Skip to content
×
Pro Members Get
Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
ANNUAL Save 16%
$32.50 /mo
$390 billed annualy
MONTHLY
$39 /mo
billed monthly
7 day free trial. Cancel anytime
×
Try Pro Features for Free
Start your 7 day free trial. Pick markets, find deals, analyze and manage properties.
All Forum Categories
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

All Forum Posts by: Ian Stuart

Ian Stuart has started 7 posts and replied 91 times.

Post: AMA - Agency Multifamily Debt (Freddie Mac & Fannie Mae)

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152
Quote from @Justin Pumpr:

Hi @Ian Stuart Thanks for hosting this. Hopefully you're still active on here! I was wondering what the best way to structure a deal with seller carry is? We have an LOI accepted on a property where the seller is going to carry roughly half of the 25% down payment. We were hoping to get agency debt on this to get the best rate. Is that possible?


Hey Justin: 

Freddie Mac's SBL program doesn't allow subordinate debt (IE - seller carry financing is not allowed behind Freddie SBL 1st lien financing). You'll have to ditch the seller financing and have skin in the game.

Freddie also requires that borrowers meet minimum financial strength requirements (IE - liquid assets equal to 9 month's P&I [bare minimum], net worth greater than or equal to loan amount [bare minimum], FICO>=680). 

Freddie also requires that the borrower loan guarantors demonstrate prior multifamily experience. Specifically, the the loan guarantors need to have controlling ownership in at least (i) 3 multifamily properties [with the first acquired at least 2 years ago], or (ii) 1 multifamily property that has been owned for at least the last 5 years. 

Minimum loan size $1,000,000 [bare minimum]. If you have limited prior experience owning / operating multifamily assets, they'll also require you to use a professional property manager with multifamily experience. IE - they do not let inexperienced new investors self-manage their own properties. 

Post: AMA - Agency Multifamily Debt (Freddie Mac & Fannie Mae)

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152

Hey @Kenneth Lee

In my experience, loan size alone is irrelevant. What matters more is whether the borrower in question has the (i) time, (ii) contacts, (iii) experience, and (iv) ability to effectively communicate & package their loan request to banks & credit unions in a way that is compelling to those lenders. 

IE - it's more a question of borrower pedigree, not necessarily loan size. Below is a quick summary of different borrower types, so you can see where you might fit in. 

1. Institutional Borrowers (With In-House Capital Markets Team): We work with many institutional clients with 1,000's of units under management that have in-house capital markets teams. These in-house capital markets teams' sole job is to self-market their own loan requests, regardless of loan size. Members of these in-house capital markets teams typically have prior experience working at multifamily debt brokerages, investments sales shops, etc., and a full rolodex / database of lenders whom they have rapport with to boot. IE - these are highly experienced borrowers with prior debt brokerage experience and a full in-house team dedicated to shopping debt for them. These clients typically do not need to use a debt broker (unless the lender specifically requires them to work with one - such as Freddie Mac, Fannie Mae, life company correspondents, debt funds, and certain banks / credit unions). 

2. Institutional / Middle Market Borrowers (No In-House Capital Markets Team): On the flip side , we work with some institutional / middle market borrowers that do not have in-house, dedicated capital markets debt teams. Typically, these groups will approach 1-3 relationship banks directly, but hire us to shop the loan to the rest of the market. That said, sometime these clients don't want to deal with shopping the debt at all - and fully dedicate the debt brokerage process to us. At the end of the day, it really depends on the borrower profile, and their priorities as they relate to time, fees, etc. 


