Investor · San Diego · Member since 2021 · 7 posts · 12 votes
Hi all
I'm new to the multifamily space and have a bunch of newbie questions to ask:
Looking into out of state investing and planning to partner up with someone on the commercial side (5+ doors). I believe most agents/brokers will want you to sort out your financing first, but I think lenders will want you to identify the property first - seems like a chicken/egg situation. To me, it seems more logical to sort out the financing first with a lender. If so, does anyone know/recommend lenders that can service nationwide, or specifically in TX, FL or AZ?
On commercial loans, my understanding is the lender will underwrite the property's financials. However, since we're planning to come up with the deposit, what criterias will lenders look for in us, besides the usual (e.g. tax returns, paystub, liquid assets, DTI)?
Has anyone successfully used a SBA 504 loan to purchase multi-families? If so, could you please share the process and the pros/cons of it (besides its a recourse loan)?
The property will most likely be held in an entity (e.g. LLC) between myself and a partner - what are some key things to incorporate in the operating agreement (not in cookie cutter entity formations)? Or does anyone have a recommended reasonably priced attorney that could help with this?
While we've been speaking to some brokers/agents, wanted to see if anyone had recommended brokers in TX (San Antonio, Houston, Austin, DFW), AZ (Phoenix) and FL (Tampa)?
Would greatly appreciate any advice on this. Thanks!
Investor · Twin Falls, ID · Member since 2015 · 200 posts · 117 votes
4y
Danny
I would be happy to help, I will do my best to answer these questions here but it might be easier to jump on a call sometime. Feel free to send me a message if you would like to chat.
The first step in my opinion is to narrow down your buying criteria and area. For example, a 25 unit in TX is going to be totally different than a 50 unit in AZ.
Answers
1. The multifamily business is all about relationships after you choose your area (see above) you need to start meeting brokers and lenders.
2. My experience with commercial loans is the bank spends most of the time analyzing the deal, most commonly they use Debt Service Coverage Ratio (DSCR) or Debt Yield to analyze these situations. Once they are satisfied with the property they will look at the loan guarantor.
3. My understanding is that most SBA loans are for owner-occupied business loans, I.e. if you had a restaurant they would help you buy the building. I am not an SBA expert but I know several I could introduce you to.
4. I have used cookie-cutter operating agreements before, my recommendation would be to hire a lawyer for this I would be happy to make an introduction if you don’t have one already that specialized in real estate.
5. Again, narrow down location and asset type first.
Investor · Twin Falls, ID · Member since 2015 · 200 posts · 117 votes
4y
Danny
I would be happy to help, I will do my best to answer these questions here but it might be easier to jump on a call sometime. Feel free to send me a message if you would like to chat.
The first step in my opinion is to narrow down your buying criteria and area. For example, a 25 unit in TX is going to be totally different than a 50 unit in AZ.
Answers
1. The multifamily business is all about relationships after you choose your area (see above) you need to start meeting brokers and lenders.
2. My experience with commercial loans is the bank spends most of the time analyzing the deal, most commonly they use Debt Service Coverage Ratio (DSCR) or Debt Yield to analyze these situations. Once they are satisfied with the property they will look at the loan guarantor.
3. My understanding is that most SBA loans are for owner-occupied business loans, I.e. if you had a restaurant they would help you buy the building. I am not an SBA expert but I know several I could introduce you to.
4. I have used cookie-cutter operating agreements before, my recommendation would be to hire a lawyer for this I would be happy to make an introduction if you don’t have one already that specialized in real estate.
5. Again, narrow down location and asset type first.
Investor · San Diego · Member since 2021 · 7 posts · 12 votes
4y
Thanks @Senate Eskridge for your input. We're currently refining our criteria to be more specific and narrow, or to quote @Brandon Turner - crystal clear!
Interesting re: the DSCR - what's the ratio commercial lenders typically look at? Also re: appraisal, do appraisers look at cap rate comps, or something else?
Would definitely love to connect to a real estate attorney, and ideally a REI him/herself.
Investor · Tucson, AZ · Member since 2017 · 394 posts · 178 votes
4y
@Danny N. I want to echo much of what Senate stated.
