First deal, bad credit and large opportunity

Multi-Family and Apartment Investing
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First deal, bad credit and large opportunity

Joshua Nicholas
Commercial Real Estate Broker · New York, NY · Member since 2014 · 65 posts · 47 votes

Hi everyone,

I'm looking to purchase my first MF deal and I was hoping the Bigger Pockets community could help me with some issues I'm facing. Brief intro, I'm 27 and I became a commercial real estate agent last year. 

I have poor credit (around a 550) due to some credit cards I allowed my parents to take out while I was in college that were defaulted on. Last year was my first year in real estate and I didn't make much in the way of commissions (lived off my savings) and as such, my tax return is going to be quite pitiful.

But recently I had a personal windfall where I made six figures, and I've raised $1.2mm in equity from some friends and family. In addition, I have a willing guarantor who owns $400mm+ in MF property.

The issue I'm worried about is that some mortgage brokers I've spoken with, and Michael Reinhard's book on commercial mortgages, say that I need to have 3 years of proven income (I changed jobs a bunch after college) as well as good credit (don't have) and previous ownership experience (don't have) in order to get a loan.

On the other hand, when I read things from some other sources like the BP forums, or from investors like Dave Lindahl, they state that with a strong guarantor a bank will still give me a loan to buy a property even if I have weak credit, insufficient net worth or lack of experience.

I'm looking at some deals and I would be looking to borrow 65-70% LTV, non-recourse and 10yr fixed and all of the deals I'm looking at have a 1.6+ DSCR.

Is there any chance I can get a loan with my problems due to the strength of my guarantor or is it futile and I should just get a new job, wait a few years until my credit is 700+ and then attempt to get started.

I'm more nervous than anything about spending countless hours underwriting a deal, spending money on due diligence and asking my guarantor to spend time applying for the loan, only to be embarrassed when I get turned down. I obviously don't want to ruin such a valuable relationship 

Any advice/help would be GREATLY appreciated.

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Karen MargraveBusiness Member
Moderator
Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
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@Joshua Nicholas First off, you never know until you try, and even if you are turned down one place, keep going until you find what you are looking for. That's the nature of the beast, if you are going to make it, be willing to do what you have to do to get it done, and don't quit! (as long as it's a good deal and makes sense, if it doesn't one of the most important things in real estate is to learn when to walk away!) 

What are the numbers you are looking at? Post the information so that we can see what it is you are trying to accomplish. What is the asking price of the property? Number of units? Income? Expenses? Age of the property? Location (city, you don't need to be specific) How much do you have to put down? Who holds the current loan on the property? (they may want to stay on as the lender with a good guarantor, etc.) 

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
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    Certain loans are more guarantor based and others are asset based.

    If you have a deal and have spoke with just a few mortgage brokers you might have better luck calling around. All different types of commercial lenders out there.

    If you take a certain equity stake under a certain percent you can sometimes get away with not being on the loan if you have other partners.

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  • Joshua Nicholas
    OP
    Commercial Real Estate Broker · New York, NY · Member since 2014 · 65 posts · 47 votes
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    bump

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
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    If your 6 figure windfall and $1.2mm in equity from some friends and family and a willing guarantor who owns $400mm+ in MF property isn't enough to buy your first MF deal without the banks, then maybe you are looking at the wrong deal? Or, how about going into a Joint Venture with one or more of them? Cheers...

    0Reply
  • Karen MargraveBusiness Member
    Moderator
    Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes
    11y

    @Joshua Nicholas First off, you never know until you try, and even if you are turned down one place, keep going until you find what you are looking for. That's the nature of the beast, if you are going to make it, be willing to do what you have to do to get it done, and don't quit! (as long as it's a good deal and makes sense, if it doesn't one of the most important things in real estate is to learn when to walk away!) 

    What are the numbers you are looking at? Post the information so that we can see what it is you are trying to accomplish. What is the asking price of the property? Number of units? Income? Expenses? Age of the property? Location (city, you don't need to be specific) How much do you have to put down? Who holds the current loan on the property? (they may want to stay on as the lender with a good guarantor, etc.) 