3. Individual High Net Worth Borrowers (With Prior Experience As Multifamily Debt Broker)
: We have a few mom & pop clients who previously worked as multifamily debt brokers at major shops like Berkadia, CBRE, JLL, Walker & Dunlop, Etc. These individuals are highly experienced in the art of debt brokerage, and are capable of marketing their own loans (regardless of loan size). These borrowers typically have full databases of lender contacts whom they have existing relationships with, so they know who to contact and how to contact them. They also have a good understanding of different lenders' appetites, and thus can save time by filtering out lenders that won't be competitive. These borrowers typically don't need our help brokering bank & credit union loans, unless they don't have the time / energy / desire to do it themselves (or again - are required to use a broker by Freddie Mac, Fannie Mae, a correspondent life company, debt fund, or specific bank / credit union). Again, it depends on the borrower's priorities (time / energy / fees / opportunity cost of finding new deals / etc)


4. Individual High Net Worth Borrower (No Prior Experience As a Debt Broker)
: In my opinion, it's individual mom & pop investors with no prior multifamily investment sales or debt brokerage experience that need brokers the most. These borrowers are typically out of the market for extended periods of time, have limited contacts in the debt world, lack understanding of how different loan programs work, and are susceptible to working with the one bank / credit union loan officer that they know through their family, friends, church group, college, etc. The result is typically less loan proceeds, lower rate, worse terms, etc. These are the people - in my opinion- that need loan brokers the most, since they really don't have a grip on the market - and are thus more susceptible to agreeing to suboptimal loan proceeds / rates / terms. 

IDK if that helps of not, but generally speaking it's not a question of loan size. It's a question of borrower experience, pedigree, time constraints, and priorities. 

Post: The Long Term of Multifamily

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152
Quote from @Anna Catron:
Quote from @Ian Stuart:

In my opinion, multifamily NOI growth will slow over time as inflation pressures in the U.S. continue to weigh on tenants' disposable incomes (which detracts from their ability to pay higher rents). The U.S. government is in a situation with an unsustainable debt load, and the only way for them to get out is to debase the dollar, which will cause further inflation.

I also think that demand for U.S. treasury bonds (which underpin most fixed rate permanent debt products) will dramatically decline over the next 20 years, which will cause interest rates writ large to substantially increase across the board. Reason being? Fixed income U.S. treasury bonds are not  attractive at all if you're being paid back with dramatically debased dollars with lower purchasing power. 

IMO, this combination of lower NOI growth and increasing interest rates will not only cause cap rates to expand / values to decline... it will also make it more difficult for owners to refinance, even out of "safe" long term fixed rate permanent debt.

Personally I would not want to own leveraged multifamily assets now for this reason. 


 Ian, I would agree if I though the US economy followed a logical progression. I no longer believe that the US economy works like it should. Yes, I agree the dollar is losing value, but we've used so many crutches, so many times, I can't imagine we won't in the future. I still have faith that using leverage in the multifamily space is a safe bet. The disappearance of the middle class is forcing many to have to rent.  


 Agree that the U.S. economy is not working as it should, because the market for U.S. Treasury Bonds is not a free market. It's directly manipulated by the Federal Reserve via quantitative easing, yield curve control, and short term manipulation of Fed Funds rate.

Over the next 40 years, there will be a Minske Moment when people realize that (without reserve currency status, and the ability to counterfeit our own currency ad infinitum) the U.S Treasury is an objectively insolvent entity. At this point, U.S. Treasuries will go "no bid" and there will be a collapse of confidence in both (i) the U.S. dollar, and (ii) U.S. treasury debt instruments [bills / bonds / etc].


When this financial inflection point comes, you do not want to own assets who's values are directly tied and leveraged to the yield on U.S. treasury debt instruments (specifically commercial real estate where most market participants are max leveraged). When the U.S. treasury markets unwind, this will create a "leverage cascade" that you do not want to be exposed to - since there will be no exit liquidity during this time. 


In the meantime, i recommend hedging your leveraged real estate bets (which are essentially, leveraged U.S. treasury bond bets) with non-financialized hard assets like commodities, precious metals, crypto assets, fine art, etc. 
 

Post: The Long Term of Multifamily

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152
Quote from @Robert Rixer:

@Ian Stuart Interesting take. If you are correct, I think it's far more than just the multifamily market that will be in trouble.


