First Deal. Great Cashflow. Banks Won't Lend.

[Kurt Krotz]

First time posting here. Currently under contract with my my first rental property. My partner and I live in NYC and the properties are located in upstate NY, about 5 hours away. Every bank we have applied through has turned us down, so I am posting to see what we are doing wrong/what has to be done better. 

A 6 unit (residential only) building as well as single family home, located next door to each other, were listed for $114,000. Our offer of $107,500 was accepted and we began looking for financing. The 6 unit was appraised in 2017 for $85,000 and the single family at $35,000 for a total of $120,000.

Currently, the rent roll is $3,850. Expenses are $1,704. The properties together cash flow just over $2,000/month, fully occupied with rent decently below market value. With our projected rent increases, which are still conservative, the properties will cash flow over $3,400/monthly.

 The banks that we speak to come back to us stating that since this is our first investment property they do not want to touch it. Or, that the commercial occupancy is to difficult to lend on. 

My question is, why is this such a hard deal to to lend on? The commercial side of it seems to be giving us the most issues. Thank you for your time. 

[Corey Hawkinson]

@Kurt Krotz This is a case where a private lender will likely be a better option. For a bank, we will still have all of our costs including appraisal, legal, maybe even environmental, etc. Also, I’m sure this never comes into play for any lender as we all just want to help out (ha!), but at that dollar amount most bank lenders will make $0. Basically, your costs to do that loan with a bank are a significant part of the price.

A private lender may charge more on rate but can likely avoid many of those fees. On larger deals, a bank is better. On a deal this size, a private lender likely wins. Plus, if those numbers are correct, you can decide on shorter amortization.

Let’s use a hypothetical comparison:

Bank deal: $75,000 loan, 4.25% rate, fees of $8,000 for appraisal, etc.

Private Lender: $75,000 loan, 6.00% rate, fees of $2,000.

Which is better? Yes, the bank has a better rate but it will take a long time to make those fees back.

(We can argue the details as sometimes a bank can go without an appraisal at that level, but I was using simple numbers to demonstrate)