What's My Strategy Approaching a Bank For My First Big Deal?

Question

Here's the short version:I'm a residential investor in New Jersey. I've begun looking in Chicago for bigger deals and have been very lucky to have found a great broker and an even more amazing (future) property manager. I have found an off-market deal that I think could work very well in the 500-550k range (final price TBD). Now, I have to do the real hard part -- approach the bank for money. This is my first commercial deal, and quite honestly, I know I'm probably going to have to go to a few banks before I get what I need, but basically I just don't want to look too stupid on my first approach. So my question to you is: What is the best way to approach commercial lenders? How much, and what kind of info should I have with me, and what kinds of questions should I be prepared to answer? I have the rent roll and expense sheets, as well as some market research I've done, and of course, money that will hopefully be enough for a downpayment. But I know this is not enough. I am going to be holding this building under an LLC, so I know not having a "resume" for this LLC may cause issues too. Should I expect to have to personally back this first deal? Again, I just don't want to walk into this looking stupid so I'm hoping those of you with commercial experience will be willing to help me with the benefit of your experiences.

Jeff Kehl · Answer

@Lou Ruggieri You have some great advice from @Mike Dymski and @Patrick Liska but let me just add one thing. I can't tell from what you've posted but if you have a good commercial deal that cash-flows you are in a good spot and most commercial lenders will be happy to talk to you. There is more capital available to lend than there are good opportunities to lend to at a decent rate right now. Yes, if you are new you are going to have to personally guarantee and prove yourself and the property out.But just having a decent opportunity is an asset in itself right now.

Patrick Liska · Answer

You will most likely have to personally back the loan. this worked for me with my first loan with a bank: have 2 years tax returns with you, a broken down and typed out Net Worth with you any current W2 forms ( 2 pay checks ), copies of current bank account statements, copies of credit reports might help but they usually like to check themselves and maybe even a business plan with you ( the last one i did not have) go to the banks with confidence that this whole deal is nothing for you to handle. walk into the meeting with them, tell them exactly what you want to do and immediately hand them all those papers. tell them you think you have everything they need for them and that to let you know so that you can get it to them right away. i did that and the loan officers mouth almost dropped, she said she wished everyone that came in for a loan was that prepared, that was 6 loans ago with that bank and i still deal with the same bank.

Michael Facchini · Answer

How many units is the property, what is the residential/commercial breakdown, and where is it located (suburb or neighborhood)?

Mike Dymski · Answer

Hey Lou. Reach out to your broker contacts and your network and ask for lender referrals that play in the apartment space.Your pre-screen interview calls could includ asking them if they do apartment lending, what their typical loan size range is, what class of property do they like, standard loan terms (amortization, fixed rate period, interest rate range, LTV, and any other product knowledge you would like). I'd start by telling them that you are looking for a long-term relationship with an apartment lender and then ask the questions above first before pitching your deal. Get them talking about their bank and themselves. Find out what they like and then pitch to that (if it is a good fit). Build some rapport during the call as well...it's a partnership and they have the most money at risk.This will help narrow down which lenders may be the best fit for you and for the project. And then you go visit and have a similar, but more detailed, in person visit. The pre-screen call has two benefits...(1) it narrows down the field and (2) you learn the process and will be more skilled for the in person visit. In the end, you have a deal on the table; so, whether you start with a call or not is just opening up the dialogue and due diligence on both sides.You can also reach out to commercial mortgage brokers and they will do the heavy lifting.I did not know what I was doing on my first deal. On your second deal, you will turn the tables and be telling them what loan structure you would like. Good luck.

Nathan Click · Answer

@Lou Ruggieri First, don't go to banks unless they are a real commercial real estate lender. True CRE lenders understand commercial real estate and have very flexible programs that are geared for exactly what you are doing. Don't confuse this with a regular back who happens to have a CRE person. This is like getting coffee from Starbucks verses a gas station that happends to have a coffee pot. A CRE lender is mainly worried about the three Cs. Cash, Credit, Collateral. Cash is going to refer to your properties cash flow (debt service coverage ratio or DSCR). Credit, is your personal FICO score (expect to personally guarantee). Last is Collateral this has to do with the value of the asset and how much they will lend against it (Usually 75% LTC/V). Keep in mind most CRE lenders have loan minimums so if the value of the asset is to low you'll have an issue. This is generaly the mainstay of lender evaluations, at least for buy and holds. I hope this helped, I'm happy to connect if you want to discuss further.

