case study multi family denver

Case Study: How to Purchase A Multi-Family Property with Conventional Lending

In Case Study, Real Estate Investing by Bergan & Company

CASE STUDY: 3102-3112 Vallejo St, Denver

In this case study we will walk you through the process of acquiring a multi-family unit (over 4 units) with conventional lending.

Before we fully dive in, let’s back pedal for a second. Do you have friends of family who are enjoying the benefits of positive cash flow from a rental property? Or are you aware that 80% of millionaires attribute their wealth to real estate? In recent years consumers have become more aware of how unpredictable and unstable the stock market is. Wealthy consumers understand that simply owning property is a better strategy than flipping houses, investing in stock markets, or dumping all their money in 401Ks.

Here’s a quick rundown on some of the benefits of owning investment properties:

  1. Cash Flow – cash flow is the money that is left after all the bills have been paid. This passive monthly income allows you to spend your time building a business, going on vacation or investing in more real estate!
  2. Appreciation – Over the long run, real estate always goes up in value! The key is being able to hold onto your property during a downturn in the market, it will bounce back.
  3. Tax Benefits – If you’re earning $100,000 through your own business and I’m earning $100,000 through my investment properties, who do you think takes home more money? Me! The government rewards rental property owners by allowing you to depreciate the property and providing lower tax rates.
  4. The Power of Leverage (Debt!) – thanks to our friends in the mortgage business, you can purchase a $1M property with only $250,000, then your tenants pay down the mortgage for you. While your army of tenants are paying the mortgage, your net worth is going up every single month!

Back to the case study. Multi-family units are highly desirable investment properties but can sometimes be tricky from a lending standpoint. Conventional loans are only available for up to 4-unit properties. Anything over 4 requires a commercial loan. The current rate for conventional loans is 4.25% while a commercial loan is 5.2%-7.25%. Obviously, your rate significantly impacts your ability to cash flow a property.

Additionally, commercial loans most often have principal balloon payments due after 5-10 years.  You are either required to pay back the entire outstanding balance or refinance the loan after the 5-10-year period. This is both stressful and time consuming.  With a conventional loan, your rate is locked for 30 years and there is never a need to refinance or pay off additional principle.

This specific client was acquiring a 6-unit property. We implemented a simple but often over looked strategy to help this client save thousands of dollars and endless hours. We split the 6-units into 3 duplexes. The primary benefit was we received conventional loans for three separate duplex units vs. receiving one commercial loan for all 6-units.

In addition, our client has the opportunity to sell each of the 3 duplexes separately in the future. Instead of reselling the entire building for a hefty $2M+, our client can sell the individual duplexes. The cheaper price point of selling individual duplexes increases the buyer pool and therefore also increases price (basic supply and demand). It will also be easier for a future buyer to finance with a conventional loan.

Legally splitting the property into separate duplexes takes a couple thousand dollars upfront and a little legwork but the benefit is undeniable.  Not only does the buyer now have a conventional loan but they can also sell off the units individually for a profit.  One key element to implementing this strategy is to work with a highly qualified lender and agent who understands your goals and objectives and is qualified to get the job done. Not all lenders and agents are created equal and in this specific scenario you need a top-notch team supporting you.