What would be the advantage to buying Apartment complex all cash, instead of 20% Down financing?

What advantage is there for paying all cash for one Apartment complex? Why not use a loan, instead of paying $5 mil. in cash for apartments. You would only use $1 mil. combined with financing to purchase the first complex. Allowing the other $4 mil. to be used to purchase more properties. What advice can you offer in this matter?
In Buying Property - Asked by Sam O. - Nov 19, 2009
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Answer(s)

Angela W.
Broker/Agent
Inglewood, CA

I don't know of any lender who will lend 80% on an apartment complex. They aren't very willing to do that on 2-4 units anymore, let alone large complexes. They require a minimum of 25-35% down but to answer your question, cash is king. A Seller may give you a much better price for cash because you can close quickly, they are not at the mercy of an underwriter who may or may not sign off on the deal or an appraiser who may not bring the appraisal in at the sales price. You can refinance later and pull out cash to buy more property. Until then you have a really nice cash flow coming in.

Nov 19, 2009
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Kambiz M.
Broker/Agent
Carlsbad, CA

The problem is if you buy all cash and then try to refi and pull the cash out, you will have a hard time getting any cashout. Many lenders look at the title seasoning and want you to own the property for at least 6 months before pulling any cash out. Also, in the eyes of the underwriter, you must have a good reason to pull the cash out. For example, renovation/remodeling, or any kind improvement towards that particular buliding that will increase the value. The banks are hesitant to give you the cash if you are going to simply take that money and purchase another property and increase your liability.
I recommend putting down at least 40%-50% downpayment so you will have an easier time getting financing during the purchase rather than investing all your cash and not be able to take the money out later.

Nov 19, 2009
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Ed B.
Broker/Agent
Denver, CO

Sam, if a property is underperforming you may not be able to get a loan. This is where an all cash purchase is a great solution. Purchasing based upon current NOI, renovating to re-tenant at market rents and than financing would be the ultimate goal. Done properly it's possible to pull most of your money back out of the proprty and obtain an excellent ROI on the remaining equity invested. Ed

Nov 20, 2009
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Karim A.
Broker/Agent
San Diego, CA

counter to popular belief high LTV loans and rehab are still avail even today - when looking at financing alternatives you want to calculate the impact to your IRR and compare these to your required returns.
Let me know if you have any additional I can help answer.
-Karim
(619) 813-5809

Nov 27, 2009
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Gregory G.
Broker/Agent
San Francisco, CA

You can get a better purchase price and buy REO's/Auctions. Loans are hard to get... find a seller that is motivated get a good price and then refinance.
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Gregory Garver - Commercial Real Estate Broker
Broker License# 01716531
(415)225-9894
gregory.garver@gmail.com
Web Reference: http://www.gregorygarver.com

Dec 3, 2009
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Steve M.
Owner/Investor
Plano, TX

Sam,
The key is what today's reality is vs 24 months ago. If you are buying a stabilized asset with good debt service coverage you can get GSE financing at great rates and with higher leverage if it meets their underwriting criteria. I would not expect a local bank to get anywhere near 80% LTV today, you are looking at more like 50-65% LTV currently for even performing assets. If you buy all cash and expect to refinance later (near term) you better make sure that it will fit with Fannie or Freddie and even local bank underwriting criteria before you buy it, otherwise you might have to hold it all cash indefinitely which is fine if that is your strategy.
The advantage of all cash in today's market is simply this: You can provide a seller a certainty of execution/closing, you can probably get a better price as a result, and you can close faster with fewer transaction costs which is good for both sides.
There is some merit (comfort) to having a deal pass through what are now tougher underwriting standards (and appraisal even though they are sometimes out of touch and somewhat arbitrary depending on the appraiser) if you get a loan as well. The downside is that if you have a financing contingency in todays market you will be in less of a position to actually get a deal under contract if there are other buyers with more experience, lower debt expectation on their offer/contract, bigger name, and certainly if you are going up against all cash buyers, etc.
The advantage of using debt is that it can enhance your return on a performing asset as your criteria is probably a cash on cash return of 9-11% on invested capital and with debt rates in the 5.5-7% range it has a lower threshold than your equity (cash) parameters and helps you get closer to that cash on cash target by using it on a performing property. Put it on a spreadsheet and play with debt LTV levels at current rates, current NOI, and the effect on cash on cash return and you will see (amortization period factors in too).
Keep in mind that Equity (cash) sits at the top of the capital stack and if the deal goes south the first part to get chopped is the equity as the debt is a first lien so there is risk in debt and increases with the higher LTV if your property becomes less of a performer at any time during the hold.
If you purchase a property for all cash and it covers its expenses and replacements there will be cash flow (return) and you won't care too much about what market values are in the short term if you are a long term holder. If you buy a property on a true 9% CAP and keep it there the return on a cash purchase will be 9%, if you raise the operations it goes up from there. You will not have the burden of the debt hurdle to reach every month that puts more stress on your occupancy, rents, etc.
One of they keys will be deferred maintenance and ongoing replacements (reserve) or if you plan on renovating the property. In that case your all-in-cost will be for a higher dollar amount than the purchase price (thus changing your Loan to Cost) and needs to be factored into any return calculations. Even on 80% LTV deals that I have done, with rehab my debt to all-in cost has always been closer to the 55-65% range after renovation depending on the amount of capital spent on the renovation.
I hope that helps answer your question.
Regards,
Steve McCrann
President
MB 35, LLC
972-896-6501
steve@mb35.com

Dec 4, 2009
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