How to Buy Multifamily Real Estate Without a Bank Using Creative Financing

If you're ready to upgrade from single-family properties to multifamilies, but don't want to go out there and raise significant amount of money or have to deal with the current bank qualifications, needing to deal with DSCR loans and needing to put down roughly 25%, then this video is exactly what you've been looking for. See, I'm Zach Beets. I'm the CEO of Smart Real Estate Coach, and I've been buying and selling creative deals for well over a decade now. And not only single families, but commercial and multifamily. So I want to share with you a recent multifamily deal that we purchased at a very good price, at amazing terms. I'm going to share with you how we plan on exiting and creating a 6-figure profit. Over the course of this time as well, so I'm going to share my screen with you here. Now this was 51 Griswold Street. Let me tell you where I found this deal. This was a wholesaler who actually had multiple properties under contract, and I both acquired this one and a three-unit building, which I'll do another video on here as well. Both of them were at a zero percent interest rate, a very. small assignment fee to the wholesaler and had an amazing experience with the actual seller who was selling them. See, what this seller had, 37 units. For many years he was self-managing them and he's just absolutely getting burnt out at this point in time. So he was trying to exit out of all of his deals. Now here's the kicker, right? He wanted to sell some of them traditionally, so he was able to acquire some money for him and his wife. But he also wanted to do seller financing for another portion of his portfolio. So when I eventually had a conversation with him, we were able to lay out an amazing deal. So if you're just actively looking for deals on the open market, there are great creative financing deals on there. And this is one that we have a projection of at least $150,000 in total profit. And This is cash flowing day 1. Now, Meriden, Connecticut is a Class B/C area. It is located right on the train to New York City. I've been buying real estate in Connecticut for well over a decade now, so love the area. And what was also really important is we knew property management companies in the area that they were able to take this over because Unlike when we buy our single-family properties and sell them on rent-to-own, this is going to need to be managed. This, of course, is also going to need to be still run like a multifamily as well. This is a 5-unit building. So let me walk through all of the details here as we walk through this. So we purchased this property for $595,000, which is very fair price for the area. We ended up putting down roughly $32,000 in down payment. Now I'm going to share with you where I got that down payment money. So if you're saying to yourself, well, I don't have $32,000 in my bank account, I'm going to show you how there are so many people out there that want to be passive investors and that are looking to get involved in real estate, but do not have the capacity, the knowledge to actually be the real estate investor and operator. We had roughly $30,000 in equity day one, which the terms that I'm about to share with you are extremely good. And the fact that we're already walking into equity is a huge bonus. We are getting somewhere between, it's right around $6,750 in regards to the total rents right now. But the pro forma is what we can increase over time. And we're netting somewhere around $1,500 and above. After all expenses paid day one with the ability to increase that significantly over time. So here's what this looked like. So it was interesting when I first had initial conversations with both the wholesaler and the seller, we were under the impression that this was a debt-free property. So that's why we went with the approach of we're going to buy this on seller financing because seller financing is when the seller is your bank. Now, typically that's in a free and clear property. But what we soon discovered after we ran title, which means that after we put the property under contract and we're starting our due diligence and we're starting to work towards close, we run title to make sure that there are no liens on the property. Right. Or additional items there. So what we discovered was there was a mortgage on the property. It's roughly $162,000. So what we had to do is we need to restructure this deal. So the original terms of this deal where we were going to buy it for $595,000, we were going to put down roughly $30,000 on the property, and then the seller was going to finance it, the remaining $565,000 at a 0% interest rate and a $2,000 a month principal-only payment. Well, now that you know that there's an existing loan in place, You then have to question, right? How is it possible that you can get 100% interest? I mean, 100% principal when there's interest baked into a normal conventional loan, right? So here's what we need to do. I actually called the seller and I said, look, Mr. Seller, I am very interested in still buying this property. All the other, all the terms make sense to me. I'm willing to get to your price because of the principal paydown. So here's the challenge. The challenge is the only way that I am able to purchase this property is if we keep this at a 0% interest rate. So how do we do it? So what we did was I actually hopped on a 3-way phone call with the seller and his attorney, and I brought my attorney on as well. And I approached the attorney and I said, all right, here's the way I believe we can still get the exact same terms as we originally stated. Right? And what we originally agreed to, so that way this deal doesn't fall apart. And I say, what we're going to do is we're going to create a new mortgage, a wrap mortgage, which is going to incorporate. And if you look on the left-hand side, both the seller's original underlying loan and the new equity or the equity that the seller has. So we then create a new loan of $565,000. Now on that new loan, we're We are going