Created $4+ million in equity in 15 months - lenders are a pain

13 Replies

In July 2014 I bought a 200+ unit off market deal for $6 million that appraised for $7.4 million at day of purchase in Dallas, TX.

The deal was a re-positioning/value add play - meaning I had to clear out the "bad apple" tenants, bring in better management, rehab the property, and value was created as rents were below market.

In 15 months, my team took the property from 84% occupancy to 98% and we achieved raising rents over $100 per unit. 

Ultimately the deal appraised $4+ million more in 15 months. With the massive amount of equity created a refi strategy was executed.

I have some experience doing large apartment deals, I have bought and sold almost 1000 apartment units. I know that getting a loan is never really "easy".

Generally for larger multifamily deals the lender looks more at the performance of the asset vs. you as the operator. Don't get me wrong, the lender wants to make sure you as the owner knows what the heck you are doing and they don't just give a loan to anyone. The value of an apartment complex is driven off of the NOI (Net Operating Income) and the market cap rate.

My point of posting is that in my opinion, there is significant investment risk in the markets right now. The CMBS (commercial mortgage-backed securities) lender I decided to go with got really skittish with the deal as we got closer to completing the refi.

Several times the deal looked like it was going to terminate.

If you need financing for commercial deals, I encourage you to ask lots of questions before you sign the term sheet. One question I didn't ask upfront of this particular lender was "of the deals they have signed up, how many haven't closed and why". I must admit I am not sure why I didn't ask the question, but will be adding to my question list the next time.


@Brian Adams 

Good to know! I am planning on buying and managing a small 16 unit apartment building in Atlanta in the next 3-6 months. Its also an off market deal and rundown. I was going to get a hard money loan at 9-10% and rehab 2 units at a time while collecting rent on the other units to pay the bills. After that, I want to refi out of that loan and into an FHA Commercial loan at around 4%.

Have you ever gotten an FHA Commercial loan?

~Phil

@Brian Adams

I like hearing about deals that create $ quickly.  When I refinanced part of my portfolio in a cross collateralized commercial loan, the lender was hesitant to give me cash out on new equity.  

Since investing in real estate my perception about money has change.  The right real estate vehicle is like a printer of funny money.  I say funny money because we can literally print money when we... mastermind, think, plan and take action buying real estate.


Frank

@Philip Bashaw , yes I have an FHA loan on one of my assets a 140+ unit deal, but the wrinkle is it is a HUD loan. The terms were aggressive, 90% LTV, rate is 4.15%, 40 year loan, amortized over 40 years and the loan is assumable.

I won't probably ever do a HUD mortgage again as the compliance with HUD is brutal, seems like every other week there is someone doing an inspection and they want different reports.

Plus with this loan program we are limited to only distributing out cash flow twice a year. We also have to significant monies set aside for cap ex. 

So I wouldn't recommend the HUD route.

Good luck with your 16 unit.

@Frank R., so you know exactly what I went through as my lender didn't like the fact I was doing a 100% cash out refi and doing it so quickly.

I get that lenders need to minimize risk. However the 100% refi execution strategy was explained in the beginning before I inked the term sheet. 

I love the funny money concept...

Thank you for the cautionary question to ask a lender. Seems a smart question to ask of any lender- what's your hit to miss ratio and why! 

Congrats on creating such massive equity in such a short span @Brian Adams ! You guys earned it!    

@Steve Vaughan , thanks, admittedly I am not sure why I didn't ask the hit to miss ratio and why.

I love the real estate business as I keep learning new things and am able to keep applying constant and never-ending improvement to my business model and investment strategy.

@Brian Adams

Thank you for the advice on the commercial HUD Ioan. I have heard its difficult, but if I can get this property for what I think I can it will have tons of equity and I'll be able to put away a lot of reserves. It may be worth the pain. Hahaha!

Are you ever going to teach a course on your apartment buying?

Thanks again!

Originally posted by @Philip Bashaw :

@Brian Adams 

Good to know! I am planning on buying and managing a small 16 unit apartment building in Atlanta in the next 3-6 months. Its also an off market deal and rundown. I was going to get a hard money loan at 9-10% and rehab 2 units at a time while collecting rent on the other units to pay the bills. After that, I want to refi out of that loan and into an FHA Commercial loan at around 4%.

Have you ever gotten an FHA Commercial loan?

~Phil

Listen to his podcast. He goes into detail on the FHA loan and why he probably won't do it again.

@Anthony Gayden , thanks for the mention about my podcast. I have had over 50,000 listens to my show and had no idea so many people are interested in owning apartments. 

@Philip Bashaw , here is link if you want to listen to my podcast. Click here for brian adams podcast

Bigger Pockets sure is a great forum for knowledge share.

Originally posted by @Brian Adams :

If you need financing for commercial deals, I encourage you to ask lots of questions before you sign the term sheet. 

What questions should be asked before signing the term sheet?