Commercial Financing below $1M - Any contacts?

Question

Hello-

I've been looking at multifamily properties (5+ units) priced between $200K and $1M but it's been difficult finding lenders willing to loan to these amounts.  I've contacted a number of local banks and credit unions in the areas I'm looking at (IN, OH, TN, KY), however they are only willing to lend to borrowers residing in that state and I'm from CA.  Does anyone have any good lender or mortgage broker contacts for these types of loans?

Thanks,

-Leo

Account Closed · Answer

Yes sir, @Leo B. Feel free to reach out.

Joel Owens · Answer

Leo another option is partner with someone local to the property. You both form a partnership to buy and the lender is satisfied someone local is there that owns the asset.

The issue with the type of property you are wanting to purchase is it is simply not enough units in volume to run remotely. Lenders know 10,20,30 units etc. unless a brand new asset at 100k to 150k a door require what they call (boots on the ground). The lenders do not want to contact someone across the country or out of the country when there is a problem with the property. The banker wants to be able to get into the car and go see them in person. I have heard this over the phone talking to VP's at banks.

The properties at 40k,50k a door etc. that investors typically want require (high touch) by the types of tenants you have and the age of the buildings require constant ongoing repairs to maintain properly.

Another option is to find an older seller who does not want to 1031 exchange into another property. They would rather owner finance the property and take capital gains in small manageable chunks over time. Since it is owner finance with some down qualifying with the seller is typically way easier than with a bank or credit union.

The lenders are under increased scrutiny and audits from the OCC. Basel 3 rules going into affect this year are requiring heavier reserves on commercial loans in some cases. All of this is requiring banks to be more picky on what they loan out on. The committees do not want defaulted loans coming back on them. They could lose their jobs or worse face federal charges as a fall person when the bank goes under.

If you keep calling lenders you might find one willing to do the loan.

Go here:  https://research.fdic.gov/bankfind/

Put in county,city,zip code where the property is and you will get a list of places to check and call. You need to find a lender who is lenient and aggressively growing their small balance commercial RE portfolio of loans. The other lenders might do the business but at crazy rates and terms that aren't good.

This is why my clients have an easier time buying  a 2 or 3 million retail property with national tenants versus say an older 30 unit apartment building from afar. One pretty much goes on it's own with little work and the other is high touch unless you are local.

Some lenders have been putting the breaks on multifamily loans as it is getting too frothy for them. They do not want regulators telling them under audit down the road " You saw the warning signs but continued to lend at these rates and terms so you are negligent and liable."

Multifamily can still work at the right pricing but some levels being purchased at right now is scary.

Joel Owens · Answer

Retail centers in good locations the tenant size tends to be 1,000 to 3,000 sq ft. When one space goes vacant in a center they lease up fast. From LOI to lease execution to build out and CO might be 3 months time.

If you have 10 tenants and one space goes empty you are still at 90% occupancy. Break even with 25% down at a 7.5 to 8 cap tends to be about 65% to service the debt.

Just like any other asset class you have to watch out for location and buy right. I focus on destination tenants where shoppers can't spend money online instead of the store. The junior box to big box spaces that are 10,000 sq ft to 100,000 sq ft can take 6 months to 1 year to fill sometimes.

An easy solution for junior box is to put up demising walls and lease to the 1,000 to 3,000 sq ft tenants for higher rents.

The strip centers I see that struggle with lease up have a bad build design, poor access, not enough parking, bad sight lines from the road, low income area with all mom and pop tenants with weak financials versus regional and national tenants etc.

Tobias Falzone · Answer

@Leo B. Good to meet another Herculean on BP!  I'm in the same boat as you, I have enough to put down for a 200k-800k property, but the financing folks people I have talked to want you to be local or get a bigger property. I'd love to invest locally, but California CAP rates are depressingly low, and assume they will make it up in appreciation, which i'm not sold on long term.  I'd rather have a sure bet on a predictable income stream.  Those types of properties with good CAP rates I can only seem to find out of state.  If I can save more or partner with someone to get a $1M+ property, I would have a lot more options.

Retail and Office properties come with their own advantages and disadvantages, but you generally run into the same financing size/locality requirements as the multifamilies.   They require less management and tend to have longer term tenants, but long vacancies are common on moveout, which increases the risk.  I personally feel that multifamily is more predictable.  Everyone needs a home.

Leo B. · Answer

@Joel Owens Thank you Joel for the comprehensive and insightful response.  It's making me rethink how I would like to allocate my funds and investments.  Ultimately, I want to make sure I invest in something that has a good balance between return and risk.

I would like to understand what you mean by a property that "does not simple have enough units to run remotely."  If a property is 30 units versus 300 units, I'm assuming the property maintenance and tenant pool be a function of the area and property management in place.  I would also perform an inspection of the property to confirm the condition and any deferred maintenance issues that may come up.

I've been looking for owner-financed multifamily properties but I have yet to find any of these.  Are you finding many deals like this?

I haven't looked into retail properties, strip malls, and office buildings so don't have any basis for comparison with multifamily properties.  Generally speaking, are the CAP rates lower, higher or the same when compared to multifamilies?  Are the commercial financing terms and rates also similar?

Thank you,

-Leo

David Repka · Answer

Leo: I would encourage you to look at larger multifamily properties in which the senior loan amount will be more than $1 million. You will have a lot more financing options. The underwriting will be focused on the PROPERTY as opposed to your personal global cash flow.

Best wishes,

David

Leo B. · Answer

I've reached out to each of you via email.  Thank you.

Donald Stone · Answer

Leo I am a broker and I have lenders in that prive range.  Contact me so we can discuss

Nathan Click · Answer

@Leo B.  I'd be happy to help you out .  Please reach out.

Darryl Dahlen · Answer

Providing you are looking at bankable properties in that dollar range I'd be more than happy to help you. I have more than 10 years experience funding commercial loans and am well connected in the lending space. Feel free to send me a colleague request so we can connect talk further.

Commercial Financing below $1M - Any contacts?

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