@Scott Schaecher Feel free to call me any time to walk you through the process for larger loans. In the meantime, here is some general info.
Know your target transaction and identify a list of lenders to contact. There will be different lenders for different transactions. There’s not much to do with lenders until you identify a property but I always encourage buyers to connect with me sooner than later so that we get to know one another. It is a good idea to develop relationships with lenders so that when you do identify a property for acquisition, you’re one step ahead in the process and you have people who know who you are. The financing process takes time, so bring your lender in ASAP. You want to start talking to your lender as you start evaluating the property – not after you go under contract.
There are many types of lenders for multifamily – banks, credit unions, private lenders, non-bank agency lenders (i.e. Fannie Mae and Freddie Mac – such as my shop), life companies (generally $10 million+ but some dip under that number) and CMBS (not the best match for small MF transactions). Generally speaking, $1 million loan amount is a threshold that separates banks from many other transaction-oriented lenders. If you pursue a loan request under $1 million, your most likely options are banks and credit unions. Over $1 million, the options start to increase. Each type of lender will look at things differently. Banks will typically look at your global cash flow, taking into consideration all of your sources of income and all of your liabilities to determine how much of a loan you can support by adding the property to your portfolio. Agency lenders (Fannie/Freddie) – and some other transaction-oriented lenders, will look solely to the property's cash flow to support the debt and with respect to the sponsor, will want to see a net worth equal to the loan amount (this can be one person or a few partners combined) and a minimum post-closing liquidity of nine months P&I payments (this too can be combined total between lead sponsors / partners) but won't request tax returns, unlike banks.
Also, many lenders, like banks, will underwrite to shorter amortizations, which can constrain loan proceeds. Whereas, agency lenders (Fannie / Freddie and other non-bank lenders) will underwrite to a 30-year amortization.
In a nutshell, while all lenders will look to your financial wherewithal, banks will rely more heavily on your global cash flow whereas agency and transaction-oriented lenders will look solely to the property, your net worth and post-closing liquidity.
You will also need to address experience. On a first deal as an active, you definitely want to highlight your SF experience and the fact that you are involved in other MF projects. You should clearly demonstrate:
- why you like the property and the submarket
- what your objectives are for improving the property (Do you plan any improvements? If so, do they translate to rental increases or is it related to curing deferred maintenance? Are expenses high and above market? If so, how do you intend to bring them in-line with market)
- Have a pro forma prepared as you stated
- Work on your bio – not many people do it but it adds a lot of value when building new relationships with lenders. It doesn’t need to be long; maybe half to full page. It should focus on your real estate experience, including properties sold, properties managed but not owned and any real estate jobs you may have had before or while investing in real estate
- Have your personal financial statement and schedule of real state up to date, accurately disclosing your net worth and all liquid assets
I hope this answers your questions. If not, let me know.