    2Reply
  • Account Closed
    Troy, NY · Member since 2011 · 32 posts · 19 votes
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    If I had the leverage you have, I wouldn't wait or worry about my credit score. I thought commercial deals were more about the investments numbers, not the individuals? 

    0Reply
  • Steven Daley
    Investor · McDonough, GA · Member since 2014 · 8 posts · 3 votes
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    Hi Joshua, I  think you are in a great position, you can utilize a small  portion of your friend and family's equity to use towards a down payment and be creative with the financing. You can try and get the owner to offer seller financing. Good luck!!

    0Reply
  • Anthony CreccoPro Member
    Residential Real Estate Broker · Thornwood, NY · Member since 2009 · 192 posts · 25 votes
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    If you have that much money available and s guarantor like that why not but the deal outright? Regarding the bank my experience is they want someone from the LLC to have a filing net worth and sreo I think you good to go Did u speak to mortgage brokers ?
    0Reply
  • Joshua Nicholas
    OP
    Commercial Real Estate Broker · New York, NY · Member since 2014 · 65 posts · 47 votes
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    Guys, of course I can buy a $1.2mm deal in cash, but in NY, a GREAT deal has a 7 cap. I want to generate 10% returns so I can take a 3% split.

    I need to use the banks to get really cheap leverage otherwise it's not going to happen.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
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    Aah, Joshua, from your original post it seemed that there was a PARTICULAR deal that you couldn't  find funding for.  Now it looks as if all you needed to say is: "hey, who knows of a (6 figure preferred) deal going in NY with a 7 cap or better"?  Good luck...

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
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    @Joshua Nicholas The returns here in NYC are not normally good. Why not just look elsewhere with that cash backing? I have looked at some very interesting things in NJ and outside the state, if I had cash backing like that it would certainly be easier. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
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    Originally posted by @Charles Worth:

    @Joshua Nicholas The returns here in NYC are not normally good. Why not just look elsewhere with that cash backing? I have looked at some very interesting things in NJ and outside the state, if I had cash backing like that it would certainly be easier. 

    What returns are you referring to? NYC has experienced rent growth and appreciation that BLOWS the doors off most any area n the USAC!!!

    0Reply
  • Steve Wilcox
    Investor · Cranford, NJ · Member since 2012 · 303 posts · 153 votes
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    If you actually have 1.2 million and no experience and poor credit, why not put your money into an experienced developers deal. Syndications are based on exactly what your situation is- ie. someone with money but not time, experience, or credit, to borrow against. If you want info on some live deals like this feel free to PM me.

    If you can get into a non recourse situation your personal credit and income is not going to work against you as long as you have sufficient capital reserves, and you look like a real person on paper. If you show no income, no assets, have no experience operating property, and poor credit score, you could see why banks may be hesitant to want to do business with you.

    If you want to run your own deals, I would recommend calling on at least 10 banks that are actual players in the area you want to buy in, be open and honest about what your plans are and ask what it would take to get into a deal. (maybe a lower LTV, maybe higher interest rate, maybe PG a portion of the loan, ect)

    P.S.- If you are looking for a 10% cash on cash return from a currently performing asset in Manhattan you are looking for a pot of gold at the end of a rainbow.

    Also I know @Joe Fairless   has lots of knowledge on this subject and maybe able to help you out. Look him up on BP and PM Him as well, maybe he will chime in this forum post to help also 

    1Reply
  • Joshua Nicholas
    OP
    Commercial Real Estate Broker · New York, NY · Member since 2014 · 65 posts · 47 votes
    11y

    I'm looking in NYC which includes the Bronx, I'm not looking in Manhattan (although I've found a few solid ones in Washington Heights that will approach 10% before even removing rent-regulated tenants through turnover.)

    0Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
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    @Account Closed true but that is backward looking. Right now at the high end it has performed really well but out of wack with incomes and at least most of the ones I looked at did not have large ROIs because the inventory is so tight that people take the good ones quickly to live in. 

    @Joshua Nicholas true both are interesting areas and if could easily end up like Bushwick or Bed Stuy were appreciation rates go crazy although Washington Heights is already discovered. Real thing I could not get comfortable with is that C areas typically require higher repairs and capex so after that the returns were not there although I only did a limited search. 

