First Deal. Great Cashflow. Banks Won't Lend.

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First Deal. Great Cashflow. Banks Won't Lend.

Kurt Krotz
Member since 2019 · 4 posts · 0 votes

First time posting here. Currently under contract with my my first rental property. My partner and I live in NYC and the properties are located in upstate NY, about 5 hours away. Every bank we have applied through has turned us down, so I am posting to see what we are doing wrong/what has to be done better. 

A 6 unit (residential only) building as well as single family home, located next door to each other, were listed for $114,000. Our offer of $107,500 was accepted and we began looking for financing. The 6 unit was appraised in 2017 for $85,000 and the single family at $35,000 for a total of $120,000.

Currently, the rent roll is $3,850. Expenses are $1,704. The properties together cash flow just over $2,000/month, fully occupied with rent decently below market value. With our projected rent increases, which are still conservative, the properties will cash flow over $3,400/monthly.

 The banks that we speak to come back to us stating that since this is our first investment property they do not want to touch it. Or, that the commercial occupancy is to difficult to lend on. 

My question is, why is this such a hard deal to to lend on? The commercial side of it seems to be giving us the most issues. Thank you for your time. 

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Corey Hawkinson
Rental Property Investor · Bloomington, MN · Member since 2019 · 404 posts · 542 votes
6y

@Kurt Krotz This is a case where a private lender will likely be a better option. For a bank, we will still have all of our costs including appraisal, legal, maybe even environmental, etc. Also, I’m sure this never comes into play for any lender as we all just want to help out (ha!), but at that dollar amount most bank lenders will make $0. Basically, your costs to do that loan with a bank are a significant part of the price.

A private lender may charge more on rate but can likely avoid many of those fees. On larger deals, a bank is better. On a deal this size, a private lender likely wins. Plus, if those numbers are correct, you can decide on shorter amortization.

Let’s use a hypothetical comparison:

Bank deal: $75,000 loan, 4.25% rate, fees of $8,000 for appraisal, etc.

Private Lender: $75,000 loan, 6.00% rate, fees of $2,000.

Which is better? Yes, the bank has a better rate but it will take a long time to make those fees back.

(We can argue the details as sometimes a bank can go without an appraisal at that level, but I was using simple numbers to demonstrate)

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  • Shane Ward
    Albrightsville, PA · Member since 2018 · 118 posts · 79 votes
    6y

    You are trying to borrow almost 90% of the value. Most banks will only loan between 70% and 80% LTV. That's the hang up. You would need to bring more cash to the table.

    0Reply
  • Kurt Krotz
    OP
    Member since 2019 · 4 posts · 0 votes
    6y

    Sorry if I didn't specify, but we are putting 25% down. That is the banks requirement. The purchase price that we agreed on is $107,500 (we are looking to finance this number. Which we have 25% of). The $120,000 was the market value of both properties together before the sale.

    0Reply
  • Corey Hawkinson
    Rental Property Investor · Bloomington, MN · Member since 2019 · 404 posts · 542 votes
    6y

    @Kurt Krotz This is a case where a private lender will likely be a better option. For a bank, we will still have all of our costs including appraisal, legal, maybe even environmental, etc. Also, I’m sure this never comes into play for any lender as we all just want to help out (ha!), but at that dollar amount most bank lenders will make $0. Basically, your costs to do that loan with a bank are a significant part of the price.

    A private lender may charge more on rate but can likely avoid many of those fees. On larger deals, a bank is better. On a deal this size, a private lender likely wins. Plus, if those numbers are correct, you can decide on shorter amortization.

    Let’s use a hypothetical comparison:

    Bank deal: $75,000 loan, 4.25% rate, fees of $8,000 for appraisal, etc.

    Private Lender: $75,000 loan, 6.00% rate, fees of $2,000.

    Which is better? Yes, the bank has a better rate but it will take a long time to make those fees back.

    (We can argue the details as sometimes a bank can go without an appraisal at that level, but I was using simple numbers to demonstrate)

    2Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    6y

    @Kurt Krotz

    You need commercial financing.  Not having any experience could be a problem.  You might need to partner on your first deal.  Try smaller banks it is usually easier.  

    Lending 

    1Reply
  • Kurt Krotz
    OP
    Member since 2019 · 4 posts · 0 votes
    6y

    Would hard money be something to consider? The rate would be higher than 6% ? But if the numbers still work it's worth it. 

    0Reply
  • Odie Ayaga
    Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes
    6y

    @Kurt Krotz if you can't qualify conventionally there are a number of hard money long term options that might work for you. As you stated though, they will be higher interest rates than you'll see conventionally

    1Reply
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