyle.
Anyone who has invests in residential Real Estate is taught to go after the distressed properties, foreclosures, pre foreclosures, sheriff sales, etc. The problem with this process is that those type properties breed lots of distress for the buyer. If you have ever purchased one of these properties, you know exactly what I mean. If you have not, be prepared for many issues including getting utilities on and doing bank and/or municipal required improvements before you own the property, etc. You dont own the property, so you cant repair it, dont have the right to turn on utilities, yet you need these items to secure a lenders commitment. Get through this, then buy, renovate and find a buyer at a profit, then you will probably run into a seasoning issue. Seasoning has come into play due to all the fraudulent house flips over the past few years. Government backed funds; FHA, etc will not allow a new buyer to purchase your property for more than the purchase price that YOU paid for a minimum of 6 months. Up to a year, you need to provide all kinds of documentation regarding the amount you spent to renovate and improve the property. Your carrying cost, closing costs, etc do not count, and oh did I mention, there is no line item for your profit. Essentially you can do everything right, but still be stuck with the property for a year unless you can find a cash or non conventional buyer.
The hardest thing that I had to overcome when graduating to the commercial arena was putting the distressed mindset behind me. In residential you have to have a distressed situation to create a profit, in multi family, remember, the properties were designed to make a profit; you do not need distress to be profitable, the cash flow is already there by design.
9. With a little knowledge you can own apartment buildings with little or no money.
Again, residential investment property requires down payments, qualifying, front end and back end ratios, good credit, proof of ability to pay, etc. This amounts to a considerable amount of time, aggravation and work for a relatively small upside. You can participate in this arena for many years and never achieve the cash flow and lifestyle that you seek.
With commercial projects, remember its the properties that qualify, not you personally. There are several techniques used to acquire large multi family properties with little or no money. You can replace the $1,000,000 deposits with the knowledge on how to structure the deal and the right financing contacts in place. The knowledge that you need is not Real Estate, its actually financing. Its easier than you think to understand the commercial financing game.
10. What all the Real Estate Gurus dont teach you. Understanding financing is the key to wealth in Real Estate.
Buy low, sell high, buy homes with no money down and rent for cash flow, option homes and flip the contract, flip assignable contracts Weve heard it all for years and years on end by the Gurus on TV making it all sound so easy and glamorous. The problem with these strategies is that its always about the Real Estate itself, but never about the real key to wealth in Real Estate, understanding and structuring the financing.
If you had an unlimited supply of your own funds, do you think you would be successful in Real Estate Investing? Im sure that you would. The thing that holds most of us back from achieving our dreams is the lack of capital and/or access to it. Understanding how to secure favorable financing for your projects is by far the most important element in the transaction. When you move to the commercial arena, the Real Estate part is simple. In less than 5 minutes, you can determine the value of a property anywhere in the United States.
Conclusion: It's easier to buy a $5,000,000 apartment building than a single family home.
When the student is ready, the teacher appears. Its no accident that you have stumbled upon this article. Its your prepared mind meeting with opportunity. Just like my chance encounter with an old friend that I had not seen in over 10 years who wrote down Durante Parks' website address on a napkin and told me that Durante could teach me how to buy apartment buildings easier than houses; you happen to be at the right place at the right time. Just a couple of months after this chance encounter, under Durantes training, I am purchasing 2 large multi family projects, with no money out of my pocket, plus I'm developing a solid income by providing financing to investors looking to do the same. A day that started out as a disaster, turned into the best opportunity of my life.
If you would like more information on how you can go from residential to large multi family projects, I encourage you to start by simply reading a report containing an actual case study where 102% financing was obtained on a $10,000,000 multi family transaction. The report is written by my mentor and brilliant commercial financier, Durante Parks. The report is posted for free with Durante's permission at this link: http://www.usaprtmentfinancing.com/moreinfo Insiders look at High Leverage Financing
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About the author
Joe Florentine is Managing Member of US Apartment Financing. Joe is an award wining builder/developer, a licensed Realtor, and has 25 years experience in buying, selling, building, developing and investing. He has been featured in Financial Freedom Magazine, Channel 12 news, The Star Ledger, Asbury Park Press and Coast Star newspapers. Under the guidance of Durante Parks, Joe has recently moved from residential to large multi family projects.
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