We (my wife and I) just submitted our first offer and it's a bigger deal than we would have expected for our first one. We made an offer on a rental portfolio (14 properties with 95 units). We are doing a JV with my brother in law. Our offer is in for $800k and we have a great shot and getting it accepted according to our RE agent that connected us to this seller. It's an off market deal. The portfolio is cash flowing $21k per month now with a 10% vacancy rate. The seller is retiring and wants to move to FL and build/sell a few houses down there and he needs the cash to do so. The seller is also currently managing the portfolio himself and he is getting too old to deal with it anymore. Motivated seller = great deal (Cap rate is 20% before property management fee, which we will hire for sure and already have a lead on).
We (my JV: my brother in law and us) have $200-250k to use as a down payment, but we will need to find commercial loan financing for the balance ($600k if our offer is accepted).
I'm looking for some help with the best route to go for the commercial loan? We are hoping to have an accepted offer in the next day or so. My RE agent believes the seller will accept.
This portfolio is in Michigan (we live in Grand Rapids and the portfolio is over on the east side of the state -Bay City, MI).
I have already received some great advice from a mentor about going to smaller local banks to look for the loan. We plan to present the deal to 5-10 banks.
We are new to REI in general so I don't know what banks loan against for a portfolio deal like this. My brother in law and I would prefer not to bring our personal (or business, he is a small business owner) finances into the equation if possible. Do banks loan against MV, cash flow, etc...? What are the best banks to do this with considering we don't have any history behind our RE business (we literally just started our business 6 weeks ago)?
Any help or direction would be greatly appreciated.
I would strongly suggest pitching banks with the deal asap. You will need to provide them with the property performance over the past 1-2 years and show them you have done your due diligence on the numbers.
You will also need to show them your track record and ability to manage the asset.
Read this guide, there is a whole section on commercial lending
As fas as the PG - If the loan is under $1 million it is hard to get non-recourse. Just make sure the OA for the LLC has all the liability protection in it.
I would love to find a deal like this.
Agree with @Brie Schmidt , you are probably going to find obtaining non-recourse financing (i.e. financing that doesn't require you to provide a personal guaranty and thus bringing personal/other business assets into the collateral package) challenging given the deal size, your targeted LTV, etc. and the fact that your REI experience is limited (at this point).
Your best bet is likely to approach banks in your area (particularly one(s) that you/your partner might already have a relationship with) and in the area of the investment. You might also try to leverage the network of a commercial mortgage broker who can do some of that legwork for you.
Thank you @brie schmidt and @Geoff Anderman . I appreciate your advice.
By the way @Geoff Anderman Anderman, the market value is $1.4M. How much will that help my ability to get a reasonable commercial loan considering I pick up the deal at $800k
Great question. If it appraises well over the contract price it definitely won't hurt at all. That said it likely won't impact how much of the purchase price you can borrow as the bank will most likely base how much they are willing to loan you on the lesser of appraised value or cost (ie purchase price).
Yes, as Geoff mentioned above, banks generally will use the appraisal or purchase price, whichever is lower. If, after a year of owning the properties the market value is $1.4M, it's possible to go back and refinance using that higher amount.
Regarding your original question, I'd reach out to local banks in the area that are familiar with the properties and the area.
Good luck and keep us posted!
@David Bayon PM me and I can share a financing contact that can help you. I had him work a refi for me and he was able to secure a non recourse loan. I was also sourcing small local banks in the metro Detroit area and found one that I was able to get better terms with so went that way. So you might be better off with a small bank. I don't know how important non recourse is to you.
1 why would someone sell an asset the is worth $1.4m for $800k - not likely. It may get to $1.4m but it will have to upgraded, better managed or whatever to get there.
2 banks will loan on property value(which considers income potential) but the loan will be the lower of purchase price(less down pmt) or appraised value.
3 the banks will require all parties financial statements, and personal guarantees. You will have to have a good financial background, and then feel that you got a hosing before its done.
4 it may still be difficult to get the loan with no experience.
5 I would advice that you do your best to get the deal done, as long as the units are worth $9,000 which seems to be dirt cheap. But based on my history with local banks, it is possible but difficult. Either way, you are about to get an education.
Sounds like a great opportunity David. Here is my suggestion.
1. Fill out a standard rental portfolio tape (spreadsheet) and verify the accuracy of the information the best you can.
2. Reach out to all local regional and community banks that provide portfolio financing. Connect with local investor networks to find out who the best local option is for non-recourse, SFR rental portfolio, blanket loan. This will typically always be your most competitive option. Typically underwritten based exclusively upon your Debt Service Ratio and the cash flow performance of the portfolio, not your personal income.
3. Reach out to B2R Finance and First Key. They offer competitive blanket loans designed exactly for this scenario and offer non-recourse as well. The first thing they will ask for is to send a tape (spreadsheet) of your portfolio. They will provide you with the spreadsheet.
Good luck with your acquisition!
David - any update on the offer? Did they accept it?
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