How I Went From 6 to 37 Units With One Acquisition Using Hard Money Financing

by | BiggerPockets.com

Disclaimer: This is a very long post detailing how I acquired a large, out-of-state commercial property. I hope you’ll find it helpful. If you have any questions or feedback, feel free to leave a comment below or drop me a message.

My Cash Goals

Prior to this deal, I owned a duplex and a fourplex. Both properties have appreciated substantially since I purchased and rehabbed them, but produce little cash flow. I have other businesses I work in aside from multi-unit investing. My 18-month goal when taking on this project was to increase my passive income (cash flow) so it exceeded my active income (wages)—an aggressive goal. In preparation, I sold one of my aforementioned properties to raise money for a lucrative multi-family property to rehab and hold onto.

My Search Criteria

  • Capitalization (CAP) rate of 10%+
  • A value-add property (a building that needs work; yet once the work is done, the value increase should exceed the renovation cost, creating equity)
  • A max purchase price of $450,000, with a cash flow of at least $4,000 per month upon completion
  • 10+ units (the more units in the building, the lower my risk)

Note: Single-family investing is not my thing, but perfectly fine if that’s your strategy.

How I Search

Finding good deals is usually about relationships and marketing. However, I don’t ignore online listings. I search frequently for properties that meet my criteria. In this case, I found an out-of-state, broker-listed, 33-unit property that was listed near my target price.

I read for hours every day, and I know which geographical areas are doing well and which areas aren’t. Of course, I’m not as familiar with out-of-state markets as local investors are, but I do my research and network with area experts when I find an interesting deal in what seems like a good area. I searched in a few states, and in this case, I found a deal in South Carolina.

I called the listing agent to get some information. The property had:

  • 33 units spread across 6 separate buildings
  • 14 of 33 units rented
  • 4 of 33 units completely gutted on the inside
  • 15 of 33 units in varying stages of rehab

As a value-add investor, this was music to my ears.

The 14 rehabbed units were 100 percent occupied and collecting rent, providing income to cover a debt payment while completing rehab work. I saw an opportunity to buy this place, complete the rehab, stabilize the property, and gain some equity to leverage for the next deal. The catch, the agent said, would be getting financing for this property, which was best suited to a cash buyer. Banks would be wary of the smaller rental market (around 45,000 people) and the condition of the property. I told the agent to give me a few days to explore some options.

After some market research, I discovered that companies were investing in the area, unemployment was down, rents for this property were well below market, and there was a long waiting list of Section-8 tenants because there weren’t enough units in the city—great.

Validating the Deal

A meeting with my CPA yielded a referral to one of his financial clients. This client was a mortgage broker focused on risky lending. I got in touch with him on Friday evening and had a pre-qualification letter by Saturday morning. Keep in mind it was only a pre-qualification, not a pre-approval (meaning the lender isn’t obligated to finance the deal), but it was a good thing to have in my back pocket nonetheless.

I made a trip, toured the property, and met a very genuine and honest seller who told me exactly what to expect—positive and negative. While I was there, I spent time in the city talking with hotel clerks, gas-station attendants, property managers, real-estate agents, and just about anyone else who would tell me about the neighborhood. I drove up and down every street within two miles and noticed that the local residents really took care of their properties.

Making the Offer

The pre-qualification said financing would cover up to 70% of a purchase price up to $400,000 (this helped with negotiations). It would also cover 100% of renovations. I had enough cash to meet these terms, with enough left over to begin construction and hold onto some reserves.

So I put in an offer of $350,000, which included 30 days to come up with the financing (I anticipated a few bumps). A few hours later, another bidder offered $375,000. Multiple offers—not good. I was willing to pay up to $400,000, so I matched the other offer and put emphasis on my pre-qualification letter. It worked. The seller accepted my offer.

Putting Financing Together

I estimated repairs at $300,000, but I needed a professional to validate my assumptions. I’m not a contractor, and I wasn’t familiar with local prices. I asked for referrals to general contractors from a local lawyer, a regional Real Estate Investors Association president, and the listing agent. Then I scheduled another trip to South Carolina and slotted six local contractors for one-hour walk throughs throughout the day.