to pay a 0% interest rate to pay down that $565,000. And what we'll do is we'll take that $2,000 payment. We will make sure that it pays the original loan, but we are going to get fully credited for the full $2,000. Now, this is, this is next level strategies. And the reason why I was able to confidently walk through this process is because I knew that we had a solution. I knew that the seller was Extremely interested in selling, and I knew that if we were able to structure this deal properly and find a solution, he was willing to move forward. So all of that prior experience of say well over a decade now really came into play into this specific deal, and because I came across confidently, the attorney was fully on board. So what it really ends up looking like. Is that there's a $1,297 payment that's paying down the original loan. Now we make that payment directly to the bank, and then there's a remaining balance of like $700, $703, I believe, that is then paid to the seller. But our bookkeepers are accounting because we're paying on the wrap mortgage of the full $2,000. Coming off the seller's note. Now, this is how we were able to navigate those nuances in this deal. It ended up becoming an extremely good deal because this was the breakdown. We pulled this directly from the HUD. So when we went to go put the property under contract and get the assignment from the wholesaler— so the wholesaler's job, if you've never worked with one before, the wholesaler's job is to put a property under contract, get the terms together, and then go ahead and assign it to an end buyer. So what we did was we then needed to put down $6,000 with the assignment contract, which is known as earnest money deposit, right? EMD. And then we had roughly $26,000 at closing. Here's the interesting part. Originally, we were supposed to put down a lot more, but because we closed on the property at the beginning of the month, the seller actually had to provide us with all of the security deposits and the rents, which drastically push down the amount of money due at closing. This is how you use these secrets and these hacks in order to get these deals done. So again, if you're interested in getting involved in multifamily versus single, there are a bunch of other nuances involved. So how did we then put this together? Right. Well, we looked at the current rents, which are $6,600, and we looked at what's the long-term rents, which are somewhere around $7,200. And we just looked at, all right, well, there's Definitely at least a $600 upside over time. And that's how we are going to guarantee that we're going to be able to sell this property for significantly more as well, because this is a commercial property. And what matters is NOI or net operating income, which affects cap rate, which then the cap rate determines in the area what the properties are worth. That's why this is really cool to mix some multifamilies with single families because you have these landlord-type properties that you're going to hold for cash flow. And in this circumstance, significant amount of principal paydown. And then you have your single families, which you're selling on rent-to-own, which are generating those 3 paydays, which is allowing you to kind of scale your lifestyle over time as well. So that's how we knew that there was going to be some increase in rents. And here's what the expenses are, right, against the rents. So we have property management fees, which are going to be roughly 10%. Vacancy, you got to account for because there's always going to be turnover at some point. CapEx, which is improving each one of these units. We knew that these units were going to need to be improved over time and we're kind of doing this slowly as the units turn over. We then fix up the property, raise the rents, and that's how we increase the net operating income over time. It's like you have to do this all at once, right? You can if you have a good structure with a seller. That you can do these turnovers or increase NOI over time. So you don't have to come out of pocket with large lump sums of money. We also have water and sewer as well, and you have insurance, and then of course property taxes, which are expenses of roughly $2,716. So here's kind of how the cash flow comes together, right? So you have gross income of roughly $7,300, which would be right at pro forma. Right now it's $6,600. So you can kind of do the math. Then we're going to subtract all of the operating expenses, which brings us to $4,634. And then we got to, of course, manage the debt service, which is that $2,000 principal-only payment. And then we subtract, which we brought in our capital partner. So our capital partner is, in this circumstance, is a self-employed business person. He's actually a a doctor, and he is looking for tax benefits of having some ownership of a property and looking for some passive cash flow outside of his current businesses. So we were able to do it. We play the role of operator in managing the deals because we've been doing it for so long, and you can certainly do this as well. And then they operate passively. They just get a check, and then once the deal cashes out, they'll be made whole. So at the very end, I've label the sponsor here, but really you, the real estate investor, us, the real estate investor, at pro forma is going to bring in roughly $2,000 a month in passive cash flow, right? And at current is roughly $1,500. So we literally are walking into cash flow day one with the upside potential of creating even more profits. And at $2,000 in cash flow, That's right around, what was that, like $400 per door? That's really strong, especially in a Class B market. So here's another cool thing, right? So the $2,000 a month, we can't look at this as an expense. Like the seller's going to need to get paid and the original debt needs to be serviced as well. So, but really what's really cool is like this $2,000 is almost like a forced savings, right? We're drastically paying down debt over time. And we're doing that via 0% interest rate wrap mortgage, so which