@Ray Hage Agreed. I think the idea of owning your house at all costs has had it's day in the sun and people are waking up to the fact that renting is often times the financially sound decision.

@Anna Catron High leveraged operators have always been wiped out with enough time, I don't think that will change. But I do share the sentiment that leverage in general will always be around.

Correct. As the U.S. bond market unravels over the next 40 years due to loss of confidence in U.S. Treasury ability to pay with non-debased dollars, yields will expand and financialized assets with market values leveraged over U.S. Treasury yields will experience substantial drawdowns. 


Less financialized asset classes such as commodities, precious metals, and crypto assets will not draw down to the same extent, as their values are not directly leveraged over the yield on U.S. Treasuries. But assets like CRE that are highly financialized where most market participants are max leveraged? They will draw down substantially in a rising rate environment, especially if persistent inflation detracts from landlords' ability to consistently increase rents & other income.

The problem you're going to run into is that you do not have stabilized occupancy. Ideally, you'll want to see average 90% occupancy across the board, otherwise you'll be relegated to regional bank and credit union lenders that require (i) recourse, (ii) deposit requirements at close, (iii) slightly higher rates, (iv) lower amortization, and (v) less interest only [if cash flow is a priority for you]. 

Also keep in mind that most loans are DCR constrained nowadays. The reason your LTV may "seem low" is because the property's cash flow is underperforming. This underperforming cash flow is likely due to your higher vacancy, not to mention whatever bad debt write offs or concessions are in the mix.

IMO - focus on improving your cash flow, lowering your vacancy, limiting bad debt, and screening for high quality tenants. Then - once you're stabilized around 90% occupancy - re enter the markets to secure quotes from Freddie / Fannie / HUD / life companies / banks / credit unions.

If it's an acquisition perhaps you put short term debt on the property, re-position the asset, then refinance after you're turned the operation around. You can typically secure shorter term 3-5 year fixed rate permanent financing for this with lower leverage, or if you're feeling riskier you could go with a higher leverage, more expensive floating rate bridge loan. Many ways to skin a cat. 


Post: The Long Term of Multifamily

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152

In my opinion, multifamily NOI growth will slow over time as inflation pressures in the U.S. continue to weigh on tenants' disposable incomes (which detracts from their ability to pay higher rents). The U.S. government is in a situation with an unsustainable debt load, and the only way for them to get out is to debase the dollar, which will cause further inflation.

I also think that demand for U.S. treasury bonds (which underpin most fixed rate permanent debt products) will dramatically decline over the next 20 years, which will cause interest rates writ large to substantially increase across the board. Reason being? Fixed income U.S. treasury bonds are not  attractive at all if you're being paid back with dramatically debased dollars with lower purchasing power. 

IMO, this combination of lower NOI growth and increasing interest rates will not only cause cap rates to expand / values to decline... it will also make it more difficult for owners to refinance, even out of "safe" long term fixed rate permanent debt.

Personally I would not want to own leveraged multifamily assets now for this reason. 

Post: How to find a Commercial Multifamily Loan <$1M

Ian StuartPosted
  • Lender
  • Seattle, WA
  • Posts 96
  • Votes 152
Quote from @Mary Lopez:

I'm looking to purchase my first 10-unit apartment building in Ohio.  I live in California, so I am not familiar with the local banks in Ohio.  I did reach out to 1 local bank which was recommended by the listing agent and they are currently not lending to out of state investors. When I did an online search for commercial multifamily lenders, most have a minimum lending requirement of $1M and I don't need that much.  How do I find a commercial multifamily loan that is willing to lend less than $1M?

Connect with a commercial mortgage broker specializing in <50 unit deals. Reach out to the Marcus & Millichap offices in Columbus/Cleveland and have one of the MMCC commercial mortgage brokers produce a few quotes for you.