In the end, the rehab estimate totaled around $400,000—$100,000 more than I had projected. After further research and discussion, I realized the contractors were high-balling the estimates for four units that needed completely new interiors. They were in a separate building where there had been a fire a number of years ago, and I needed an architect to determine what would be salvageable, how to configure the units to meet current code, and to help get a permit issued; without firming up the scope, it was difficult for the contractors to give an accurate estimate. Those four units represented most of the inflated cost. Meanwhile, the clock was ticking on my 30 days for financing.

Upon further analysis, the seller’s agent pointed out that if I didn’t do any work on those four units, the rest of the property could be completed for $120,000. Worst case scenario, I could bulldoze that building and still easily meet my cash-flow goal. Going ahead with the project still made sense. So I sent the contractor estimates to the mortgage broker, explained the discrepancy, and the broker got to work underwriting the deal.

life-hacking

Related: 8 Things The Real Estate Experts Won’t Tell You About Hard Money

Selecting a Lender

Unless you’re a cash buyer or have a standing relationship with private lenders, securing financing is likely the most difficult hurdle to closing a multi-unit deal. The referral from my CPA was a solid one. However, from past experience, I knew it was not unusual for a lender to pull out at the last minute—so I made a few other phone calls, just in case.

I called about 25 lenders and brokers in total. Some were from my personal list, some were referrals from my contacts.

  • Local Community Banks in South Carolina were a pleasure to deal with but couldn’t help me since I was from out of state.
  • Major U.S. banks that I had banking relationships with were just too big for this deal.
  • Mortgage Brokers were 50/50: About half said they wouldn’t do this deal because of the construction loan and because I couldn’t put down 30% of the total cost (I was looking to put down 30% of purchase price). The other half said the deal would be no problem.

At this point, five mortgage brokers were reviewing my paperwork, saying they could get this deal done. I was honest with the brokers. I told them I’d spoken with others since I knew the deal was tricky. It’s important not to give anyone the wrong impression or let them think that you’re working only with them.

Of the five, two brokers backed out because they couldn’t find a lender willing to take on the project. One broker said he was close. The CPA referral was still considering the deal too, but he hadn’t directly engaged any lenders yet. I continued making phone calls, following up, and juggling multiple brokers.

Finding Property Management Companies & Insurance Agents

I contacted five local property management companies. Three of them called me back. One of the reps was nice enough, but didn’t really seem like a people person—so that wasn’t going to work. Another company immediately sent me a copy of the property-management agreement to look over, but it outlined a plethora of fees, and basically stripped me of my decision making-rights in managing the property. That wasn’t going to work either.

My real-estate agent referred me to someone he’d used before in a nearby town. The owner was knowledgeable, personable, and willing to negotiate terms that would benefit us both. I negotiated a flat monthly percentage of rent as the management fee, with no other charges at all. Thus ensuring our interests would be aligned.

Next I called an insurance agent I had been referred to. After many excuses and unreturned phone calls, he finally sent a quote that was double what the current owner had been paying—for the same coverage. So I called the current owner’s insurance company and was quoted (the same day) roughly the same price the current owner was being charged.

It was nice to have a management agreement and an insurance quote ready to go for when I needed it. Lenders eventually ask for these.

Related: How I find Private Money Lenders to 100% Fund My Deals (& How You Can Too)

Financing, Continued

I estimated an after-repair value (ARV) of $1.1 million based on (the midpoint of) the low end of the price-per-unit spectrum for recently sold properties in the city. I didn’t have income information for those properties, so price per unit is what I went on.

After weeks of making phone calls and sending and resending documentation, two brokers sent me term sheets. One promised he’d continue working on the deal until I had something firm.

The term sheets were as follows:

  • Broker A: 90% financing on the purchase price, and 100% financing on rehab costs; 7% interest for 24 months, no prepayment penalty.
  • Broker B: 20% down payment on the overall purchase and rehab; 13% interest for 12 months, no prepayment after 9 months.

Both brokers were primarily working off loan to ARV. Broker A’s deal was obviously much better. However, Broker A’s terms were subject to underwriting, since the offer was presented based on the information I provided (purchase price, rehab costs, and an ARV of $1.1 million). My down payment would workout to around $40,000. Closing fees, broker fees, taxes and insurance were extra, of course.

Broker B’s deal had a better chance of moving to closing. Broker B was ready to order an appraisal and close within two weeks if everything checked out. My cash-to-close cost would work out to around $240,000.

