What would you do to get to the next level

Question

All,

Little bit of a rant, sharing of experience, and seeking advice.  I left corporate America last year in Feb. was tried of the 9-5 grind. Jumped into RE full steam ahead. Worked for a guy for free learned some things after 4 months I bought my first "resort" property. Actually that's my own inside term I use jokingly. I have a partner that brings "credit" "stable income" and balance in terms of strength and weaknesses to the table.  We used liquid cash, Heloc, and raised ...private capital to get the engine rolling.  We only buy and hold right now in South Chicago in tougher neighborhoods and we have created success in a short period of time, 7 buildings, 16 units, 9 months, all free and clear with returns averaging over 30% NET.  We acquire through demolition court, wholesalers, alderman referrals, and other city programs.  We are really gaining traction, here comes the issue. Our exit strategy was to refi out with local banks we had 4 lined up but all now are saying " great work but "too green" "not seasoned enough" " come back later" "you suck" blah blah blah.  The goal was to refi / cash out / build up into the MF 6-10 units range and continue.  Because of the pocket we are working it is difficult to find JVP.  We have access to hard money at 15% which we are actually considering using because the returns are so solid, and we can continue to build.  Using the same exit in 12 months with the cashout refi - but now we are skittish because if we hear the same story in 12 months from banks or credit unions we are stuck with a high double digit loan.  Other option is to package up about 35-50 units and start over in different location slaughtering the golden goose laying the cash flow eggs.  As I write this is am sitting in my office in South Chicago with my door open it's not as bad as the media paints it but I will be shutting the door in a few hours and locking up. What would other members do in our shoes?????

Chris Winterhalter · Answer

@Jared Kott

You haven't called enough local banks or credit unions.  Your situation is difficult because of several reasons like you pointed out however many local banks might not love the location of your properties and deal size (small spread across many deals).  Local bankers are great at crushing your spirit especially when you are newer (and more seasoned).  When I first started in multi-family I got the same push back from local banks and credit unions.  It took me 18 months to refi our first 12 unit property (that was also 2009) and so many no's it was like asking a super model to your prom dance.  You need to push through to find the right bank.  Talk with brokers that work in that area for suggestions.  Network with other investors that are working with local banks in that area.  Talk to the insurance brokers that insures rentals in that area (they know the mortgagees).

Also make sure you have everything extremely organized when sending financials and property information to banks.  That can go a long way.  One little thing can be off and an underwriter will toss the file.  You can get around the seasoning requirement with the right bank, documentation of rehab, and fresh or renewed leases.  Good luck!

John Weidner · Answer

@Jared Kott  your Cap Rates would be attractive to an investor although they will obviously be reduced at their acquisition price as you'll pull a profit out

I'm not a buy and hold investor so personally I'd unload them then repeat your model with your own cash.  Start getting a proven business model under your belt and I'd bet you'd find a bank to do a cash out refi at 70% LTV.  Repeat, repeat, before you know it you have your inventory up and your self financing your deals still

By the way would love a tour of the properties sometime and your model...not my area (I'm NW side of city)but could have investors down the road interested if the model has really high cap rates

Rolanda Eldridge · Answer

@Jared Kott ...keep pushing on.  A door will open, if not find a window!!! I'm in a similar situation.  I requested more specific information from underwriter.  What reserves, ratios, liquidity, etc required?  I plan to revisit the loan in 6 months.  I'm also inquiring with local investors about other options as well.  I'm careful with credit report inquiries..

J Scott · Answer

Are you sure it's the seasoning of the business (you guys) that the bank cares about?  Or is it the amount of time you've held the properties?

Did they give you an idea of how long is long enough before they'll fund you?  Don't be shy about asking them flat out, "What will it take to get our loans through underwriting?"

Perhaps offer to cross-collateralize a couple of the free-and-clear properties against loans on the rest?  This should reduce the risk the lender is taking, and may be enough to get them over the hump.

Anthony Gayden · Answer

Well you can start looking for private money from other sources, or you can start doing owner financing. You might just have to step back for a while to build up cash to start investing again.

Jared Kott · Answer

J - it's really all about the seasoning requirement, most said we can offer 65% acquisition + rehab then they have all said, oh you have only been in business 9 months. LOL I have clearly told each of them this. I have even done presentations clearly stated in our time line. Its not like I am cold calling I see them at RE clubs, city meetings, lunches, functions. They all love the model, but the seasoning crushes the deal. If we go the hard money route we can continue, season, and build but I am nervous that we may get the same message again, at which time we could package and sell but the cash flow is something I don't want to give up. The other side is high juice for a year where we can still cash flow, now as I write this its just greed. Plus I have never used a bank so it gets me skittish.

J Scott · Answer

Have you gotten anything more specific from the banks than, "you suck?"  :-)

Seriously, if you're not getting through underwriting, there's likely a specific reason (or multiple specific reasons), and if you can find out specifically why you're being turned down, it may give you some insight into the likelihood that you'd be able to qualify in 12 months.

For example, you said you've had the properties for 9 months.  If the banks are requiring 12 months seasoning before they'll cash-out-refi, perhaps it's just a matter of waiting three more months?

But, these are the questions you need to ask and get answered...I strongly doubt that you suck...or at least strongly doubt that this is the reason you're getting turned down...  ;-)

Jared Kott · Answer

Awesome, keep me posted.

John Weidner · Answer

@Jared Kott

Thanks - I think I'll contact you for a tour next week.

Jared Kott · Answer

Thanks John, I am down in the pocket almost everyday if not downtown marketing, feel free to contact me anytime if you would like to circle the area, plenty of deals to be had just nee to be hands on and smart.

Jared.Kott@Marblestonepg.com

What would you do to get to the next level

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