Mike Dymski · Answer

Patrick covered it well above. You may want to consider developing a financing package (business plan). It's helpful to use with lenders, brokers, property managers and potential investors. It will include things like your strategy, track record, resume, personal balance sheet, schedule of real estate owned and then separately (or included) would be deal specific information (could be the offering memorandum, your own analysis or both).I'd recommend asking and calling around to find banks who show some interest in you and your strategy. Not every bank is interested in every asset class, price range or investor. Many times, it's about finding the right fit. You may find that community banks are more interested in that price range too. Keep us posted.

Nathan Click · Answer

@Lou Ruggieri Some lenders are better than others at marketing their criteria. Finding a good CRE finance broker can help you save time when it comes to calling lenders. A good broker would already know ahead of time which lenders to approach and how to present your deal. They will likely have several relationships in place that will help move your deal along.

Lou Ruggieri · Answer

@Mike Dymski Good advice. I forgot that brokers are the point guards more often than not. I'll reach out to him and get some calls in. @Michael Facchini Commercial 13 Unit building in a suburb of Chicago.@Nathan Click This is what I've seen also. I know that if I go to the wrong lender with a half million dollar deal they'll just laugh me out the door. Knowing the niche is found by just calling or asking around I guess? I don't suppose that's the kind of thing lenders would typically market? @Patrick Liska That's kind of what I thought. It's just the distance that's a pain in the ass. Obviously, not a big enough pain to dissuade me from doing it. But I guess it will just take a series of steps. Calling being the first, and then scheduling a time to get out there in person once I have my business plan and supplemental materials in hand. @Jeff Kehl Ultimately I would like to have several larger properties under a larger C-Corp. But individually, I would like each property to be their own separate LLC. Obviously this presents its own set of issues but that discussion is for another thread. And I wasn't focusing on it per say, I was just thinking about best and worst possible outcomes in order to understand the risk/reward tradeoff.

Jeff Kehl · Answer

@Lou Ruggieri1) Is it better to try and get financing where the property is located (Chicago) or better to try around NJ. I would presume the Chicago banks would have a much easier time figuring out the area, while on the other hand, it is much, much easier for me to go to banks around where I actually live. Bankers like to invest where the bank is located so you want a great relationship with a local bank in Chicago preferably right in the same suburb as the town. Start calling them and if possible setup some in-person meetings. If you want it more convenient for you, you should probably look for properties closer to you.2) Since this will be my first property under an LLC (my owner-occupied is currently in my name), is there any benefit to having my current tenants (and myself possibly) start paying my LLC as a "management company" instead of me personally, in order to establish credit for the LLC?This depends on your goals. If you're looking to expand the business beyond this property, the more assets and transactions you put in the business the better. If you're in 'build an empire mode', put all of your rentals in an entity, decide on a name, brand, website, get a professional team together, start hiring/contracting for services. As soon as you can start applying for credit.If you're just dabbling, hold off on the above.3) If I do have to personally back this first loan, what is the worst-case scenario? The bank takes the property and then also everything else I have? Just trying to think though every scenario. Conversely, what is the best case scenario? Is there a way to eventually refinance and have it become a non-recourse loan where I don't have to worry about losing my shirt? Yes the bank could probably take everything you have except for maybe your IRA/personal residence. If the deal is great though as the numbers you shared indicate why focus on this?

Patrick Liska · Answer

Lou,It will be easier to get a loan from a bank that is in the area / state. it doesn't matter how far the bank is, you will have checks / debit card/ online banking. The bank i deal with is in PA, 3 hrs away, everything i pay is online, utilities, mortgage etc. what i would do is open the business checking account at the bank you get the loan from. this way if you need to pay the mortgage you can just transfer the payment from your checking. as far as depositing, most banks now have an app to take pictures of the checks for depositing. Yes i would have them make the checks out to the LLC, this separates the business from your personal. the banks will only go after as much as you will owe them, starting with that property and possibly satisfying any difference owed with your personal.