How to Present a Deal for Financing

Question

I am very new to real estate on my own, but I have been around the residential rental game my whole life since my parents own 19 properties, one of which is commercial. First question is, would apartment buildings be considered commercial or residential to a lender?

My main question is, I've found a great deal on an apartment building with a great cap rate, below market rental rates, 100% occupancy, and an occupant waiting list. Is this worth even going to my bank with, or would it be a wast of time since it's such a large amount of money and my net worth is around $100K? I have so many questions like, how much would I typically have to put down on a deal like this? Being new to the game would I even have a shot at making a deal like this go through? Should I start smaller and work up? Would the bank do it but I would have to come up with 50%, and in that case do I raise that 50% from hard money lenders/private lenders?

I'm very confident that I could handle the outcome if I got the deal, but I'm having trouble thinking that anyone would invest with me being newer and given it's on the larger side of most deals since the acquisition price is around $1.9M.

Any input on this would be much appreciated, thank you in advance.

John Lutkenhoff · Answer

Thanks so much for the reply and honesty Benden Mitchum, it's extremely helpful to hear. Since doing some networking, I've made some really good contacts including somewhat of a mentor. I've decided to get my feet wet on a smaller scale and tackle a more achievable goal of picking up a quadplex, I will then work up from there. The lack of knowledge is definitely there for me, but I'm amazed at how much can be learned each day with the presence of interest and drive. We all have to start somewhere, and it usually starts with large visions until we grasp the full scope and what's involved. Thanks again for your feedback, best of luck to you in your journey. Hope to speak with you again soon.

Eric Johnson · Answer

@John Lutkenhoff Investors who put little to no money down are usually syndication operators. Meaning, they have previous years of experience in acquisition, redevelopment, and exit strategies of multifamily buildings in their market and other investors trust them to earn returns for them. They create a fund and purchase multifamily properties. So yes, a part of it is raising capital with individuals who have say, 50k minimum to invest (which really isn't that much).

It's a complicated structure that takes years of credibility to build up and a savvy knowledge base of a wide array of topics to properly execute a deal of that magnitude. There is ALWAYS an equity injection in these deals (as mentioned before). It doesn't technically have to be the deal operators money, but the aggregate equity of the partners will have to meet minimum guidelines for the senior debt.

John Lutkenhoff · Answer

@James Barry Thanks for jumping in on this, this information is priceless.

On the current deal I'm working on, I recruited my parents to partner with me. Unfortunately, they are extended at the moment with their commercial tenants asking for rent extensions given the current virus situation, a couple single family properties soon to be vacant due to tenants moving out of state, and their recent purchase and rehab of another property that they fully funded. They are older and would be dipping below a comfortable liquidity level which is totally understandable. They would be all in if it weren't for the current situation and timing. All that to say, part of my reasoning for trying to get creative and figure out how some investors are able to pull this process off.

Either way, I'm glad you mentioned that because that's valuable to know going forward. With these different lenders that you mention, does their criteria differ quite a bit from lender to lender? Are these considered hard money lenders? The biggest thing I'm struggling with is such a large down payment, I have no issue finding a cash flowing deal or even the management side of it. The 25% down is my biggest hurdle.

John Lutkenhoff · Answer

@Eric Johnson Very interesting, that all makes perfect sense.

You're correct, I'm finding out that in the investing world $50k is not very much at all. It seems like a lot to someone who is trying to save that on their own from their day job to improve their position, but in all reality, you can make a great ROI on that money in real estate if placed correctly. Thanks for all the insight Eric

James Barry · Answer

Hi John,

I am in the multifamily industry and can provide some insight into this process.

Once you have obtained a Trailing 12 month P&L statement and rent roll, a mortgage broker can "shop" the deal through multiple lenders, although Freddie mac and Fannie mae are the preferred option for most multifamily investors in my experience.

Given the experience and collateral of you and your parents, you should be able to enter the Multifamily space without equity partners.

-James

Eric Johnson · Answer

good luck my dude

John Lutkenhoff · Answer

@Eric Johnson I definitely am, thank you for the information.

You being a lender Eric, might be able to answer this. I hear of multiple people doing deals with little or no money of their own in the deal. How is this possible? Unless you know multiple people with cash laying around, it's pretty difficult to come up with $80-$100K for a down payment. I've been working on a deal for a couple of weeks right now, and trying all kinds of work arounds, but without that 30% in a secured form, there pretty much is no deal. How are investors purchasing properties with hardly any of their own money in it? On top of that, how are they purchasing the second and third properties shortly after that, again with little to none of their own money in it? Have they just established great relationships with wealthy people that have the same goals?

Eric Johnson · Answer

@John Lutkenhoff sounds like you are on a better track than you were a month ago, so that's good!

You'll need to come in with 30% down for any senior debt to consider a viable deal. Hard money is not gap funding, they all want first lien position. If you brought in 2 additional partners, each of you can inject 10% equity for the 30% and apply for the financing together. This hopefully puts you in a more favorable position. Take down a 4 unit first too much too learn in the meantime, good luck.

Brenden Mitchum · Answer

Hey @John Lutkenhoff, welcome to the BP community!

So sounds like you are definitely suffering from a case of lack of education. Typically, I'd recommend some podcasts and books to get started but it appears you already have a deal and are debating just jumping in. So first I'll ask, what are the numbers? What makes the cap rate "great"?

I am only just getting into apartment underwriting and although it is not difficult it is a bit complicated. Are you confident in your underwriting? If so, your best bet here is to find a partner for the deal. There are tons of experienced investors out there looking for deals right now. You can meet some here on BP but I'd recommend going to a meet up in your area and chatting with some individuals. Chances are you will find someone interested in the deal if it's a good one. That's my advice because the short answer is no, a bank will not lend to you without experience. You may get lucky with a credit union, but again you will likely not get anything better than a 70 LTV. If you don't have 30% to put down then you will need to find a partner anyways.

How to Present a Deal for Financing

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