I went with Broker A—I’m not afraid of risk. After speaking with this broker’s lender, I had a good feeling. I was confident that the deal would work out in my favor. I let Broker B know I was going a different route, and he said, “No problem; let me know if things don’t work out.” He was a great guy to deal with. At this point, I told the other brokers who were still working the deal that I had signed a Letter of Intent (LOI) with another company.

I signed the term sheet on the LOI, paid for an appraisal, and moved forward with Broker A. The appraisal came back with a current value of $475,000 and estimated a value of $1 million upon project completion. The higher-than-expected current value helped provide some comfort to both the lender and me. The ARV was lower than I anticipated, but the lender assured me it wouldn’t affect the terms of the deal. We could move forward. I sent him the property management agreement and the insurance quote and he said everything was fine. I was surprised, since lenders won’t normally go above 70% loan to value, or 65% in smaller markets, but we trudged on nonetheless. In the meantime, I kept working on trying to get some better contractor quotes, just in case.

Closing the Deal

Three or four days before closing, I received an email from the lender stating they couldn’t find anyone to fund the deal: I would need to put up another $200,000 in order to get things wrapped up. The terms were now similar to those offered by Broker B, but I had already paid for the appraisal with Broker A’s lender. I took a conference call with the lender. The managing director told me he had originally thought he could finance in-house with funds managed by his colleagues, but none of the fund managers would take the deal due to the small size of the local market. He assured me that he could get the deal done, but said he needed more for the down payment—30% down on the purchase price. That was exactly what I had been originally expecting, so it was no problem.

Closing was extended by two weeks, and some additional earnest money was paid. Two weeks later, another setback: The lender’s managing director called me again and said he would finance the deal himself by getting a bank loan. We extended closing again, this time by 20 days, and the seller said in no uncertain terms that this would be the final extension. With the additional earnest money, I now had $15,000 in the deal—not including the appraisal and travel costs. If the deal didn’t go through in the next 20 days, the seller would have kept the place and I would have been out more than $20,000.

More Setbacks

Well, the bank didn’t like the property and turned the lender down. Remember, a smaller market means greater risk. At this point, the lender, now acting as a mortgage broker, reached out to another broker who had an interested lender in California. This new broker-lender duo moved extremely quickly, did due diligence, and communicated effectively throughout the process. In the end, the down payment worked out to be about 20% of the whole project (about the same terms as Broker B had offered).

Broker A passed along the documentation we’d accrued thus far, and we moved forward with the deal. The California lender asked me for a few more things, which I sent the same day. A conference call with the lender helped answer outstanding questions about the appraisal, my background, and the property. The lender assured me he everything he needed to close in one week (which was the final, hard deadline). My lawyer said I’d receive the closing documents before closing.

One day before closing, the lender sent a list of things he needed in order to close the following day. Most were quick and easy to send, such as updated bank statements and proof that earnest money was being held in a trust account. However, two things would require some effort:

  • A breakdown of the contractor’s quote by type and quantity of material, insurance costs, overhead, profit, etc.
  • An enforceability letter from a lawyer in Canada, where my other property is located, allowing the US lender to go after my Canadian assets should I default on my US loan.

I dropped everything for the remainder of the day and got to work. I immediately sent everything asked of me except the two items described above. My contractor’s office was closed that day, but with a few frantic phone calls, I put something together. The enforceability letter harder to come by.

My flight to South Carolina for closing was delayed due to a big storm. The unfortunate weather provided me with enough time in the evening to make additional phone calls. Eventually, I remembered a childhood friend whose cousins had all became successful doctors, lawyers, and accountants. One of the cousins referred me to a friend of a friend who said he would put the letter together the following morning.

At 1:40 p.m. the following day, I received the enforceability letter and sent it to the lender. The lender had promised to have the loan documents ready to be sent at the click of a button, and he followed through on that promise. Closing was scheduled for 3 p.m. I had one hour and 20 minutes to review 98 pages of documentation at a coffee shop and then drive to the closing at my lawyer’s office. Luckily, the loan documents matched up with the term sheet, so there were no issues there.

Closing went ahead at 3 p.m. as scheduled. Even though the wire transfer didn’t arrive from California in time for the closing, the large wire transfer I had sent the day before satisfied the seller enough to allow closing to take place (without knowing the final settlement amount, I had sent an overage). The seller agreed to pick up his check for the balance the following Monday. And with that, the deal closed.