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
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    Originally posted by @Charles Worth:

    @Account Closed true but that is backward looking. Right now at the high end it has performed really well but out of wack with incomes and at least most of the ones I looked at did not have large ROIs because the inventory is so tight that people take the good ones quickly to live in. 

    I agree that buying at the top of the market is generally not good.  But I have repeatedly witnessed people bail on the SF & Honolulu market saying it can NOT go higher only to be priced out of the market. 

    0Reply
  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
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    @Account Closed very true its generally a preference but to me that momentum works until one day it doesn't and then there is a long way to fall, whereas properties that make sense of price to rent or cash flow likely will not fall nearly as far in any scenario.  For me what did it is all the pros I know say NYC is a really really tough place for returns. 

    0Reply
  • Joe Fairless
    Investor · Cincinnati, OH · Member since 2013 · 2k+ posts · 1k+ votes
    11y

    @Joshua Nicholas congrats on being in this position! Sounds like you've got the cash raised but the credit and experience is lacking. That's been overcome before and the next step I would take is to have conversations with commercial lenders in the market you're looking to buy in. Plus, have convos with mortgage brokers. The purpose of the convos is to get a firm understanding of the underwriting guidelines they require. Then, after that convo, simply partner up with someone who can supplement the areas you're lacking. 

    I have lending friends in the industry who I'd be happy to introduce you to. You can message me and I'll make some intros. 

    Thx, @steve 

    @Steve Wilcox for the kind words. Much appreciated. 

    0Reply
  • Todd R.
    Delray Beach, FL · Member since 2015 · 11 posts · 2 votes
    11y
    Originally posted by @Joshua Nicholas:

    Hi everyone,

    I'm looking to purchase my first MF deal and I was hoping the Bigger Pockets community could help me with some issues I'm facing. Brief intro, I'm 27 and I became a commercial real estate agent last year. 

    I have poor credit (around a 550) due to some credit cards I allowed my parents to take out while I was in college that were defaulted on. Last year was my first year in real estate and I didn't make much in the way of commissions (lived off my savings) and as such, my tax return is going to be quite pitiful.

    But recently I had a personal windfall where I made six figures, and I've raised $1.2mm in equity from some friends and family. In addition, I have a willing guarantor who owns $400mm+ in MF property.

    The issue I'm worried about is that some mortgage brokers I've spoken with, and Michael Reinhard's book on commercial mortgages, say that I need to have 3 years of proven income (I changed jobs a bunch after college) as well as good credit (don't have) and previous ownership experience (don't have) in order to get a loan.

    On the other hand, when I read things from some other sources like the BP forums, or from investors like Dave Lindahl, they state that with a strong guarantor a bank will still give me a loan to buy a property even if I have weak credit, insufficient net worth or lack of experience.

    I'm looking at some deals and I would be looking to borrow 65-70% LTV, non-recourse and 10yr fixed and all of the deals I'm looking at have a 1.6+ DSCR.

    Is there any chance I can get a loan with my problems due to the strength of my guarantor or is it futile and I should just get a new job, wait a few years until my credit is 700+ and then attempt to get started.

    I'm more nervous than anything about spending countless hours underwriting a deal, spending money on due diligence and asking my guarantor to spend time applying for the loan, only to be embarrassed when I get turned down. I obviously don't want to ruin such a valuable relationship 

    Any advice/help would be GREATLY appreciated.

    Hello, your in a very good position... I wish I had $1.25M.  But you really dont have to worry about credit score because you are now above the threshold where you can get Non-recourse financing. In TX at least, Many of the lenders I know say if you borrow $1M or more you can get Fannie Mae Non-recourse financing up to 80% financing. Non-recourse is alot better and thats where they look at the asset, its debt coverage ratio and not as much looking at you.  You should take that Million and come down to booming TX where you can buy 150+ units for $3M   Ive heard NY is a challenge.  TX is booming, oil, technology, healthcare and massive population growth here! This will be the best place when the nations economy will take another down turn also.  But with that much capital, you are in a very good spot.

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