All Forum Posts by: Matthew Drouin

@Tayvion Payton to get a better understanding of the loan products, it's best to have a conversation with a commercial loan officer at a local community bank or credit union.

On commercial, the number one rule is a deal meeting their DSCR loan covenant, which is typically 1.2 to 1.25. How to calculate DSCR is NOI divided by Annual Debt Service. Also asking them how they calculate DSCR and whether its on Pro Forma or trailing 12 financials or tax returns.

A lot of times you'll see properties that don't make DSCR on tax returns because the owner might have booked capital expenditures or major maintenance to repairs and maintenance. Most lenders I work with go off of the Pro Forma income expense on calculating DSCR.

The terms can be all over the place. Some banks will do 80% LTV but only on a 20 year amortization schedule or 75% LTV on a 25 year AM. Balloon payments are very prevalent in commercial financing. Most banks will do a 25 year amort but only a 10 year term, which means you either have to sell or refinance the property at the end of the term.

Also be aware of prepayment penalties.  Most community banks in commercial lending will have a pre payment penalty if you refinance or sell.  They usually have a step down on that penalty like 3% year one, 2% year two, 1% year three and so on and so forth.

So if you are buying a deal with the intention of rapidly increasing it's value in less than 24 months in order to refinance it and pull your cash out, you might want to go with a credit union for the acquisition financing because FCUs are barred from charging pre payment penalties.

I could talk about this for hours about all the nuances but my fingers don't type that fast lol

@Leslie L Meneus you are trying to find a tribe of super freaks.

Let me explain…

Only 6% of Americans own one or more rental property.  If you own one rental, you are part of the exclusive 6% club. A freak.

Those who own larger commercial deals, I would venture to say 1% or less maybe? 🤔 

Anyway my point is you need to surround yourself with likeminded people.  Obviously you are trying to go down that track.

So go to as many meetups as you can.  And start feeling people out and figure out who’s real and which one of those you vibe with. And start the tedious process of building those relationships.

Or you could skip all that and find a mentor that also has the community of likeminded people.

It will take you less time but is likely going to require an up front investment.

Btw have you done a deal yet or would this be your first?

@Tayvion Payton if I were starting out again I would follow the “DDD” rule.

Just “Do a Deal Dammit!”

Newbies starting out get all spun around with:

😵‍💫 Do I do a single family rental?

😵‍💫 Do I buy for cash flow or equity?

😵‍💫 Do I do LTR MTR or STR

😵‍💫 House hack?

😵‍💫 In my backyard or out of state?

By the time they research and go down all the rabbit holes of different strategies, never sticking to one in order to gain traction, they get exhausted, throw their hands up and never take any real substantive action.

Pick something and go with it, all the way to its conclusion.  Remember, the first deal is not meant to make you money, it’s meant to get you into the 6% club (only 6% of Americans own one or more rental properties)  Get into the club and figure out which direction you want to scale.

If I were to start all over again, knowing what I know now, and assuming I had some good cash to work with (I was broke as a joke when I started), I would have done small commercial all the way.  And bought a stabilized value add 5+ unit deal.  Something that didn’t need a complete overhaul but something that I would do light cosmetic cleanup in a good area.

Reason being is that let’s say I bought a 5 unit building for 500k and put $100k down.

Let’s assume that building has $100k in annual gross rents. And where I could boost the rents 20% over a four year period.  Or $20k.  Commercial is valued differently than residential.  In residential (1-4 unit), you are hamstrung by what your neighbors property sold for down the street.  In commercial you are valued based upon income.  So assuming your subject property is in an area where the income capitalization rate is 7.5%.  You divide that $20k by .075 and you get a boost of $260k to the valuation.

Allowing you to take the property back to the bank, get a new loan with $208k of additional debt on the property, pay yourself back that investment and now you have enough cash to buy a $1M deal and use that strategy over and over while scaling exponentially.

Welcome @Tayvion Payton!

• Analyzing Deals: Typically 50% of revenue is going to go right to operating expenses on small multi family.  Could be less on newer construction but you’ll pay more for the property.  This is a quick and dirty way to quickly make heads or tails of the property very quickly to understand if it’s insanely over priced.
• Lessons Learned: I should have transitioned to larger commercial deals sooner.  It took me 11 years, 25 properties, and 76 doors just to replace my income.  It took me 1 property and 1 deal to replace my wife’s.  Every other mistake I made was valuable and part of the journey.  And you’ll make mistakes too.  When you make a mistake, 99% of them will not be fatal.  The only bad mistake that should be avoided is buying a bad location.
• General Tips: I could spend hours talking on this one.  Happy to connect one on one to dive into this and give you some clarity.

