All Forum Posts by: Ben Firstenberg

That's one I haven't seen before!

I think your best bet might be Fannie or Freddie. As far as I know they're the only group that goes longer than 30 year Am and they typically have the best rates in town. Especially if you can show them your units are "affordable". 

They base their loan proceeds on a 1.25x DSCR.

Xavier, I'm an investor and agent in Atlanta and I specialize in working with other investors. Would love to connect. 

It's definitely possible. In high finance it's called "Equity placement" or "investment sales". I believe those people charge a 1-3% fee but I'm not certain. There's also "debt placement" where brokers will shop around for the best mortgage on your behalf and charge a .50-1% fee for that service. 

Some even employ in house "investor relations" people, whose sole job is to raise capital. 

In my opinion, start with the realtor. I think financing is easier to find, as any bank will have loan officers and you may not even need to be local to get a loan. Similarly, your lender at home may be willing to lend on the property you find out of state. 

Don't worry about being perceived as a tire kicker! A good agent knows that "soft leads" will sometimes flourish into extremely profitable relationships (for both parties) just as "hot leads" can fall apart in days or hours. If you're serious about making a purchase, that will eventually show in your conduct and the agent will take you seriously. 

Crime maps can tell you a lot. As can checking the quality of local schools. Take a look at nearby retail and job centers as well. 

Good locations will have: low crime, good schools, high quality retail and good access to jobs/offices near by. There may also be hospitals or colleges in the area ("Meds and Eds" people say) although both can be located in rougher parts of town too.

Bad locations will have the opposite. "Low/high quality retail" may be somewhat subject, but you'll know it when you see it. Especially low quality. 

Check out what single family homes are selling for in the neighborhood. I look for at least $300k average, but preferably closer to $400-500k for a strong neighborhood. If you can find a SFH that sold for as much as $1M in the area, you're in pretty good shape.

After that, as Doug said above, make sure you go see it in person. That will teach you more than anything. 

Hey Josh, welcome! To answer your questions:

1. I think about it like this. In real estate there are two MAIN ways to make money. In "chunks" or in "yield". Chunks would be wholesaling, value add flips, build-and-sell... you get the idea. Yield would of course be cash flow. Which method of making money appeals to you the most? Maybe you want to do a little of both?

2. It depends on who your investors are. As a total beginner, you're going to have to lean on relationships to raise money. Friends, family or people who know you well. Once you've done even one deal, you can say to people "Look, I executed this business plan and it worked, I'm raising money to do it again." Of course, that isn't guaranteed to work, but it's a much stronger pitch. 

3. You can absolutely do it part time. There will be times (during closing, during tax season, possibly other times) when the workload is a lot higher, but if you can get through that, you'll be in good shape. It's a lot harder if you're planning to self manage. 

Commercial lending is a lot more complicated than residential. When you say "What's the best type of loan to go with" that's a little bit like asking "What's the best city to invest in?". It's a great question, but it's just hard to answer without fully understanding your situation. Based on what you've said, though here are some thoughts:

1. If you're planning to subdivide, make sure the loan has language for releases. Commercial lenders are very particular about what the collateral is. They typically don't let you subdivide and pay off parts of the loan separately unless you request it upfront.

2. On a similar note, if your plan is to subdivide, make sure to understand what the prepayment penalties are. Commercial lenders generally don't let you prepay your loan the same way residential lenders do. Sometimes you can pay extra for prepayment flexibility, so if that's important to you, be sure to ask about it. 

3. Are you willing to offer recourse? That is, are you willing to be personally liable for the loan in the event of default? Banks typically require recourse, but other lenders might not. Given your credit and experience, you may not have a choice, but just be aware of what you're signing up for. 

4. Be aware as well that commercial lenders sometimes can do fixed rate at lower leverage or floating rate at slightly higher leverage. So if leverage is important to you, you could request a floating rate quote. 

As far as a typical interest rate, that's also a really tough question to answer. It depends on your credit, the quality of the property, the length of the loan term, the type of debt you use and the institution you borrow from. It may also depend on your relationship with that institution, especially if it's a bank. In general, commercial loans are priced relative to treasuries (fixed) or relative to SOFR (float). Floating rate debt for someone in your situation might be somewhere around SOFR + 3-5% and fixed rate might be somewhere between Treasury + 2-4%. BIG emphasis on "might" there, as there really are a lot of variables. For reference, SOFR is somewhere around 4.6% and the 5 yr Treasury is somewhere around 4.3% these days. 

If you want to make your application more attractive to a commercial lender, you could:

1. Offer to amortize the loan on a schedule faster than 30 years. You could offer 25 or even 20 year amortization. The faster you pay down the principle, the less risk to the lender. 

2. Offer to fully amortize the loan. Commercial borrowers might borrow for 5 years on a 30 year Amortization (this is called a 5/30), so when the loan matures they still have lots of balance remaining. It's safer for the lender if you fully amortize with, say a 30/30 or a 25/25. 

3. Offer recourse even if they don't require it. You being personally liable for the loan helps lower their risk.

If you want to try to get better terms from the lender, you could request

1. An interest only period to lessen your payments initially. 

2. Lower leverage in exchange for a lower rate. When you borrow with lower leverage, the loan is considered safer and the lender can offer a lower spread relative to the Index. 

3. Releases or prepayment flexibility like I mentioned earlier.

Good luck!

 Absolutely! Glad I could help. Good luck!

To answer your first question: why can't the person with the money hire a property manager? They absolutely could, but then they would have to learn how to invest in real estate, which is not easy. As the managing partner in this transaction, the value you add is your knowledge and skills. You find the deals, win the deals and manage the investment. Don't underestimate how much value that is.

To answer your other question: While you can do it, I wouldn't go into a partnership with one partner contributing NO cash equity to the deal. You're correct, most passive investors would not be okay with that. Plus, you should WANT to put your own money in the deals! As the managing partner, I'd put in at least 10%. My point is, since you're doing all the work you should get more equity than just the cash you put in.