All Forum Posts by: Ari Stern

There's plenty of solid feedback here already, so I'll try to give a different perspective that wasn't discussed.

Listening to my clients and what they are going through, I notice two main opinions:

- Some want as few investors as possible, as it limits the amount of noise and opinions in the deal. 

- Some want as many investors as possible, as they don't want to give too much ownership to any one person. Most people who get into real estate do it because they like the idea of being their own boss, running the deal, and making decisions on their own. Having an investor with a huge chunk of the deal or large sum of money invested, will often times have that investor inserting himself in the deal, insisting on having his opinions heard, and pushing his weight around, which will have you feeling like you work for him.

There's no right or wrong, but pros and cons you'll have to weigh on your own.

Good luck!  

Quote from @Brian Plajer:

@Ari Stern thanks for the helpful information. Any advice for the residential real estate investor that is scaling up to apartment building investing but doesn't own an apartment building yet, so no experience in commercial properties?

Depending on your current situation, and what your plans are for your next purchase, I would suggest one of two things...

If you do have some experience in rentals, but not necessarily in apartment buildings (i.e. you own a few condos you're renting out vs owning a 2/3 flat) - with enough persuasion, you can find a lender to take that leap, and finance you on an entry level commercial 5-unit building. And from that, parley that into larger and larger properties.

If you don't have any experience in rentals, or if you're looking to buy a larger multifamily property as your first property, I would suggest partnering with someone who has that experience. The partner will carry the deal, and will be the one underwritten on the loan, but you should own at least 25% of the property to gain that “experience” in commercial real estate, and will allow you to go off on your own the next time around.

@Brian Plajer, when it comes to commercial financing, lenders require that the sponsor(s) have a net worth equal to the loan amount, and liquidity of at least 10% of the loan amount. They will also want to see your experience in commercial real estate, and will ask to see a PFS, SREO and Bio.

As far as how much you will need to put down, depends on the lender you go with. In commercial financing, lenders run the gamut, from local, regional and national banks, agency lenders, credit unions, life co's, CMBS, debt funds, etc. The leverage can range from around 60%-80%, and each type of lender has their own unique benefits, which you will need to identify based on your objectives. For example, rate, recourse vs non-recourse, flexible prepayment penalty vs YM/defeasance, etc.

It's important to identify your goals with the property, and then identify the right lender(s) who will meet your objectives.

I hope that helps.

@Benedict Aurelius, great question, but it will depend on the type of property you are looking to buy.

Much of what I’m about to say won’t apply to you if you are looking to buy a 2/3 flat. However, when it comes to commercial multifamily properties (5+ units), whether you choose to get your financing from agency (non-recourse) or a bank (recourse), both are going to want to see the following:

- 3 years tax returns

- experience in real estate owning properties

- a (combined) net worth equal to the loan amount

- a (combined) liquidity of at least 10% of the loan amount.

Most lenders don't look at being a real estate agent or even managing other people's properties as "experience", and want to see that you own, or have owned, property.

My advice would be, for your first deal or two, if this is the type of property you had in mind, to partner with someone who has that experience. You should own at least 25% of the property in order to gain that “experience”, but the partner will carry the deal, and will be the one underwritten on the loan.

Good luck!

@Monica Boyles, all of the advice on here is solid. Rather than repeating what has already been said, I will stress something that I feel was only lightly touched upon - property management. 

I see this more often than I'd like, where new investors will buy a property solely based on how it underwrites. If the numbers look good on an excel spreadsheet they jump all over it. Yet they don't put too much focus on the actual management side of it, and end up cutting corners, or engaging a third-rate management company. And sure enough, the investment ends up being a disaster.  

Since this is out of state, and you're not likely to self-manage the property, I'd highly suggest putting a lot of your effort into identifying a solid local management company. One of the important things to pay attention to, since you are looking for a small property, is your building's proximity to other properties that the management company is managing. A big mistake a lot of investor make, especially when when it comes to small properties, is that they rely solely on the reviews, feedback and reputation on the company, and disregard how far away the company is from their property. Since you're likely to pay the management company a percentage of income, the management company doesn't end up making all that much on smaller properties, and they tend to not want to inconvenience themselves and deal with issues as they arise, and in a timely manner, if it means traveling a half hour away each time. As apposed to a management company that is already managing a portfolio of properties within a few block from you, and can hop over at any time. As a side note, especially with smaller properties, another thing to pay attention to, is some companies also tend to play games on the accounting and expense side, to prop up how much they make from the property. So definitely do your research on this.

Good luck!

With an NOI of $75,600, utilizing a 75% LTV, and using an interest rate of 8%, and assuming a 30-year AM - the way to get to a 1.25x DSCR is by using an 8.25% cap rate, which will give you a value of $916,364.

Keep in mind, that only works with a 30-year AM mortgage. If the lender is only willing to give a 25-year AM, that will drop the DSCR to 1.19x. In that scenario, to maintain the 1.25x DSCR, you will need to bump up your cap rate to 8.65%, giving a value of $873,988.

Hope that helps.

The first question you need to ask yourself is, are you looking to price the property like other unrealistic sellers out there, still living 9 months ago in a 3.5% interest rate world? Or are you looking at the property like an investor, and pricing the property in a way that makes sense.

Lenders tend to use industry standards for expenses when underwriting deals. Just back of the napkin, since the property was just renovated, for this example I would allocate a 30% expense ratio (although it can easily be much higher, especially since it's a relatively small property).

EGI - $108,000

Expenses - $32,400 (30%)

NOI - $75,600

At this point, it depends on two things. What's the cap rate is in the area? And based on today's interest rate, assuming a 70-75% LTV, does it DSCR at a 1.25x?

Crunch those numbers, and you’ll find a value that makes sense.

All the best.

This is why I love BP. There's so much good advice on here. 

One thing I will say is, if the numbers work, and your property can sustain the refi, and you've also identified another property to buy with your proceeds that makes sense, it seems like a no brainer. 

Since you are looking to sell your portfolio in 12 to 18 months, you should just make sure that whatever loan you do refinance into, has a flexible or no prepayment penalty. You also might want to consider a loan that is assumable. In the event rates do go up, your property will be that much more attractive to a buyer if he can assume the loan at today's rates vs putting on new debt at a higher rate in the future. Plus if rates do go up in the future, the property might not pencil out at that point, and that might kill the deal for any future sale you were hoping for. And of course, if the rates dip a little, having that flexible prepay will save you on any yield maintenance or defeasance prepayment penalties. 

For commercial multifamily properties (5+ units), lenders want to see that the property is stable. Typically, that means "90 for 90" – at least 90% occupied for at least 90 days.

When getting financing, the appraised value of a property is always vital. However, as far as how much the lender will give you (especially when refinancing within a short period of time from when you purchased the property), will have a lot to do with your total cost basis in the property, as lenders tend to want the borrower to have skin in the game.

Like everything in life, exceptions are always made. But the typical rule of thumb is as follows:

<1 Year – up to 80% LTC

1-2 Years – 90-100% LTC

2+ Years – 100%+ LTC

For example: say you bought the property for $900k (including all closing costs), and invested $100k in improvements - ($1MM total cost basis). Even if the new NOI gives the property an appraised value of $1.5MM, if you refinance within a year of purchasing the property, the lender will usually only refinance you up to $800k.

@Jason Baik, I'm sure there's a consensus on here, that none of us mind if you extend this to 60 days! 

Great content. Thanks for sharing and educating!