Hey Lenders and NNN Investors I have a question on financing

Commercial Real Estate Investing
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Hey Lenders and NNN Investors I have a question on financing

John M.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

I've been told it's possible to put 15% down on a property instead of the usual 25% by using collateral.  Let me know your thoughts!!!

$5,300,000 Purchase Price

795,000 15% down

530,000 10% equity to come from an investment property I own outright.  Bank will take 75% of appraised value as collateral

$4,505,000 Loan amount 

24,405 Monthly Debt of Loan (assuming 4.25%/25 year am) 7 year term to match Leases

26,500 Monthly income NNN

2,095 Monthly Profit

Property is NNN lease mini strip facing a busy highway in a commercial corridor. Stores are a pawnshop, mattress store, and a Mens Big and Tall Store.

Let me know your thoughts on a deal like this?  Good, Bad, Indifferent?   

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Ronald RohdePro Member
Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
4y

BAD. those are weak tenants with a very thin margin. I cant see any lender doing that short of a HML...

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    4y

    BAD. those are weak tenants with a very thin margin. I cant see any lender doing that short of a HML...

    1Reply
  • John M.
    OP
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    HML? The deal is based on global cash flow of the standard 1.25 DSCR, not necessarily the underlying cash flow of the property. However the cap rate is 6% and the loan is at 4.25 so at least there is a spread in there for the asset to cash flow.

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  • Paul Smythe
    Investor · Greenville, SC · Member since 2012 · 269 posts · 187 votes
    4y

    If this was a great credit tenant with significantly reduced risk of default, I could see the 6 cap being worth it. You've got the 1.25% spread, though, so there's little room for error. You'd be operating on razor thin margins where even the most minimal vacancy will leave you at a painful deficit.

    All that said, I don't know your financial position so this is only surface-level advice. 6 caps in this market are not unreasonable, you're just taking on a lot of risk with this particular deal.

    0Reply
  • John M.
    OP
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    It is true that if you lose one tenant your in the hole, but because it's a good location it should be easy to rent.  My finances can cover any short term vacancies.  Value add is only in the rent increases of 2% a year.  

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  • Terrance Schab
    Member since 2022 · 13 posts · 2 votes
    4y

    I agree not much return on your cash either.  29000 cash return on 800k and that's the best case scenario. I learned a long time ago just because you can doesn't mean you should.  Once again just a view from a mile high.

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  • John M.
    OP
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    4y

    actually 25,140 in profit/$795,000 down =3.16% return first year. Perhaps a little more if you factor in any kind of depreciation benefits.  Only upside is 2% increases every year and the tenant paying down the mortgage.

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  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    4y

    I don't know a reputable bank that would take that exposure with 85% LTV. I have found that the LTV and amortization is directly related to having, or not having, a solid national anchor (not counting dollar stores in dump areas).

    Many in here will agree - a bad deal at closing will always be a bad deal.  That strip mall with those tenants two years ago would be an 8 cap.  Don’t get into a bad deal that spurs your future.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    4y

    I have some doctor clients that can get ZERO DOWN on retail strip centers with their personal bank but they have super high net worth and income and pledge all the assets. The center also has to be a certain cap rate usually a 7 cap or greater. I have seen some other banks with doctors go up to 80 to 85% LTV. Again super rare most regular NNN lenders want 35% down.

    The tenants you mentioned are very poor and historically have some of the highest default and go dark rates in the industry.

    If the property had an oversized lot for more development or the tenant are paying way below market rents like half for that box tenant size then might can make sense. That way you back fill when they go out and even with TI,LC, lost rent, attorney fees, new tenant opening 2 month rent credit still upside bringing rents closer to market. It always amazes me people want this stuff. Generally even if you get bank to go high leverage they often want shorter amort like 15 to 20 to accelerate paydown which sucks down cash on cash expected return using higher leverage. No free lunches out there. You get in one place you take in another.   

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