Buying a 6-unit: What scenarios to consider?
Planning to put 25% down to rehab while living in it (primary market, cool neighborhood)
What are some possible scenarios?
If I can sell it after renovations at peak IRR, I will.
If the market drops, I could be stuck with it for ten years, but if it's leased and renovated, maybe my NOI is higher and After Tax CFs positive.
If I receive a 100K inheritance during the hold, should it go toward the mortgage? For both scenarios?
When might someone typically refinance?
If you're okay with holding long term, I wouldn't worry too much about the market dropping. If you're planning to flip and be more focused on IRR, timing is much more important.
If you're comfortable with the cash flow and have a low interest mortgage, there are better ways to put that $100k to use (accretive capex, buy another property, or just put it in an index fund / retirement accounts).
Typically you will refi when the rents/value have increased enough that you can pull out a bunch of cash and still have solid cash flow/DSCR post-refi. You'll probably want to refi at a similar or lower interest rate than the current mortgage and with minimal prepayment fees.
What's the primary market and neighborhood, if you don't mind? Someone might be able to provide more context.
What is the $100K relative to the total equity and debt on the property? Also, what is it relative to your net worth? I.e. if the property debt is $5M, throwing $100K at the principal probably doesn't do much. If it takes away a significant chunk of your debt and increases DSCR a significant amount, might be worth doing. You might be better of weathering the storm if the market drops.
I tend to generally agree with the above post, tho. $100K might be worth more to you somewhere else: stocks, down payment on another property, etc. to diversify. Especially if you don't plan on selling any time soon, stabilize the property, and ride out the bad markets. $100K in your pocket might be worth more if something goes wrong (see question about net worth).
Thank you both. Good point, but for educational purposes, let's ignore the personal finance component. The extra $100K = 38% of my equity in the property & 15.6% of my debt in the property.
In a refi, what % of the equity typically gets pulled out, and what may be the goal in doing so? Say my brother also wanted to throw in $100K. What are some options to consider?
As an example, lets say you buy a property generating $10k in rent at a 50% exp ratio, so thats $5k NOI, purchased at a 5% cap for $100k. You purchase with $25k equity and $75k debt or 75% LTV. The debt is 4% interest so your annual payments are $4,300, cash flow is $700, and DSCR is 1.16.
Now its 10 years later. You've increased rents 3% per year to $13,500. Opex inflated to $6k, so NOI is now $7,500, and your property is appraised again at a 5% cap to $150k. Your debt has amortized down to $50k. Now you're only 33% leveraged. Your cash flow is $3,200 and DSCR is 1.74. Nice. Yet...
Lets say you refinance at 75% LTV and 4% interest again. Your loan proceeds are $112,500. Your new mortgage payment is $6,500. You've reduced your cash flow from $3,200 down to $1,000 and DSCR down to 1.15, but once you pay off the $50k outstanding balance on the first mortgage and refund the $25k of equity to yourself, you've netted $37,500 of cash tax-free AND continue to enjoy the stream of cash flow and capital appreciation from the property with no money down.
Underwrite to reasonable expense and reserve levels.
Just to clarify...you know this will be a commercial loan and not a traditional residential loan, right? Depending on the T12...you might need to be at 30% equity.
Overall...it's a good strategy. Just pay attention to your spread when running the financials. Let that guide you in your decision making process.
Local bank will probably give him 75% LTV if its owner occupied. Might get 30 year am, will probably get a higher rate and only fixed for 3,5, or 10.
Good insight.
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