equals $24,000 each year, and that's $120,000 over 5 years. And guess what? We have 84 months as well. So we actually have an additional couple of years. So that actually could be somewhere around $150,000+ just by paying down debt. Now, unless you're doing these things creatively, You're not able to access these types of interest rates, right? If you were going to go to a bank, it's physically impossible to be able to get a 0% interest rate. So by going directly to sellers and solving sellers' problems, and there's a huge, huge portion of people out there that are tired landlords that are just trying to get rid of these types of properties. In an ideal world, if they can get their price, getting it over time, actually is a better scenario for them than receiving it all at once. So let me walk you through like the 3 pieces that then come into this. So, all right, through this exit strategy, we're doing, right, 3 things. We're going to go ahead and raise the rents over time. We're going to pay down debt over time. And I just had in a very conservative number of roughly $650,000 is what we're going to sell it for in 84 months, which is, I'm telling you, it's extremely conservative because we believe the upside is probably closer to 7 and above. So it's an amazing deal. So if we look at the math, right? So sale price, roughly $650,000. We less any closing costs, which was $39,000, less any remaining debt, which is roughly $450,000. Gross equity at sale is like $166,000. If we returned the original capital back to the investor, that's $85,000. That means that we have Anywhere from $81,000 to roughly $128,000 in equity just in a 5-year hold. And if we then incorporate not only the equity, but we also include the cash flow throughout this process as well, that is $158,000. And guess what? Zero money came out of our pocket. Zero. Money came out of our pocket and created $158,000 in profits and projected profits. So this is the reality though, because NOI actually drives the market. So I was making an estimate based on today's market, but if we look at it, and again, I'm just kind of giving you some examples of cap rate because the value of the properties in commercial real estate is the NOI divided by the cap rate, right? So stabilized, this property in good condition is actually worth somewhere between $695,000 and $795,000. But to be conservative for today's Deal Structure Sunday, we put it at $650,000 because I don't want to overestimate the actual deal. But here's some cool things that we learned from these. So the structure, of course, beats the price. The 0% interest rate is really what makes this deal pretty significant, plus a very low down payment. And of course, the principal only is what generates the equity. Never, of course, trust the seller's numbers. We have to reevaluate and you have to double-check everything as well, because if we would've taken at face value that seller had zero debt on the property and didn't run title, then we would be in a challenging position, right? Of course, if you're going to be bringing in capital partners, make the capital partner an amazing win. Give them the opportunity to really make some awesome money. There's so many people out there that are making very small amounts of money in their savings account, in their 401s, you name it. Of course, make sure you have the right projections when it comes to your exit and be conservative with that. And then know what you're going to do before you balloon when you come to these payments, because these aren't rent-to-owns and we're not locking in tenant buyers to exit out of these within a 24 to 36 month term, you need to be really strategic when it comes to your balloon. You need to understand that you have multiple exit strategies, right? We know that we're going to increase the value. We might sell it. Heck, we might even be able to refinance this property and keep it. Now, you can also go back and renegotiate as well, but really important that you know exactly what you're going to do at that 84 month balloon. Not sure where to get started? Go to smartrealestatecoach.com/ Get Going for free books, strategy calls, and a whole bunch more. We're going to help you get going the wicked smart way. We've been after this for over a decade doing exactly that. Of course, there's some things that you need to watch out for. 8-month balloon could be short for a long-term hold. You obviously have a due-on-sales clause. We buy all of our properties that are subject to, or in this case, a wrap mortgage in a trust because of the Garn-St. Germain Act of 1982. That's what all of our attorneys suggested. Because properties cannot be called due or loans can't be called due for state or tax planning purposes. Yeah. Understand any servicing risk. We, of course, make all of the payments directly to the seller's bank. We don't pay the seller that $2,000 and hope that they make payments directly to the bank. So we handle that as well. And then just make sure that we have— you have a plan in case there's any rent gap. As well. So these deal structures are happening consistently in our business. There are huge opportunities with tired landlords, especially in the current economy. There is a massive opportunity, especially in the small multifamily space where you don't have people raising large amounts of capital or institutions buying up these properties. These are mom-and-pops. These are building relationships. These are solving problems. Go ahead and book an advisory call at smartrealestatecoach.com/advisorysession. And let's, let's chat about how we are currently structuring these deals and how you can structure these deals. And we can actually guide you through that process. If you enjoyed this Deal Structure Sunday and you learned a ton, go ahead and comment. Below, make sure you go ahead and share this and go ahead and subscribe. Every single Sunday we have Deal Structure Sundays that are sharing with you deals that are happening not only in our real estate portfolio but in our community as well. Have an awesome day, everyone. Talk soon.