Lessons Learned

In the end, the deal went through. I now have a relationship with a solid lender and a few good mortgage brokers. Some things I did well, such as preparing documentation in advance and not relying on a single, unknown mortgage broker or lender (if I had, this deal certainly would have fallen through). That said, I could have closed the deal a lot sooner had I done a few things differently. Here’s what I learned:

  • If a lender offers terms drastically better than what others are offering, it’s probably too good to be true. Choose a more certain option.
  • Get contractor quotes before taking your renovation estimate to the bank—unless you are very experienced and you’re doing the work yourself. Banks will want proper documentation.
  • Don’t rely on a single lender to finance the deal unless you’ve dealt with them before.
  • Many mortgage brokers will tell you they can close a deal like this, but only some of them can—and it will take time.
  • Communicate well, and be available. When a bank asks for something, they need it as soon as possible in order to avoid slowing down the deal. Stay in touch with the bank and your broker to ensure you stay on the same page.

Have you ever done a deal that took multiple tries to get right?

Share your stories in the comments section below.

About Author

Jamie Turner

Jamie Turner is an entrepreneur, real estate investor, and holds an International MBA. He’s also a licensed salesperson based in Philadelphia & NYC. He blogs at: jturner.ca

41 Comments

  1. James Kojo

    Can you speak a little bit about how you estimated the rehab? Did each contractor provide a bid for their own opinion about what needed to be done or did they each bid on a single scope of work?
    Were there any challenges with managing a rehab from out of state?

  2. Stephen Torti

    The one variable that I think set successful real estate people (and anyone really) apart from the rest and the ability to go the extra step. I’ve seen that with what I needed to do on my 1st multi and from every one of these stores. Good Job!

  3. Jamie Turner

    Thanks everyone for the comments. To answer the rehab questions:

    All contractors bid on a single scope of work. It was made clear that I’m looking for someone to do a lot of work, and multiple projects, and I’m not interested in squabbling over minor things such as the exact number of window panes that were broken. Bids were a price per unit per unit configuration to get units ‘rent ready’.

    I defined what rent ready means, we walked through the scope of work in each unit and added up approximate costs. Bids were run by some friends experienced in the business, and the owner worked with me to clarify local pricing.

    I have a good property management company that keeps me aware of what’s happening about once per week. I also visit the site every 3-4 weeks to evaluate progress. We set some milestones for payment, and when I see the work is done, I cut a check on one of my visits.

    Work is only about 30% complete so far, and moving along steadily. Seems like another good blog topic when it’s all done.

  4. Justin R.

    Thanks for taking the time to write this out! My experience has always been that buying the property is the easiest part, and that trying to make it perform is where the real challenge is.

    I hope this next phase goes well for you!

  5. Roger Johnson

    Hi,
    Great article! I didn’t know you could purchase a buy & hold with a hard money lender. I have some questions also. Were you able to stay above water with the loan repayment and the low net income coming in (only 14 units rented)? How long did/will the renovations take?

  6. Daniel L.

    Great post Jamie. This was very informative and encouraging.

    I’m interested in what the property’s marketing material showed to justify the list price at $450,000; and how you were able to determine that you would offer $350,000, especially with so many moving parts such as the rehab and low occupancy.

  7. Ryan Johnston

    Great post! I had a question though. You said you read for hours each day to know what places are doing well and which ones aren’t.
    I was wondering what type of material do you read? Is it just a variety of local newspapers? Are there any specific sections/article types that you tend to default to?

  8. September provencher

    I enjoyed reading this article. It was so informative, well written, and organized, I felt like I was along for the ride from beginning to end. Great way to chronicle and share your experience and look back on what you learned from it. Thanks so much for taking the time to share it here. I didn’t realize rehab costs could be financed with a hard money loan – is this something reserved for larger multi-family properties or potentially available for single family properties as well?

  9. Jamie Turner

    Thanks for all the comments!

    To answer a few questions:
    -Rehab should take about 8-9 months.
    -I read both American and foreign news to get a balanced view. The Wall Street Journal (US), Globe & Mail (Canada, but with a lot of articles about the US), & Financial Times (UK with great foreign content). The Economist is great, when I have time to read it. Additionally, when there’s an area I’m thinking about I’ll do more research with local newspapers.
    -Hard money loans are readily available on single family homes. Your local REIA can probably refer you to some. I suggest finding out how easy the draw process is for rehab, and checking on how much points (fees) they charge.
    -Feel free to IM me for a referral to a lender or broker.

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