If you don't have the time to research contact info / programs for 25-50 different lenders and make the calls/emails necessary to obtain optimal financing, hire a broker.

Quote from @Robert Quiroz:

It's super informative to understand the requirements and intricacies of this loan program.  Thanks so much for sharing.


 No worries my man. Here to help where I can. 

Have your broker or banker pull and send you rent comps / market concessions / etc. from like kind / vintage / size properties in the immediate neighborhood surrounding your asset in Baton Rouge, and then make a value judgement on whether you have room to push.

Also recommend pulling a few rent comps off of Craigslist yourself, and see how they compare to your units on a $/month and $/sqft basis. When it comes to comps - only compare on a like/like basis. IE - only comp studios to studios / 1BR’s to 1BR’s / 2’s to 2’s / etc. If classic non renovated units - only comp to non-Reno’s. If your project has limited amenities - don’t comp to fully amenitized assets with a pool / fitness center / carport and garage parking / etc. Sort the unit type comps by square footage descending for best results.

If you’re inside of market by $100-200… immediately bump by $75-175 and see what bites you get. Worst case scenario you have to offer a small rent concession, but now you know where the market is. Don’t get greedy though or market vacancy will straighten you out quickly!


Best of luck 

Quote from @John Barrett:

@Ian Stuart Thank you for the breakdown, this is helpful information to have.  The thing that I don't see getting talked about much is the on going reporting requirements for property financials and borrower financials.  For Fannie Mae in my experience, you need to understand and plan for the quarterly and yearly reporting requirements along with the loan servicing inspection requirements.  None of these are deal breakers but do take time and effort to ensure compliance.

In your experience, is there any difference between Fannie and Freddie loans with regards to the ongoing reporting requirements for the borrower?  As compared with local lenders credit unions the reporting requirements are vastly more for agency loans.

John

Hi John - To your point, borrowers are required to provide updated quarterly rent rolls and financial statements on an ongoing basis. These are typically provided by the borrower's professional property manager. However - if you self manage the asset - you're correct that you will have additional responsibilities related to keeping your books fresh, up-to-date, and in order. 

The primary reason for this, is because Freddie Mac & Fannie loans are "securitized loans" (IE - they are turned into mortgage bonds / mortgage backed securities / MBS after they are originated). The yield on these mortgage bonds is paid by your property's net operating income (NOI). This is why Freddie & Fannie keep such a close eye on your rent rolls and financial statements. They want to ensure that the property NOI is amply covering your debt service, and therefore able to cover the yield on the mortgage bond / MBS.

As a quick example, let's assume that your property NOI fell significantly, because you decided to simultaneously renovate 25% of the units all at once (taking them offline, and causing NOI to sharply fall for 2-3 months). This would be a problem for Freddie & Fannie, because now all of a sudden you're not covering your debt service and are not covering the yield paid out by the mortgage bond. That is to say - because there is a mortgage bond that is reliant on your property's NOI... Freddie & Fannie won't let you just "do whatever" with the property, especially if it impairs the property's cash flow for a period of time.

This is the primary reason why Freddie Mac & Fannie Mae "agency" multifamily loans have so many additional rules compared to bank and credit union loans. There is an underlying mortgage bond yield that needs to be paid & covered by your property NOI. This is why agency loans have more restrictive yield maintenance, and defeasance prepayment penalties (they don't want you to immediately jump ship, and leave the mortgage bond holders handing). This is why the agencies don't let you swap out management companies, or engage in unexpected mass-renovations (as opposed to simply renovating on turnovers), without their prior approval. They're  concerned that the borrower is going to do something stupid, drive the property into a ditch, impair the property NOI / cash flow, and thus impair the mortgage bond. 

Bank & credit union loans - on the other hand - are not "securitized" or turned into mortgage bonds / mortgage backed securities / MBS. This is why banks scrutinize your financials less, are generally more lenient, and are generally are more flexible than Freddie and Fannie in these areas.