If you raise capital but are unable to carry the bank note?

Question

Hello, my partner and I have around 13 single family homes and we are thinking of taking the next step into Multi Family.  I have been searching for private capital lenders for a little while and seemed to have gained a little traction.  I have my eye on a specific unit in my area costing around 1,250,000 and 1,500,000.  I think between one or two investors I should be able to get the down payment for that loan.  My question is, what if myself or my partner is unable to carry a bank loan of that size.  Do the investors carry the loan and get equity?  Or is there a third party that would consider carrying it for a percent of return?  Thank you

Brian Adams · Answer

@Kully Millage if you have some experience, can raise the capital to close a deal, but don't have the liquidity or net worth that a lender will require, than you will need to fill the void with a loan sponsor.

Most lenders require that the guarantor/loan sponsor has a net worth equal to or exceeding the loan amount and has 10% liquidity of the loan amount.

You can ask one of your investors to assist and sign on the loan or network and find someone to help.

Going in you will most likely need to give a portion of your deal away to the loan sponsor as they are taking on the financial risk.

The "give away" is negotiable. Could be a fee only, cash flow, additional equity, back-end profit, management of the deal, or a combination of some or all.

Good luck!!

Andrew Campbell · Answer

@Brian Adams nailed it.  Only thing to add, and consider.  If you are going with a local bank and its your first deal, you are likely looking at full-recourse debt.  So the guarantors (including yourself) will need to be comfortable with that.  Once you can get into agency, non-recourse debt I think you'll find it easier to attract a sponsor.

Best of luck!

Andrew Campbell · Answer

@Mateusz Prawdzik  You can use out of state folks to help you run numbers, but they are not going to be familiar with the area like you are.  So if you are telling a story about the how the neighborhood is in the path of progress, you'll need facts and sources to back that up.  On the lending side, for a property that size its easier to stay local.  They will want to walk the property and check on it--especially if you have a construction component to the project.

If they are on the tax record together, I would think you can get a single loan.  We're working on a deal with 16-buildings, but its all one property and one loan.

Good luck!

Mateusz Prawdzik · Answer

@Andrew Campbell I am definitely thinking for the long term more, I don't know what the prices in texas are for construction and resell but 25k for a total gut doesn't sound too bad for the prices in NJ. If you think that I should only spend 5-7k a unit, then that's what I will do but I mean I would be buying this property for around 86k a unit, and the average sale price per unit in the town that I am doing this in is in the 200s. I don't know what kind of rehab cost I can allocate but I think a higher number to achieve a better look and higher rent might be worth it.

Andrew Campbell · Answer

@Mateusz Prawdzik I would say it really depends on your business model, and what condition are they in now?  Are you planning to own this forever?  Then it might make sense to come in and address the mechanicals to future proof some repairs.  If you are a shorter horizon of 5 years or so, I would focus more on the cosmetic stuff.  You won't see as much return in the form of higher rents because you updated wiring and mechanicals as you would from cosmetic upgrades like flooring and kitchens.

Would also depend on the age of the property.

$25k is pretty steep for a full gut.  On our cosmetic upgrades, we spend about $5000-$7000/unit--and I would bet the premiums are very similar vs if you did a full gut rehab.

Good luck!

Mateusz Prawdzik · Answer

@Andrew Campbell Thanks I appreciate it, I have lenders that I use for the flipping and developing aspect... but since this is my first deal in buy and hold, I was just asking around because I figured it was a different beast. I can tell you right off the bat what a unit will need in rehab... but another question that I had is how much out of your experiences would you devote to one unit that will be renting out for 1500? Would you touch any of the mechanicals inside the wall if they don't need fixing to prevent future problems or would you just do cosmetic stuff? Something like a full gut of a 800sqft unit would probably cost me like 25k, if not the best finishes.

Mike Dymski · Answer

There is more capital in the market than there are good deals.  Ramp up your networking and you will find ways to take down properties.  Nice work on finding deal flow and figuring out how to take advantage of the opportunity.

Joseph Gozlan · Answer

@Kully Millage if you do this deal with 1-2 investors, it'll probably be a general partnership which means the investors are on the line of the loan just as much as you are.

If you go to the local banks, it'll be a full recourse loan which means they will be under the gun for that as well...

Mateusz Prawdzik · Answer

@Andrew Campbell Would you recommend staying with local underwriters and commercial lenders? Or can I get assistance from someone that is in another state to help me see where my head is at on a deal? I was also wondering, the property that I am looking to purchase has 2 buildings... one is 3 units and one is 4 units... There are on the tax record together "60-65", does that mean I could take out a single loan for both the properties? Or does that mean I would have to take out separate loans for both. Please let me know.

I am new to buy and hold investing and want to learn as much as I can about it before I jump in feet first. I am mainly a developer and rehabber, so I know the construction process and I know what costs what to fix but when it comes to taking out commercial loans and buy and holds... I am not totally educated on the matter. I have my pro forma and my cash flow model ready and the numbers work and make sense for the price that I want to purchase at, I just need to figure out more about the lending process and how it would work, working with partners.

Kully Millage · Answer

Thank you for the information , that certainly helped.

@Brian Adams @Andrew Campbell

If you raise capital but are unable to carry the bank note?

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