@Rebecca Cho I’m going to be a heretic here.  Even though your market might prove expensive, I would exhaust all options before ruling it out.

Truth is, you have a unique competitive advantage in your market.  You have relationship infrastructure and knowledge that took a very long time to develop.  And once you change to a new market, you throw all that out and have to rebuild it.

I love expensive markets.  They might not be great for cash flow but might be great for long term capital appreciation especially when you use leverage.

I’d rather own a $1M asset that breaks even but appreciates consistently by 3% than own a $100k asset that cash flows $3k per year.

There’s power in investing in or near your backyard.  Happy to talk further.  Cheers

@Timothy Hero community banks and credit unions are the OG DSCR lenders. DSCR recently came popular in the loan brokerage and private credit space with the rise of STRs and MTRs.

Your local bank lenders will have the best rates typically.  I had a couple clients lock in just recently at 7.1% on 10-30 unit deals.

@Allen Masry to echo everyone’s sentiments here, be patient, educate yourself because as quick as that money comes, it could go away just as quick if you make hasty decisions, especially on people giving advice on Internet forums like these.

That being said, settlements take much longer to come in than you might think.  So you have plenty of time to educate yourself.

How have you managed your own money so far?  And how has that worked for you?

Also I'm not sure on the tax implications of settlements but work with a CPA on a strategy. If it's a structured settlement and you aren't getting a lump lum, you could contribute some of that to a Roth or Traditional IRA each year, or if you are self employed even more to a SEP IRA.

Also what’s your short term, mid term and long term objectives?

Also do you have any debt?  If so what are the interest rates on those debts?

If you have a 10% interest rate on a car loan, then paying that off would give you a risk free 10% rate of return.  Can’t beat that with a stick!

@Kyle Carter just because a building has all section 8 tenants doesn’t necessarily mean that the cap rate will be higher on exit but it might attract a buyer(s) that are focused cashflow and not appreciation; therefore a lower price to juice the yield.

One of my non negotiables if I were you would be to only buy in an area that is desirable.  Some investors think that just because they are section 8 they don’t care where they live, they just want a roof over their head.   Not the case.

Just like everything else, there are always different quality of Section 8 tenants.  The higher credit, higher income, gainfully employed S8 tenants are choosy about where they live and do not want to live in a bad, high crime area.

By buying in an area that appeals to high quality S8 tenants, the arbitrage that you might see between S8 being higher than market might disappear.

So that being said, it’s more important to lead by location than strategy.

Happy to talk further if you like.  Cheers!

@Marie Copul

Hunker down and pare down your lifestyle expenses as much as possible so you can replace what you need as quickly as possible.

I did have a client take down a 57 unit mixed use apartment deal that added $1.1M to his net worth and $180k a year in cash flow in 12 months but those types of results are not typical.

However, some type of commercial real estate would be my suggestion and one where you are driving the ship so you keep most if not all the equity.

I have some ideas for you and would be happy to talk you through them.

@Matthew C. sounds like you bought in a low demand neighborhood.  But I can see your dilemma, it looks ( at face value) that the area is starting to gentrify.  And you don’t want to sell after going through all that trouble and miss opportunity.

Here’s my take.  Check with some of the people that commented here about the specific location.  “Is this really in the path of progress?”  Urban areas can definitely be tough to gauge from a google maps search because environments are street by street, block by block.  One area can show great signs but literally cross the railroad tracks and it’s a different world.

Be aware of these types of physical delineation.

If you are getting no demand from qualified applicants then I would say it’s not in a margin of a gentrifying neighborhood.  Qualified applicants that get priced out of rapidly improving neighborhoods will move into these areas but it seems like they aren’t biting.

High quality, lower income applicants aren’t stupid and they won’t settle.

If you think this area is a losing proposition, I would think about selling and not banking on hope.

In regard to vacancy, I don’t consider any area that has average occupancy (economic and physical) below 95%

You might pay more for a better area but time will treat you right and you’ll make a ton of money in equity over the long term.