1. I would start with the broker.
2. Find banks in the area you are wanting to buy. They are typically more helpful and willing to go to work for you- credit unions, regional banks, local banks that do commercial lending. 1.25 is typical for the DSCR. They are also going to want to see some strong experience, especially on the larger deals. One of the big things is that the net worth of the borrowers needs to be at least the size of the loan for the property. On bigger deals, they will want you to have a key sponsor and this person will need to sign on the loan. Another factor is whether the loan is recourse or not.
4. It is important to nail down the responsibilities of everyone operating agreement. This is an internal document that can be modified at any time.
Appraisers will look at sales comps but they will also look at the cap rates. DM me for brokers in Phoenix.
Those are very competitive markets! Write lots of offers. Good luck. DM me if you would like more info.
Real Estate Broker · OR · Member since 2020 · 20 posts · 2 votes
4y
Hi Danny,
Great questions you have! I have provided some guidance below.
1) We always suggest getting pre-qualified and sorting out your financing first. This will allow you to get a realistic understanding of what you can/can’t afford and a baseline for what you need to do to improve you position and any additional capital to save.
2) Lenders will request the below preliminary information.
Name of entity (organizational chart if applicable)
Personal Financial Statement (PFS)
Schedule of Real Estate Owned for each borrower/guarantor (SREO)
Resume/Bio for each borrower/guarantor, if applicable
Bank statements for verification of deposits
Last 2-3 years of tax returns
I recommend using a mortgage broker in your area that is able to connect you with top commercial lenders to get you multiple competitive offers. When brokering an apartment/commercial deal with our clients we also act as the gateway liaison on the finance side and connect them with our network of lenders. We do the negotiating for our clients. We encourage and motivate lenders to compete, getting our clients the best rate and terms, by collecting multiple offers from lenders.
As for the process after preliminary information is provided:
From here, you receive one or more loan quote offers from lenders. After selecting from those preliminary offers, the process of making formal loan application will begin. The chosen lender will pre-underwrite your loan to evaluate the risks related to your credit, capacity, and the condition of your collateral. Once the preliminary underwriting is complete, the lender will provide you with a Term Sheet – also known as a Letter-of-Intent (LOI), outlining the full expectations for the loan. From there, the lender will order an appraisal, any other required third-party reports and move your file through the formal underwriting process. The Credit Department will then generate a FINAL Commitment Letter and close the transaction through escrow.
4) Pooled Fund Investing is the combining of capital from multiple investors which, when added together, create greater purchasing power (and thus more diverse and higher returning investment opportunities). The group is comprised of a few (typically 2 to 5) investors, with similar investment goals. As a group you will invest directly in a piece of real estate. Each member of the group will hold title to the real estate as Tenants-In-Common.
The Tenant-In-Common entities are each named on the deed, as well as the Tenant-In-Common entities percentage of individual ownership. A signed agreement between Tenant-In-Common owners details respective rights and responsibilities. Additionally, all services the owners, as a group, contract for, should have separate contracts, with payments based on specific services rendered. For example real estate commissions earned from buying and selling a specific piece of real estate, professional property management fees, legal and accounting fees and fees associated with refinancing of existing debt. The group may contract for specific products or services from an individual member of the group if that member is affiliated with a business that can offer value to the group. The contract needs to stand on its own merits and be open for review and separate from the ownership agreement.
5) Feel free to check out my page and Realty Yield's website for more information and resources. We currently are based out of Oregon, but are expanding to Phoenix, Arizona at the beginning of 2022.
Property Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
4y
All great advice so far, we'll try not to repeat any of it:
1) Not all banks will lend on small multi-family or out of their local footprint. So, start looking for a bank that will entertain lending on your target purchase. Count on having to personally cosign for your LLC.
2) Lendres usually want to know source of funds to make sure you have borrowed them, meaning your DSR is false, meaning you may default on the loan. Your financials may be able to offset a lower than acceptable DSR (property needs rents raised), but that depends on the lender.
3) Can't help
4) Ownership percentage, who is managing member and thus has authority to make decisions and sign for LLC, what happens if a partner can't make capital call, etc all usually pretty standard. What most Operating Agreements lack is addressing what happens if one partner wants out before the other(s) or dies. Usually you want a well-crafted first right of refusal so you don't end up with inherited partners with totally different goals than the remaining partners.
