Net worth must be equal to loan amount?
Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes
Net worth must be equal to loan amount?
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Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
10yYou're being mislead. You're purchasing power is determined based on a lot of things and the asset type you are purchasing as well as the type of financing you are obtaining. This is the quick response:
For Conventional type (loan in your personal name) with 1-4 family you will be getting a loan based on credit, income and debt to income ratio. This type of loan you can get 40% of your income and sometimes more if you're a strong buyer. You typically can get the deal done with 20% or less down payment
For commercial loan 1-4 family your loan will be based on nearly the same standards as conventional, however they also look at the asset performance or projected performance. The bank may base the loan amount on your net worth as well in this scenario depending on the borrower.
For Commercial loans with 5+ unit deals or other commercial assets your loan will be based on your financials and the property performance. This is likely where net worth will come into play. Most banks want to see a net worth close to the loan amount. If, however, you have an extremely high income from your job they may look past a low net worth. Afterall, if you make $500k/year and have a low debt to income, you should be able to cover some pretty good loan payments.
If you are looking at buying, figure out your goals and call local banks. Ask for a mortgage lender and discuss with them your options.
36 Replies
- Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes10y
Originally posted by @Andrey Y.:
Originally posted by @Chris Pochari:
Plenty of doctors make $500k/year and don't know the first thing about commercial loan qualifications / real estate etc.
I might be making 500k when I'm 60 years old and own 250 units! not anytime soon though and most real estate investors are not doctors making 6 figures!
- Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes10y
@Ian Walsh Neither did I, this is for Fannie Mae financing
- Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes10y
Originally posted by @Wendell De Guzman:
Originally posted by @Chris Pochari:
Hi guys I'm new here but I've been puzzled over this question for a while. If commercial mortgages require that the investor have a net worth equal to or greater than the loan amount than isn't the idea of a 30% downpayment ridiculous? the real downpayment would really be 100%? Say someone had a $120,000 to invest, most real estate gurus would say that you could obtain a 400,000 mortgage right? Well not really because if the bank requires your net worth to be equal to the loan amount than you could only borrow $120,000.
Chris,
For the smaller deals, there's no correlation. However, when I assume a $5M loan for a 133-unit apartment building, one of the requirements of the lender was that the net worth of the borrower has to be equal to or greater than the loan amount.
Having said that, each lender is different so get a good commercial mortgage broker to find the best lender for you.
Also, the downpayment that you have is not equal to your net worth. If it is, that means you're putting everything that you own as the downpayment and if I am the bank I will be worried too. If you default, I have no way to recover my loan from your other assets.
Net worth = value of your Assets less Liabilities
Cash is just one asset
You can have equity in other properties you own
Equity in the stock market
Equity in the home you live in now
Equity in businesses
etc.
Yes but equity in the stock market, retirement account etc isn't going to be anywhere near the amount of the loan!!
- Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes10y
Originally posted by @Chris Pochari:
Originally posted by @Wendell De Guzman:
Originally posted by @Chris Pochari:
Hi guys I'm new here but I've been puzzled over this question for a while. If commercial mortgages require that the investor have a net worth equal to or greater than the loan amount than isn't the idea of a 30% downpayment ridiculous? the real downpayment would really be 100%? Say someone had a $120,000 to invest, most real estate gurus would say that you could obtain a 400,000 mortgage right? Well not really because if the bank requires your net worth to be equal to the loan amount than you could only borrow $120,000.
Chris,
For the smaller deals, there's no correlation. However, when I assume a $5M loan for a 133-unit apartment building, one of the requirements of the lender was that the net worth of the borrower has to be equal to or greater than the loan amount.
Having said that, each lender is different so get a good commercial mortgage broker to find the best lender for you.
Also, the downpayment that you have is not equal to your net worth. If it is, that means you're putting everything that you own as the downpayment and if I am the bank I will be worried too. If you default, I have no way to recover my loan from your other assets.
Net worth = value of your Assets less Liabilities
Cash is just one asset
You can have equity in other properties you own
Equity in the stock market
Equity in the home you live in now
Equity in businesses
etc.
Yes but equity in the stock market, retirement account etc isn't going to be anywhere near the amount of the loan!!
Then why not partner with someone with high net worth? What I teach newbie investors during our JV & Funding Summit is whatever you lack, someone else has it. If you don't have the cash, someone else has the cash so JV with that person. If you don't have good credit, you can still borrow money from a bank by doing a JV with one who has great credit. If you don't have a good deal, someone else has it. etc.
- Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes10y
@Chad Olsen WF said that? They say a lot of things. In my experience, on the borrowing side and selling side (to buyers of my flips trying to qualify for a mortgage) they frequently do not come through. I know realtors that warn their sellers about accepting offers with WF pre-approvals.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes10y
Chris, you are asking the right questions and there are lots of paths to build that net worth through REI or to acquire properties without it. This is a radical example (and I will come back to less radical examples in a minute) but an investor could sponsor a $5mm commercial real estate investment, have high net worth key principals in the deal, put no money down, collect the $1mm down payment from passive investors and take a 30% ownership interest (among other possible compensation...origination fee, management fee, disposition fee). The sponsor just acquired $300k in equity (30% of the $1mm). Let's say the property is improved and the value increases and is sold for $6mm, the sponsor gets another $300k (30% of the $1mm gain) along with it's share of cash flows from the property and the fees I mentioned along the way. This is hard work and takes intelligence and time to build up to but there are many investors on BP reading this post who do exactly this type of work.
