If you stick to 1-4 units the financing is much easier than 5+. Once you go over 4 the lending criteria changes. While not impossible, it is quite different. Usually over 4 carry a debt coverage ratio (DCR) requirement and a higher down payment requirement that 4 or less does not. Depending on caps, the DCR could raise the down payment requirement. 4 or less usually can be done with less down but will still be determined by cash flow among other things.
Once you recognize what cap it takes to meet the lending requirements you can hone in on properties that might fit the bill. On 4 or less the lender looks mainly at your qualifications (they will discount the cash flow probably 25%). If, after the discount the property is positive, you are probably good to go? If it is negative they will look to see if you qualify based on your other income and debts. Over 4 they will look at the debt coverage ratio, which today, will probably need to be 1.25 after they deduct a management and vacancy percentage?
What that means is that for every dollar of monthly debt the property will need to generate $1.25 in income after the management and vacancy deductions are made. A property selling at a 6% cap may require 65% down to meet the DCR requirement? The same property at a 10% cap would meet the 1.25 DCR requirement with only 21% down. At that point the minimum down requirement would kick in requiring 35% down.
If you e-mail me with the details of a specific property or if you know generally where caps are in you area I will send you an analysis so you can see for yourself what I am talking about. email@example.com or call 626 485-5163
Paul Sylvester, CCIM
May 20, 2009