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Down Payment for Multi-Unit

ryanlake

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Hello,



I am sure there is some savvy investor out there who could help me figure out if a multi-unit building is still 20% down. I have this gut feeling it is more like 35% however.



thank you!
 

Thomas Beyer

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Depends on the location and the asset quality. In Edmonton or most major cities 25% down or more is quite common. In small towns 15% with CMHC is still doable in some instances.



Eliminate your feelings. Go with cold hard numbers.



The main benefit of CMHC is lower rates, by about 1%, as it insures the bank's risk of lending money to you. For this you pay a premium, usually added to the mortgage. Thus, the break even point is about 3-4.5 years out, depending on the LTV and fee % you pay. The second benefit is that this "CMHC ticket" is good for the amortization period, usually 25 years, so if you renew in 5 years with perhaps a different bank, you will probably get a much lower rate again, and again, every 5 years.
 

RedlineBrett

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I wouldn't buy multi fam without at least 30% down right now.



If you go CMHC you will pay a lot of fees. It will take you many years to pay down that principle when compared to a conventional loan. You are also at the mercy of their program when it comes time to renew your loan. What if they've changed their policy and you need to come up with more money down at renewal? Equity always gives you options.



Cash flow in multi-fam (or any residential real estate investment) is usually quite meager until you turn around the building and get your cost structure in place. Most sellers have a lot of equity so they are not under as much pressure to really dial in their costs or maximize their revenues. for this reason it is important to pay down some principle. In a flat market it will save you.
 

Nir

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[quote user=RedlineBrett]I wouldn't buy multi fam without at least 30% down right now.






I would strongly prefer buying 2 multi fam with 15% down each over buying only one of them with 30% down.

Sincerely,

Nir
 

Thomas Beyer

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Of course 15% down with cash flow is preferable BUT that is very hard to impossible to get today given CMHC's underwriting rules and market realities. I also prefer a 5000 sq ft home in Bridlepath for $1M over one with 3900 sq ft for $4M.
 

RedlineBrett

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[quote user=Nir][quote user=RedlineBrett]I wouldn't buy multi fam without at least 30% down right now.






I would strongly prefer buying 2 multi fam with 15% down each over buying only one of them with 30% down.

Sincerely,

Nir


Buying with such high leverage will likely yeild the highest overall return when looking out over long periods of time....



But to benefit from a property 5-10 years from now you have to make it there! Very few properties work with only 15% down.... especially tired apartment buildings that need refurbishment and a freshening of the tenant profile to yeild higher incomes. Saddled with heavy debt, it can be tough to transition a building.



Also, when you work in the CMHC fees you end up with at least a few more years worth of debt to pay off. With so much cash out there and such low returns available from stocks and bonds making larger down payments is, in my opinion, a better way to go right now.
 

invst4profit

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What dollar value do those investors recommending high down payments place on the value of that cash injection. It is always easy to say that the lower the monthly payments on a property the higher the cash flow but that does not reflect reality. Investors must calculate in the cost of cash investments before considering cash flow on any property.



Every property has two income streams one is of course the property itself but a investor can not ignore the fact that the cash or equity tied up in a property also generates cash flow that should logically be part of any smart investors calculations.



Investing X dollars in cash into a property deserves to be rewarded off the top of the properties cash flow prior to actually calculating it's true cash flow. Individuals profiting from selling investments and those profiting from buying investments should view cash flow from different perspectives.



A property purchased with 100% cash does not produce infinite cash flow, why, because that cash must first earn it's keep before the property is credited with real cash flow.



Recognising ROI, COC, cash flow and positive cash flow are all different animals.
 

RedlineBrett

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Higher down payments reduce the overall return of the capital invested,
but they also reduce the risk associated with managing the day to day
operation of the property. Less leverage = less debt service = a more robust property that is
better able to withstand swings in vacancy, R&M, and interest rates.



The opportunity cost of capital rate that you use when discounting the overall return (discounted cash flow analysis) is an internal rate that each investor must choose for themselves. Said rate will vary depending on the investor's appetite for risk and the goal for their portfolio.



A property purchased in cash should yeild a lower overall return than one that is 100% financed. All other variables being equal of course. As it relates to real estate investment the cash purchase is the extreme end of wealth preservation while the 100% finance is the extreme end of wealth generation. Where each investor sits on that scale and the corresponding opportunity cost is entirely up to them.



I have a balanced real estate portfolio and have some very low levered properties and some with very little equity. The investors behind me in each have different goals and hence each investment is structured differently.
 

invst4profit

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My one remaining property (33 residents) was purchased 3 years ago with 100% financing. It had great return (positive cash flow) from day one but as the mortgage is paid down the return is reduced. Although rents have increased to offset.



I have two options, remortgage to free up equity or continue to pay down with the intent of selling providing owner financing to next investor.
 

RedlineBrett

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How is the return reduced through principle paydown? They only way it would be is if you could immediately access that equity to invest it elsewhere. Otherwise it is locked in 'latent equity', since the opportunity cost is zero you are doing just fine by leaving it in there.



Also, you would need to re-amortize to reduce your payments to reflect your new debt/equity ratio.



[quote user=invst4profit]I have two options, remortgage to free up equity or continue to pay down with the intent of selling providing owner financing to next investor.


Your third option would be to re-amortize with your existing balance which should generate higher cash flow. Puts cash in your jeans rather than principle paydown. Depending where you are in your life cycle this could be an attractive option.



Also with rates as cheap as they are now I think you should keep your asset and your cash flow rather than sell. No one is going to want to pay the seller a higher rate of interest than they would to the bank... so you may have trouble getting the same return on a fixed rate basis from a new buyer. And if you don't have a better place to put that money why bother, unless you see significant downside risk in your local market.
 

invst4profit

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I had a set time frame from the day I purchased the property. My intention is to hold the property only till I am 65(another 7 years). I have no need for the added income after that point in time and no desire to deal with any aspect of the business beyond that point. I am fairly certain that by age 65 I will be sick and tired of the hassles and responsibilities.



My goal is to retire entirely, no real estate, no tenants, no property managers, no stress. Just a simple laid back middle class life of ease.



As far as my comment concerning principal pay down reducing the cash flow on the property is concerned I view money tied up in a mortgage as a negative. Every dollar of income that goes toward the mortgage is saving me less interest than I could receive on that dollar if I could invest it elsewhere.

After all it is my money.



My mortgage is at 7%, I could invest at approximately 10% (personal loans) so the properties monthly income is required to pay me the difference, 3%, on my principal pay down. Therefor the more I am forced to pay down the principal the more my properties cash flow is reduced. Probably not significant to most investors but I believe every dollar must earn it's keep and the income property does not get a free ride by excluding hidden costs from the bottom line.



But like I said the upside is that because bank financing is extremely difficult to get on my type of property if I pay it off I can expect to get a good return when I sell by holding the mortgage. That was my plan from day one so I accept the consequences.
 
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