12 unit property funding

[John DeWitt]

What do banks/lenders consider when someone wants to purchase a multi-unit rental? Is it based on tenant occupancy or additional factors?

[Bjorn Ahlblad]

It is largely based on the financial health of the property, expertise of the borrower or team (PM). Borrower needs to have NW equal to loan amount. Lender will want 12-18 months of reserves on deposit.  

[John DeWitt]

Quote from @Bjorn Ahlblad:

It is largely based on the financial health of the property, expertise of the borrower or team (PM). Borrower needs to have NW equal to loan amount. Lender will want 12-18 months of reserves on deposit. 

 So my NW would need to be 12M for a property like that? The list price is 12M

[Bjorn Ahlblad]

Someone on the team needs that NW equal to loan amount-in this case about 9 million. Oh yeah and 20% Down. 12 Mil for a 12 unit? Check your CF underwriting.

[Matthew Jones]

Quote from @Bjorn Ahlblad:

Someone on the team needs that NW equal to loan amount-in this case about 9 million. Oh yeah and 20% Down. 12 Mil for a 12 unit? Check your CF underwriting.

So cal properties traditionally support LTVs between 45 to 60% based off of DSC. All major lenders are going to use an income approach. There are some lenders who will go asset based, typically require 30% down, and as mentioned, rate might be a bit higher.

Liquidity guidelines very from lender to lender, and it is typically 6 to 12 months of the subject property debt service. If your payment is 30k, you need 180k to 360k liquidity post close. Obviously the more liquidity the better, and the strength of the sponsor is a large factor on file $5MM+. 👍

[Carlos Ptriawan]

You can think the same way if you're the lender. For large MF I'd rather go to the syndication route except if you want to become GP. Even if you have 12 mil in the bank, why want to own a single asset that you can diversify to reduce the risk.

[John DeWitt]

Quote from @Carlos Ptriawan:

You can think the same way if you're the lender. For large MF I'd rather go to the syndication route except if you want to become GP. Even if you have 12 mil in the bank, why want to own a single asset that you can diversify to reduce the risk.

Sorry, but what’s a GP?

[Jonathan Taylor]

@John DeWitt to provide some clarity, there are different types of lenders in this space. You have your Freddie Mac lenders that offer longer term stabilized financing below 1-4 residential rates but as @Bjorn Ahlblad stated, Net worth, experience, Personal financial statements, and the property stabilization is considered in this loan, along with required reserves. Its geared toward high net worth, experienced investors.

Next you have DSCR based lenders who lend in MF High balance loans. These loans are similar to the 1-4 DSCR loans in concept but have more calculations. Which include but are not limited to a percentage of rents for operational expenses (25-35%), experience in this space is a must, reserve requirements, PFS and NW are considered but not necessarily equal to the loan amount. Rates are higher than stabilized Freddie Mac but this lender type usually don't have as many requirements as Freddie.

So the question you have to answer is, what is the goal with this property and do you or your team have enough liquid to purchase? @Matthew Jones is accurate that larger down payments are needed for SoCal properties to debt cover. 

[John DeWitt]

Thanks so much! Just got the “Bigger Pockets” book on large multi family investing. Just excited to learn!

[Nick Belsky]

@John DeWitt

My lenders are going to look for the following for a deal like this in terms of the borrower:

Cash on Hand to cover down payment (likely 25-30%), fees, and closing costs? I would estimate around $4MM to be safe.

Liquidity will need to be at least what you have for Cash on Hand plus 12 months reserves. Say around $5MM.  We will also look at your primary residence (no lates, value, etc...)

Experience - Do you own other properties similar to this? Do you have a Property Management company running operations?

FICO also plays a role, but finances are more important.  No Bankruptcies or Foreclosures within past 2 years.

Don't be surprised if you are asked for a personal Bio (short statement about you and your investment past, present, and future).

As the others pointed, out the health of cash flows from the property will be the rest. The leases are ever important here. They determine the current and future cash flows. Operational statements will help determine the NOI that the lender will also use to check Debt Service Ratios.

These loan types don't have to be difficult.  Be sure to work with a mortgage broker/lender who knows this space.  Many claim to know, but don't.  Loans of this size are not cheap compared to Residential 1-8.  12 doors at $12MM is quite a valuation... I don't have details on the location and whatnot, but establishing acceptable ratios may be difficult without putting a lot more down.

Cheers!

[Drew Sygit]

@John DeWitt you should sit down with 2-3 commercial bankers/lenders and ask them all these questions:)

[John DeWitt]

Thanks.Will do!

[John DeWitt]

Here’s the link to the property. It’s actually 16 units for 8M

https://www.loopnet.com/Listin...