All Forum Posts by: Matt Lefebvre

@John Acheson The difference between residential and commercial lending is generally a residential lender wants to make sure YOU qualify first and then that the property meets their criteria... whereas with commercial lending they want to make sure the property qualifies first and then you do.  Now both steps are important, its just a matter of how they evaluate each file that comes across their desk.

If for example, you're looking at an 8 unit building for $500K and you want to put 25% down on the property... well the building had better meet their 1.25 DSCR number first. It doesn't matter if your PERSONAL income is $50K/yr or $500K/yr, if that building doesn't have a NOI that meets their DSCR, they won't loan you all the money you're looking for.

At this stage of the game, there really isn't any substantial benefit to you having an LLC that's borrowing money with a non-recourse loan... because they still will take into account the LLC's track record when it comes to property acquisitions. If it hasn't done any deals... it doesn't matter if its been around 10 days or 10 years, they won't lend the money without a personal guarantee.

I'd look into having a discussion with a local commercial lender that can talk you through the process. Yes, you'll need to make a certain personal income, but more importantly, your deal needs to make a solid NOI and you need to have enough cash to put down to buy a property.

@John Acheson this article sounds like the picture perfect borrower for a lender... but doesn't paint an entirely accurate picture. You don't need a "seasoned" entity to purchase real estate with commercial financing. In fact, investors form new entities all the time right before purchasing a property. The difference here might be if you're considering recourse versus non-recourse financing. Unless you have an existing entity with a solid set of financials (i.e. you own a landscaping business that is looking to purchase a commercial building or you own an entity that already holds several properties), the majority of these commercial loans are going to need to be personally guaranteed by you anyway. You can buy it in ABC, LLC... but the mortgage docs will have you on the line if they have to foreclose on the property because you didn't make your mortgage payments.

When you're dealing with purchasing commercial properties, yes some of those different reports may be requested, but depending on the size of the property you're looking to purchase, they might not be relevant or necessary.  If you're looking at acquiring a mixed-use, 30 unit building for $3M then yeah... they'll require a full commercial appraisal, an environmental report (might not need a Phase 1 here depending on what a quicker environmental survey brings up), and the others are fairly standard for a commercial or residential purchase.  

The bank will most likely require the deal to be underwritten at a specific DSCR (usually 1.25 or higher as @Dennis Wasilewski mentioned). Banks want to make sure they get paid... and they don't want the deal to be too risky. In that example, your total NOI (so after all of your expenses should have been subtracted EXCLUDING your mortgage) should be no less than 1.25 times your annual mortgage payment. So to break that down... if your property has a NOI of $125K/yr, your mortgage payment can be no more than $100K/yr or (usually) 75% LTV (which breaks down to roughly $8,300/mo... or approximately a $1.6M property depending on terms).

There's a lot of differences between residential and commercial lending... but I promise they're not too complicated and your lender will be there to work with you and get you to the finish line.  Let me know if you have specific questions though!  Always happy to answer!  

@Joseph Parker I think whether you should be nervous or not depends on how quickly you think you could fill the potential vacancies.  As a general statement, commercial spaces take longer to lease than residential apartments.  Is there a demand for the type of commercial space that will be coming available?  Are current market rents similar to, above, or below what the current tenants are paying?  Will you need to make significant renovations to the existing units, or can you leave them as-is for the next tenant to fit up?  Those will be important factors to consider with whether your deal makes sense to move forward.  

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@David Besins in my opinion, the biggest expense items you're not really budgeting for are your capital reserves and your repair & maintenance costs.  For 1900s buildings in New England (even if its a brick building) I typically budget between 8% and 12% of gross scheduled income towards repairs and 6% - 10% towards reserves.  These can be huge expense items if you're underestimating them.  

Now admittedly my percentages might be skewed a little high because a 30-35 unit brick building costs probably half in NH compared to in Boston, but rents aren't necessarily cut in half and we still see fairly high maintenance costs.

As it stands right now, the reserves you're budgeting could probably replace 2 or 3 hot water heaters and you'd be out of cash for the year.  This would mean you're not saving a single penny  towards replacing the roof in 10-15 years (which is a $25K+ expense), or the siding, or the furnace, etc.  

While I'm not sure here, another thing you noted is that the landlord is responsible for heat.  It might be on natural gas (which is one of the cheapest fuel sources out there, look at the following math:  

$12,000 annual fuel cost / 30 units = $400/yr heating bill / 12 months = $33.33/mo heating bill per tenant.  When was the last time you've ever seen a heating bill at $33/mo in Boston?  Especially after the insanely cold winter we've had this year.  And this doesn't even factor in heating common areas or any gas water heaters (didn't say who pays for HW but I assume landlord).  Now this number might be accurate because its a brand new system, but that heating cost seems exceptionally low to me.  

Just my two cents :)

@Jeremy G. I'm reasonably certain I know both what town and property you're referring to specifically here so I'll leave my two cents.

I think you're grossly overestimating the rent in that town.  If you're using the median rent for NH (which is factoring in luxury apartments and the Seacoast), you're going to be way too high.  For the 1BR apartment you're looking at $700/mo... and the 2BR $750, maybe $800/mo if its really nicely done and you can find a good tenant.  

Your strategy is good, and you are looking at a town that's affordable... but remember there's always a reason properties are very affordable when only 20 minutes away, properties are selling for double or more.  

@Alex Tobias Commercial lenders still are concerned.  In fact they're typically more concerned than their residential counterparts because houses by comparison are fairly easy to sell if it gets foreclosed on.  If a commercial property gets foreclosed on, that's a much more niche market and they have to maintain some existing tenants (depending on the lease agreements and type of property).  

The bank cares about their investment first and foremost. They want to make sure that the "quick sale price" of the property is never going to dip below the balance of the mortgage they carry. They also want to make sure the cashflow from the investment can support the debt service plus some extra cushion (that's where a DSCR comes in).

Because of the larger numbers, banks are typically willing to allow more creative financing terms, because they don't expect each and every customer to always have exactly the amount of cash needed.  

Convincing the seller to lend your a portion of the money is definitely a big undertaking too.  They have to evaluate whether or not you'll ever pay them back or if they get paid bank after the bank gets paid.  Usually the mortgage they hold is "second position" (hence the term "seller second") so the bank gets their money back first.  

That depends on what type of property you're talking about @Alex Tobias. For commercial mortgages, I typically see lenders allowing a 75% LTV and allowing a second mortgage to be held by the seller, so long as you are personally putting up at least 10% and all of the numbers still work from a cash flow perspective.

If you're talking about a residential mortgage, nope.  Not gonna happen.  Seller seconds are a thing of the past.  

And as a reminder, in either case, if you do NOT disclose to your primary lender that you're having the seller finance a portion of your downpayment, that's considered mortgage fraud.  

Welcome to BiggerPockets @Maggie Gassett!  Best of luck with your path to financial freedom.  Let me know if I can ever be of assistance.