AGC

All,

I know this is off topic, but I figured someone might know the answer to this question.

I am looking at buying an investment property (6 family) with a couple of partners. We are looking to put 20% down, but I just heard from a friend that you need 30% down for any investment property. Does anyone know if this is true. I was also wondering if anyone knows of a mortgage company in NY

Thanks all
AGC

amfp

Should post in off topic. I cannot speak for partners for one investment property, but 20% down without pmi is the norm for individual rental properties. Just need to shop around. Suspect banks/credit unions may be offering some leadway now that housing is beginning soft a bit with more inventory.

kdurg

If it is truly a 6 unit property, it will not qualify for traditional (conventional- fannie mae/freddie mac) residential financing.

A 6 unit would be considered commercial property and yes, typically the best terms and conditions are found with a 30% down payment. You could put less down, but the rate and costs will be higher.

Can't help you with a NY Lender referral, sorry.

John95cab

Investor properties require at least 25% down to be considered for financing, at least mine did.

Rick Lee

In addition to a larger down payment, the rates on investment properties are usually 2 discount points higher than on owner occupied. Approval also depends on the number of Fannie/Freddie-financed properties already owned by the buye(s)r. Some investors have a hard time beyond 5 financed properties if the loans are Fannie/Freddie. Not sure how this has changed since I left the business 6 yrs. ago, or if the rule applies to total properties owned by total number of investors.

88911coupe

You can get as high as 90% for commercial property. I work with one lender (I'm a broker) that will go that high an LTV depending on credit.
Later,

chris walrod

A fellow race engineer has bought several single family dwellings in Phoenix for investment purposes with only 10% down on each. This may vary from state to state. This is something I would like to do in the near future myself..

ColoradoMark

I'm a commercial RE broker. My advice is to shop around for rates and terms, they vary widely by region, bank, time and individual. Your broker should be able to help you.

akolodesh

A 6 unit property will not be a large enough deal for you to get in the conduit and insurance company market. I would look at traditional bank financing: fixed for 7 to 10 year term, 20 - 25 year amortization, 20% down. Unless you plan to live on site or have access to a great maintenance person, i would look at a bigger deal: one that is large enough to support on-site management. I deal with an excellent broker for these types of transactions. He works on a national level. If you want pm me and I will put you in touch with him.

MrClifton

On units of five+ the amount of your loan is figured by the capitalization rate. To get the best rates, the lender will not look at the percentage of down payment. They will look at the rents. You as the borrower will not even be considered in the capitalization figures. It will strictly be the property. For example, I was looking at an 8 unit building last month in California with a $1,900,000 sales price. With rents of $7960 per month, the max loan that the lender would allow was $650,000. With high property values and soft rents, buying more than 1-4 units requires a huge down payment. Most of these transactions are exchanges for borrowers coming out of other properties with lots of equity.

akolodesh

You are correct that as the borrower, you will not be calculated into the cap rate. Cap rate, like IRR, MIRR, GRM, etc... is a method by which value is standardized. Whereas cap rates and gross rent multipliers (GRM) evaluate value on a static basis, using NOI and lease revenue respectively, IRR and MIRR are dynamic measures: they take the time value of money into consideration when evaluating the asset's return.
In all cases the bank, conduit, insurance company, etc.. will look to the appraisal for their determination of value. The appraiser will utilize three methods for their judgment of value: income, comparative sales and cost to reproduce. More weight should be given to the approach that makes the most sense for the particular asset being evaluated.

While the borrower does not figure into the determination of the asset's value, he very much figures into the bank's determination of how much equity should be in the deal - an experienced real estate investor or developer with a successful track record will be required to have less equity in the deal than a newbie.

In truth, since the appraiser's client is the lending institution, he or she will tend to evaluate the asset on the conservative side in order to protect the interest of the client.

As a buyer, your purchase price should be based on the same set of conservative estimates as the appraisers (in theory at least). If your purchase price is significantly higher than the appraised value you may want to reevaluate the methodology used: is your cap rate too low? have you not accounted for enough of a vacancy factor? have you accounted for ongoing management expense? have you accounted for a sufficient amount of replacement and reserves (not part of the NOI calculation but important to account for anyway).

Basically - if your proposed down payment is WAY too high, you have probably fallen in love with the asset and are paying too much for it - think internet bubble - the guy selling to you is Mark Cuban cashing out at the right time (analogy only ). Oh how soon people forget!!

88911coupe

It looks like the seller used a 5% cap rate to come up with their asking price ($7960/mo X 12 = $95520/5% = $1,910,400...Is it correct to use Gross Rental Income as NOI? Some lenders may just back into a maximum loan amount using a debt service coverage ratio of say, 1.2 which may be a lot less than the "appraised value".
BTW...this is about as OT as I've ever seen.

AGC

First I would like to THANK everyone for their feedback.

I am a first time buyer (investment property) and appreciate all your help. Currently the rent in undervalued, so I see a nice upside to this property. As for the location it in a area very good location with newer 2-3 families selling for $1M+. I am able to get this 6 unit for less than $1M, because it is thru a family friend. My accountant even offered to buy it if I do not go through with it, because he thinks it is a good deal. Now here is some of the details of the property, rent roll is about $70k/yr, expenses about $20k/year (tax included) so that leaves me with about $50k/yr. I woudl like to only put 20% down so I don't over extend myself, but have heard I might have to go to 30%. Any ideas, I spoke to LendingTree and they said 20% should be fine, but I am not sure how realiable they are

Also if anyone in the NYC area know's of a broker that can help me out that would be great

Thanks

akolodesh

You cannot use GRI interchangeably with NOI unless you are dealing with a true triple net lease or ground lease. In all other circumstances you will have expenses and vacancy/credit loss to account for between the gross potential rent and the net operating income. The example that you point out would be correct if there were no expenses associated with the property (not the case in multifamily residential)..