5 unit Commercial Loan

[William Beck]

Hi All

I am currently looking into a 5 unit residential property (no commerical space here) in Philadelphia. I am very new to the game so any tips here would be great. Just looked at the property this weekend with my partner in crime and we both agreed this property is worth diving into.

However, as you may suspect with my youth (23 years old) I do not have a great grasp on the commerical loan realm. Needless to say, I don't have much expercience in real estate, besides watching my dad build a mini empire of houses. To give you a rough vision of this property, it is sitting in a C+ to B- area (subject to one's opinion obviously) but is by no means a scary neighborhood. The property has been completely renovated as of August 2013, new water heaters, new windows, new kitchens, refurbished common stairwell with nice wood finish and a nice stone front look from the exterior. Currently, there is one vacant 2 bedroom unit, one occupied 2 bedroom unit, two occupied 1 bedrooms, and 1 occupied stuido (top floor but nice space, i would estimate 600-700 sq ft). Fully rented out this property has a potential income of $3,400/ month.

Enough of the details i dont want you guys stealing my property haha, my real question is what do you think my best option for financing would be? Will a commerical loan be too difficult to attain, given my lack of a track record/ excperience and the fact i will only be able to put down 30%? My plan is to explore seller financing possibilites while i hunt down a commerical loan that will satisfy my needs. You may be thinking at this point, why doesnt this kid ask his pops? I have and I have him interested but he really wants to see me get this done on my lonesome, not cool right? But i respect that. Also, if you are wondering, my "partner" is my a good friend who is my age and has been persuaded by me to pursue this endeavor, he's got some cash.

At listing price we are looking at potentially 82K down (at 30%), which is definitely a bit of strech for our personal funds but we have been looking at properties for a while now and this is definitely the one to make a move on.

Let me know what you guys think. Appreciate any insight or advice on the matter. I only ask that you dont reply saying this is out of your league because I know i can make this work. I have a lot of resources at my disposal that i didnt discuss here (mainly family).

Thanks for reading.

-Bill

[Michael Blank]

Hi Bill,

First, kudos for embarking into commercial real estate, I think it's the best way to create long term wealth. And you're getting started early, good for you!

You had some questions about financing.

Seller financing is great if you can get it. You should always ask the seller. Maybe offer a little bit more (even above asking) to sweeten the deal.

The best source of financing is still a traditional commercial lone. As Colleen pointed out, a 5+ unit will be considered a commercial loan. But even for my 12-unit we bought two years ago, your personal financials unfortunately still play a major factor in underwriting.

But you already have a lot of the minimum requirements for qualifying for a loan. You have cash to put 30% down - most banks look for 25% or 30%. Check.

The building is 100% occupied. Very good. The bank will want to see the financials obviously. But an occupied building is easier to get financing for than a vacant one. Just make sure you try to verify the actual rents collected. The best way is to get actual bank statements from the seller. You may not get all of the documents you request, but you must INSIST on verifying the rents actually collected.

The one thing you may be weak on is track record and personal financials. OK, not ideal, but you can overcome this. Here are a few tips:

Tip #1: Create a one pager about yourself. Write down anything you've done and succeeded at. Show the lender that you have a track record of success and are ambitious. Also mention your partners. If your Dad is in real estate, list him as a partner and mentor, and describe his experience. List your CPA, especially if he has real estate experience. Do you have a real estate attorney? If not, find one, then list his bio also. All of this adds to your credibility.

Tip # 2: Find a strong financial partner. For smaller properties, the bank will want personal guarantees, good credit and minimum liquidity. (Interestingly, the larger the deals get, with loans > $1M, the chance of getting non-recourse loans, i.e those where your personal financials play less or no role at all, become greater). Since you do have resources (your family & friends), find someone who would be willing to co-sign the loan. In return, you will give them a % of equity in the building.

Tip # 3: Talk to local banks. Avoid the national or regional ones. It's much more about relationship with the small local banks. Schedule appointments with several local lenders. Show up with your one pager. Put together a short financial package of the deal you're looking at. Even if you don't have the property under contract, make up a deal package anyway. This will give you a much better chance to make a good first impression.

I know you can do it!

Michael