Using other people’s money!
The greatest part about investing in real estate.
Robert Kiyosaki said it best, ‘the real reason I love real estate is because I don’t use my money, I use the banks money’!
However, using the banks money doesn’t come without its challenges.
Banks as you all know don’t just lend to anyone, and since the recession, they also want to make sure you have skin the game too.
However, when it comes to investing in larger multi unit rental properties, it can become even more complicated.
Well watch this video to find out, so that the next time you are looking to invest in a multi unit property, whether its mixed use, commercial or a residential property with more then 6 units, you’ll be prepared.
Hey, its Tyler, 2015 CREW Magazine investor of the year and your real estate investing educator.
I’m so glad you landed on my channel, where I’m constantly sharing tips, strategies, just tons of information on how to start investing in real estate and all the benefits from investing in real estate.
So, I love multi-unit properties.
The first property I ever purchased was a duplex, but that was to flip.
The next one, was a duplex that I renovated and refinanced.
The cash flow the property generated, not to mention that the property generated an income almost always, since I never have had both units vacant, is nice to have to cover my costs, when one unit is vacant.
These days though I’ve moved on from small multi-unit properties and single-family homes and into larger multi-unit properties.
From fourplexes, which I’ve owned a few in the past but have since sold.
To a twenty-one unit mixed used property I still own, where you have commercial and residential in the property.
To an eight unit mixed used property I still own, and hopefully soon a ten unit all residential multi-unit property.
Now, when it comes to financing these larger multi-unit properties, there are many factors that you need to consider.
The positive is that when investing in large multi-unit properties, that is, properties with more than six residential units or mixed used...
Or straight commercial, lenders only look at the income the property generates.
This is awesome when compared to buying single family homes or smaller multi-unit properties, as banks will need to qualify you personally.
So, if you have bad credit, or too much debt, or own too many properties like me, the banks will most likely say no.
The negative though with larger multi-unit properties, especially properties that have commercial tenants; so a mixed-use property or straight commercial property such as a strip mall...
Is certain commercial tenants’ incomes aren’t recognized, or only half of the income is recognized, when the bank is calculating the value of the property.
Yes, that’s right.
When I recently sat down with one of the top mortgage specialists in Canada at RBC, Joe Bondy, he informed me that if a commercial tenant is a restaurant, their rental income might not be considered.
This can make financing the property much more difficult.
As it will have a huge impact on the value of the property based on the now lower income since a portion isn’t being recognized by the bank.
Let me show you what I mean.
Let’s say you are looking to purchase a property for $650,000, and the current rent roll at the property looks like this below.
Well, according to the bank’s rules, the income the property gets from the commercial restaurant tenant isn’t recognized.
So, when the bank goes to value the property, using a 7 cap, the bank values the property, they will only value the property at $461,000, which you can see the numbers broken down here below.
Whereas if they did recognize the restaurants income, they’d value the property at $699,000.
That’s a huge difference!
With them only valuing the property at $461,000, and they are going to only lend up to 70% of this value, and you are looking to purchase it for $650,000.
Well, instead of you thinking you’d only have to come up with 30% of the down payment, so $195,000, you’re actually going to have to come up with 50% of the down payment, so $327,000, which you can see here below.
Now, this is worse case, and different banks will have different rules, as this is not set in stone, but when investing in real estate, you always want plan for the worse, and hope for the best.
So, if I were to invest in this property, this is something I’d be considering before even making an offer to buy, because maybe I don’t offer $650,000, I only offer $500,000.
Or if I’m going to sell, I need to consider this as well, that it will be hard for people to get financing, and might have to list lower.
Your best bet when buying mixed use properties is to find tenants that are anchor tenants, such as franchises; long term stable tenants.
This is because banks see these tenants as less risky, and will most likely use 100% of the rental income when determining the value.
Now I’m not saying to avoid commercial properties altogether, as banks will want your business, and will work hard to get it.
But they are more risk averse, so you should shop around to other banks, local banks, credit unions, to see whom wants your business and whom will offer the best financing.
Better yet, look to larger residential only multi-unit properties instead of mixed use or commercial.
Banks will use market value rents in determining the value, so even if the rents are below market value, the bank will use what the market rents are, increasing the value.
Which make it even easier when trying to get financing.
And they recognize all the residential income, unlike with certain commercial tenants’ income.
Armed with this knowledge, I’ve now begun focusing more on large residential only multi-unit properties for 2 reasons:
1. The banks don’t look at me personally for financing, just the property.
2. The recognition of all the rents.
So, the only item I need to worry about is the down payment.
WHAT TO DO NEXT
Download the exact spreadsheet I use by clicking on the image below, to help you analyze a properties rental income from the banks point of view.