Does city or class of property affect ability to get financing?

Question

Hello,

I'm planning on accumulating several dozen single family homes with cash over the next year, and then getting a non-recourse loan so I can leverage up the portfolio (without risk of personal bankruptcy).  I am still contemplating whether or not I am going to buy mostly class C properties in the Midwest with very high cap rates and low to zero appreciation, or if I will mainly focus on class A and B properties with lower cap rates with higher appreciation potential and less vacancies and repairs.  But I was wondering, does the direction I go in affect my ability to get financing to fully leverage the portfolio down the road.  Let's say I, hypothetically, accumulate a $1 million portfolio of homes paid for with cash and I am earning a 10% net return, making $100,000 a year in net profit.  And I want to get maximum leverage (let's say 75% LTV), is the finance company going to care if the houses are class C properties in the Midwest versus class A and B properties in the Ft. Lauderdale area?  Might they say, "Sorry, since your properties are class C and aren't likely to appreciate much and could easily depreciate, we are only going to give you 50% LTV.  If you wanted to get 75% LTV, you should have bought class A and/or B properties in Ft. Lauderdale".

I'm trying to learn about this now so I don't end up learning the hard way.

Thanks!

Dan

Dan G. · Answer

How big of a factor is cash flow? For example, if I have a $1 million portfolio of 20 $50k class C houses in the Midwest with a cap rate of 13% versus a $1 million portfolio of 5 $200k class B houses in Ft. Lauderdale with an 8% cap rate, how would they compare for non-recourse financing? The class C portfolio would net $130k per year versus the class B portfolio netting only $80k per year. Is the much larger income stream not appealing to lenders? Would they still only want to finance the class B portfolio despite the lower cash flow?

Joel Owens · Answer

Of course a non-recourse lender cares about the quality of the asset and where it is located. Their only option is to foreclose on the asset or do a workout with a borrower to get performing again.

When someone has a full personal recourse loan guarantee against them and assets to go after lenders will bend the loan criteria a little. Some local banks will do non-recourse or limited recourse at 50% ltv. They will not generally be doing it at 75% ltv.

For 75% ltv non-recourse it is generally a wealth fund, conduit lender, or CMBS type and the property records have to be PRISTINE to be at that LTV for a loan. Lender legal for a local bank might be 3,000 and for non-recourse with  non bank lender can go into tens of thousands for securitizing the debt and selling it off.

By the way non-recourse you still have carve outs on the loan for fraud, taking rent payments and not paying the loan, fraud, bankruptcy etc. So do not think for a second non-recourse will allow such things.

If you find a one off type lender they may be more flexible who is an individual that invests in mortgages etc.

Mark Creason · Answer

Dan,

When looking at commercial non-recourse loans, typically class of property and class of location are extremely important.  If you wanted financing from an insurance company, they typically want to finance A properties in A locations.  CMBS has more leeway, but most likely will not do C properties in C locations.

Mark