I started with a radical example and this can be done on a much smaller scale with partners and investors on any property under a number of deal structures. An investor can also use their own capital and invest in properties where they can add value and create equity...a flip being the clearest example to use. Many investors on BP started with limited net worth and built it up through the use of adding value, using OPM, sweat equity, hard work, appreciation...all the above. Good luck with that journey.
- Bodega Bay, CA · Member since 2016 · 12 posts · 2 votes10y
Originally posted by @Mike Dymski:
Chris, you are asking the right questions and there are lots of paths to build that net worth through REI or to acquire properties without it. This is a radical example (and I will come back to less radical examples in a minute) but an investor could sponsor a $5mm commercial real estate investment, have high net worth key principals in the deal, put no money down, collect the $1mm down payment from passive investors and take a 30% ownership interest (among other possible compensation...origination fee, management fee, disposition fee). The sponsor just acquired $300k in equity (30% of the $1mm). Let's say the property is improved and the value increases and is sold for $6mm, the sponsor gets another $300k (30% of the $1mm gain) along with it's share of cash flows from the property and the fees I mentioned along the way. This is hard work and takes intelligence and time to build up to but there are many investors on BP reading this post who do exactly this type of work.
I started with a radical example and this can be done on a much smaller scale with partners and investors on any property under a number of deal structures. An investor can also use their own capital and invest in properties where they can add value and create equity...a flip being the clearest example to use. Many investors on BP started with limited net worth and built it up through the use of adding value, using OPM, sweat equity, hard work, appreciation...all the above. Good luck with that journey.
Thanks, great advice
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
All lenders are different and have different thresholds and guidelines for doing deals.
Can't stick it all in a box with a pretty bow and say that's how financing works. So many factors are at play.
Net worth is a component but it tends to be iliquid.
Someone buying a 4 million property putting 1 million down but has net worth of 3 million and 2 million is liquid still looks pretty good. Financing kills deals so you have to know the financing.
Give you a quick example in commercial. Someone spots a Walgreens pharmacy with 7 years left on primary term of the lease at a 9 cap. They think it will cash flow like a monster. Purchase price is 4 million and they think 25% down with a 25 year amort.
Instead lender looks at 7 years guaranteed and gives 15 year amort. max for payment schedule. The lender on the appraisal has a current tenant occupied value and a dark value if the tenant doesn't pick up the option 7 years from now. The lender wants that dark value at or higher than the loan balance will be in year 7. That way if they have to foreclose they will be made close to whole on the loan. So the lender might require 35 or 40% down to do the loan and a 15 year amort. Now you have accelerated principal pay down for the lender but very little cash flow.
You have to know the financing to understand what the return will be.
- 10yChris JacksonPro MemberInvestor · Southold, NY · Member since 2016 · 173 posts · 154 votes
There are a lot of solid answers here @Mike Dymski has really summed it up.
I would say that the net worth >= greater than loan amount does come into play in the 1MM+ commercial non recourse space. Just know that going in so are not surprised after you have spent 150 hours on the deal.
The good news is its solvable. Many real estate deals in that 1MM+ commercial space involve partners (GP/MMs and LP/LMs and sponsors ) If you have a super sweet deal and the only way you are getting that deal done is with that loan that requires some net worth , then you can partner up with someone that trusts you and provides that net worth gap. p.s. you would probably need to give them a piece of the action, but that the beauty of real estate, create win win.
You dont get the deal done without net worth partner, net worth partner just has to sign on the dotted line, get a fair piece of the action (everything is negotiable) and you get the deal done.
Also in many cases the net worth piece is 'combined net worth' of the principals on the deal. Now lets be realistic, dont go out and get 20 people with 50k net worth. The bank will say 'who is this clown' Be realistic, 1-3 maybe 4 sponsors with decent experience may pass the combined net worth requirement.
I know alot of people get frustrated with bank requirements (including myself) and many times the requirements seem illogical but my advice would be, think like a bank. 2.5 MM non recourse loan is a loan that a bank is basically saying "if you guys screw this up we are going to have to take this loan back and manage the property" and they dont want to do that. So if you have 3 principals, 2 of which own 70 units over 4 years, 1 guy has 600k net worth, 1 300k, 1 no experience but 1.9MM in net worth the bank will say ok there is some net worth here , the guy who has 1.9MM on the loan although doesnt have experience but does have net worth, if something goes wrong he does not really want his credit dinged so he/she has the financial reserves to throw in 100k to help the property if things get dicey. Although in non recourse that capital injection is not required, if you think about it logically at least the capital is there from one of the principals and thus lowering the risk to the bank.
I tell my nephews and anybody that is on the younger side (im 41 so I am beginning to be old man bro to some people heh) , this is why keeping your credit and financial health in order is very important as you begin to partner up with people. If you show up with experience, good credit and solid net worth you have leverage. They dont teach you this stuff in school, shame really.
- Lender · Morgan Hill, CA · Member since 2015 · 55 posts · 24 votes10y
@Salvatore Lentini I agree with you about that. WF can be very challenging to work with. But in reality, all of the big banks are like that. I've not actually tried to go through the process with them on a commercial loan yet, but will let you know when I try and what the result is.
- Rental Property Investor · SAN DIEGO · Member since 2019 · 69 posts · 38 votes6y
Old thread. Thank you @Chris Jackson for this golden nugget! This was a question that I was asking as far as sponsorship and net worth for the loan.
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