Investor · CA · Member since 2018 · 22 posts · 12 votes
Hi.
Here is a case. I have 500k, and there is a value added deal, asking is 3.1M and with upgrade the value can goes up to 4.2M. Is there any way I can fund for the deal or finance it?
@Sean Zhang yes you can. If you have a good investment opportunity you should be able to find partners or investors to bring capital to purchase the deal.
Please take these thoughts with the kindest meaning.... I'm a little concerned you're about to dump $500,000 into a deal that has a $2.1 million potential spread on the value add, but you don't know about how to finance it yet.
There are multiple ways to fund this deal. Here's a list to start your research:
1) Syndication - be sure to know the pertinent laws regarding FTC filings.
2) Form an LLC with multiple investors. Similar to syndication.
3) Cross collateralization with other assets that have high equity.
4) Non-recourse lending with owner carry back 2nd.
I'm curious what the high-level plan is for boosting value and what budget you have for it. A value add of $2.1 million that costs $1.9 million is scary. The same value add done for $900,000 is a home run!
@Sean Zhang as @Erik W. has stated there are various ways to fund this deal. I would like to see your due diligence. There is a lot more to this than the numbers you provided. For example, what is the neighborhood like? Is this a single family home or multifamily with 5 or more units? What is the cost of the value add? As stated by Erik, this could perhaps work as a partnership.
@Sean Zhang most commercial lenders will require a strong personal financial statement as well as 25% down and 6 months reserves, along with years of experience, especially for a value add deal.
I would suggest finding an experienced partner, they will have the know how, and the relationships with lenders to get the deal done!
Disregarding the details of the deal itself do you want to do this project by yourself or with partners?
If you have $500k ready to deploy that is close to the amount of cash you would need to bring to the table to close assuming you financed it with 70-75% LTV.
I would look at Fannie and Freddie small balance loan for ideal financing assuming it is stabilized. If it is not stabilized I would look at doing a bridge loan to be taken out with a Fannie/Freddie at stabilization.
You could also invest in $100k in 5 or $50k in 10 different syndications with experienced operators/sponsors to cut out the learning curve and better diversify while making your investments much more passive. This is my personal favorite strategy for someone looking to deploy a decent amount of capital into real estate but may not have the experience.
@Sean Zhang, I am agreeing with the others that there is a lot of missing info. As Spencer mentioned, do you want a partner? If not, you will likely have a lot of issues finding financing to cover your 83ish% LTV. If so, active or passive? If active, you are forming a basic partnership and defining roles and ownership. If passive partners, you are filing with SEC, and creating the appropriate docs.
With financing, there will be liquidity and reserve requirements which will limit how much of you $500k you can actually put in the deal as down payment.
Then you get to the deal itself: you have a $1.1mm increase in value. How much will it cost to create that value? How are you funding that? A bridge lender might take that, but then you are probably going in at below 75% LTV on acquisition price.
For tactical advice to get moving: start calling commercial lenders and figure out what LTV they will lend, if they will cover CI, what are their standard covenants, what is the DSCR requirement, etc.
I would expect to bring around $1,000,000 in equity to do this deal, plus the amount to renovate it. Let's say that amount is $350k, which brings you to needing about $1.35mm. You have a few options:
1. Bring in money partners through a syndication
2. Bring on JV partners that bring both capital and experience (direction I would go if I was you)
3. Negotiate seller financing
No matter what option you would choose, make sure you are educated enough to take the step forward.
@Sean Zhang if the other options above are a stretch or too time consuming, considering investing your cash as a passive investor in one or more other deals that are ready to roll. You still have the potential for strong returns without having to stir up a bunch of other capital. Just an option....
What market is the property located in, missing a few metrics? Nevertheless, you still 275k away plus closing cost.
However, that is overcome with some seller held financing. That said, if property in Sacramento CA you looking at a 5 to 5.5 cap, unless downtown or midtown then it could be a 3 or 4 cap!
As caps go, at 3.1k you are looking at a NOI of roughly $155.000. What are the lost to lease numbers? How much are the upgrades, are they aesthetic or roofing, plumbing and electrical? Have you seen the T12, or inquired as to rent collections during this pandemic?
And, remember you still need a property inspection, in which you should have your contractor or contractors bid and quote you a price. In closing, watch that DCR, the lender will as your partner!
@Erik W. Hi Erik. Thank you so much for your advice. Before I made any decision, I would like to learn more detail about each possible options. Maybe I will go for a smaller deal by myself.
@Erik Hatch Hi Erik. Thank you so much for your advice. It is a 36 unit multi family property, the property is just next to the University camps. It is rentable condition, the rental is below the market. I like this deal, but so far I just want to use it as a case study, to see what options I have to close the deal.
@Steven Wilson Thank you so much for your advice. If it is too hard to get the commercial loan, maybe I will consider to start with a smaller deal, or parter with someone( if I find a real good parter).
@Evan Polaski Thank you Evan. There is a lots of knowledge here. This is a rentable property, just the rental is way below the market. So I think, either upgrade the whole property ASAP, and bring the rental close to the market, or do it slower with the money gained from the property itself. I like to do it ASAP, but need to find a good way to fund.
@Todd Dexheimer Hi Todd, thank you. This is why I created this post, knowledge. Once I know which options I may have, I will research more detail about it. I also prefer the idea of JV, only if I can find good parter. Or I would go for a smaller deal.
@Andrew Schutsky Thank you Andrew, good to know. Instead of more passive income, I prefer have more control. But I am very open minded with syndication.
@Sean Zhang for $500K is not enough for a down payment for Fannie and Freddie. The typical ltv is 75% unless the property is located in LA, New York etc, 9 months PITI Reserves in an escrow account, your networth will need to be equal or greater than the loan amount and have experience. I suggest getting a partner or syndicating the deal.
@Sean Zhang yes you can. If you have a good investment opportunity you should be able to find partners or investors to bring capital to purchase the deal.
@Sean ZhangFor your specific question: I know a fantastic debt guy who can help you close on your deal. He's the one running our deal, which we are closing on in 2 weeks or so.
Sean, one of the biggest lessons I've learnt this past year, as I had a multifamily deal under contract, is how "insufficient" I am as a person, though super amazing at many things, there are many things I am not great at and recognizing this is humbling! In the past, my brain (not me lol) will try to convince me that I can do it all!
Frankly, this epiphany has been fundamental to growing the business, finding more solid partners and building our team.
It is too much for one person regardless of how much money one has.
@Sean Zhang I have found in Real estate you have to have 1 of 3 things to do a deal.
1. money
2 the deal
3 knowledge
So I can gather that you are a bit new to the whole process so why not find someone in your area that has #3 and see if you cant bring #1 and see how they would partner with you and bring in #1. This will not get you 100% of the deal but then again it will not get you 100% of the liability either. I have always found in my career when I bring my talents and combine them with someone else who knows more than me, I may not make the money on the deal that I could if I did the whole thing myself. Being teachable and having a mentor will pay you such dividends and I will be able to be part of something much bigger with less of my Time and Money at risk AND I will learn a ton of hands on thing with out the newbie sign on my back.
At the end of the day you will find after 2-4 of these kind of situations you are ready to head out on your won and will be able to do so with confidence and knowledge that you didn't have before and unlike college where you pay before you learn you will able to learn and get paid. Real estate done right is not hard but real estate done wrong can ruin you , your finances, your credit, your future and often your relationships.