Multifamily Investment Start ups

One of the best lessons my father ever taught me was about leverage. I didn’t even know it at the time, but now I have come to realize the importance of the lesson. By definition leverage is the use of borrowed money to finance the bulk of an investment. Actually it’s much more than that. It’s about building your net worth. So how do you get started you’re asking yourself? Perhaps my multifamily investment story can explain it.
I purchased my first multifamily dwelling in 1995 several months after I got married. Since my father was a realtor, he showed me how owning would be more valuable than renting. I had a steady teaching job and good credit, but little savings. I was also young and scared, but I had a lot of faith in my father’s wisdom. The house was an old Victorian in the city of Buffalo with tremendous character. We lived on the first floor and rented out the two units on the second floor. The rent covered our mortgage and most of the maintenance costs associated with the property. It was a gift at the time since my husband was running a start up business and the tax write offs were a nice balance. We purchased the house for $90,000 with a 15 year fixed rate conventional mortgage that rolled in our closing costs. We used some of our wedding funds for the required 20% down payment. In other words, we leveraged 80% of the deal or $72,000.
Five years, and two children later, we had out grown our one and a half bedroom multifamily investment and were ready for our dream house. Much like our market today, finding a moderately priced house ($150,000) that wasn’t a major fixer upper in the Elmwood Village was next to impossible. We happened upon a house that was priced above what we were looking for ($279,900), but had some income attached to it. Since we had become used to the idea of having other tenants in the house it was worth consideration. After walking through the house with the listing agent and some other realtors, we knew this was it. How could we make this work? The house was $130,000 more than we could afford!
When we sat down with my father, he showed us how it could work. We were already preapproved for a mortgage ($150,000), we had the income and equity from our first multifamily investment (~$93,150 in value plus $28,000 annually in rent) and there was an income apartment in the new house thus ($20,400/year), our net worth was greater than we realized thus we could leverage more. Suddenly, the asking price was doable. That was the second time we recognized that our first multifamily investment was indeed a gift. The equity we had built up in that property had qualified us for a home that our mere salaries would not have and because we were adding additional income with the new rent we were able to purchase our dream home with other people’s money. It was a successful start up.

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