All Forum Posts by: Nick Schoch

Can you share the language as drafted?

As a former banker, I was careful of dictating how a borrower runs their business via loan covenants due to the risk of lender liability. That said, the boiler plate language generally required the loan parties to notify the bank of any material changes in condition or business purpose. 

This is typical.

Most lenders will at least want regular property reporting, specifically rent rolls and operating statements. In addition, the loan documents will typically call for regular financial reporting from the principals, including things like tax returns.

Whether your lender asks for it or not, many loan documents generally allow lenders to ask for any documents they feel are relevant to the transaction.

See below for an example from Fannie Mae's multifamily documents:

As others said, you would not be able to get a HELOC or Home Equity Line of Credit on 5+ unit multifamily or non-residential commercial property. 

However, there are some lenders that will provide revolving lines of credit secured by real estate. The trouble is that these facilities are generally much more expensive than HELOCs. Specifically because of the following:

1. Unused fees. Lenders still reserve against unused commitments (i.e. the amount available to draw), which means it costs the lenders money even if you aren't paying interest. As such, lenders will charge fees on the unused balance to offset the cost of holding reserves.
2. Renewals. Commercial lines of credits are typically renewed every 1-3 years (most I have seen is 5-years), which means new appraisals and underwriting and perhaps an origination fee. These costs significantly increase the cost of capital vs. using longer term mortgage solutions.
3. Floating rate. The yield curve is relatively flat right now, which means that many lenders are adding a spread to LIBOR that puts you close to longer-term fixed rate pricing.

I recommend doing an analysis that compares using longer term mortgage debt vs. a revolving facility. Depending on your strategy and intended utilization, you may be better off with longer term debt. First, you'll need to find some programs from lenders to get an idea of the terms you'll be comparing.

Good luck!

If you provide the property Net Operating Income, we can quickly estimate the maximum supportable loan.

How long ago did you acquire the property? If it's less than 2-years, many lenders will be tempted to lend on the lesser of cost or market, which may limit your proceeds.

It sounds like you are thinking the entity type (LLC) is a hurdle for getting a multifamily (i.e. 5+ unit) loan. All lenders I work with will provide cash out refinancing to LLCs for 5+ unit multifamily. In fact, some lenders require that you hold the collateral property in a bankruptcy-remote single-asset entity such as a Limited Liability Company.

For example, the Freddie Mac Small Balance Loans program requires a single asset entity for loans over $6 million. See page 2 of the Freddie SBL guide here:

Tell us more about the loan request and we can provide more specific feedback.

This is called submetering. Google searching using this term yields a bunch of relevant articles and companies that can help.

You will be installing water meters on each of the units, which will require accessing the water line somewhere between after it splits off from the main and before it branches within each unit. This may not be obvious and may require some investigation. Ideally, you'll have an obvious water shutoff for each unit that allows you to insert an in-line meter. You will want to discuss the best approach for billing with the local water utility. They may require specific meters that allow for things like remote reading.

As an investor, I would ask a couple of questions:

1. How long will it take for the increased cash flow to cover the cost of implementing individual metering?
2. Will your rental rates stay the same if residents compare your property to competing properties? Will tenants consider the incremental cost for water?

Economic theory would suggest that rational tenants would factor in the individual billing for water when comparing properties to rent. If this were true, there might not be any benefit to individual billing. However, we know that tenants are not always rational!

The most important factor to determining your sensitivity to a downturn is how much leverage you have.

In the market today, most investors are so eager to purchase that they'll take as much debt or "other people's money" as they can without asking whether they should. 

A recession causes problems for real estate investors in two big ways:

1. Decrease in cash flow caused by decreased market demand, leading to lower rents and/or lower occupancy.

2. Decrease in value due to decreased cash flow and investor appetite to purchase.

The first issue is the primary concern for most investors since it raises the question of whether you can make your monthly mortgage payments. However, so long as you have other sources of cash or significant cushion in NOI vs. debt service, you can bridge your way through the recession by continuing to make payments. You can reduce some of the risk here by ensuring you have a fixed rate loan. Even if rates stay low, many adjustable rate mortgages will still increase on the first adjustment.

The second concern is refinancing risk. If your loan has a bullet maturity (i.e. a balloon payment), you will have to refinance or come up with a significant amount of cash to payoff the maturing loan. Both options are difficult in the midst of a recession. You likely won't have as much cash or feel comfortable parting with it during a recession. Refinancing will be tough since (i) your property cash flow likely decreased, (ii) your property value likely decreased, and (iii) lender appetite is lower and their standards are likely higher. These factors can lead to a refinancing gap that requires you come up with a significant amount of cash. You can mitigate this risk entirely by ensuring your loans amortize the entire balance by maturity. You should also consider fixing the rate for as long as possible. On 1-4 unit investments, it's common to have a 30-year fully-fixed fully-amortizing loan. Whereas on 5+ unit investments, a full term fix is unlikely. As such, most investors refinance their adjustable commercial loans as soon as the prepayment premium burns off so they can ensure they have a few years of interest rate protection in case a recession happens in the next couple years.

Ultimately, most recoveries begin within a couple years, even with deep downturns like 2008. As such, the levered investor's goal is to survive the downturn by minimizing demands for cash and structuring their loans wisely.

How many units?

You can establish your LLC while you're in escrow. The lender will treat the borrowing entity as To Be Decided until you get closer to closing.

If you want to get conventional financing, you will want a max LTV of 80% and a minimum debt service coverage ratio of 1.20x. You can get higher leverage but it will nearly double your capital cost.

There are resources that will provide a good introduction and overview if you Google search for "apartment loan handbook" for example.

@Steven W. I just spoke with a lender about an $800k loan. He said even though Fannie says they go below $1 million, they tend to be more selective. Freddie can also go below $1 million with their SBL program but as an exception.

While this question relates to a 4-unit property, I figured it worth mentioning that many lenders will evaluate an owner's cash equity relative to the loan amount. The theory being that owners with minimal skin in the game will be less likely to prevent loan default.

As such, most lenders will use the "lower of cost or market" approach for purchases or refis within a short time after purchase. Lenders will apply their LTV constraint (e.g. 75%) to the lower of your total cost (purchase price + improvements) and the appraisal value. Lenders will have arbitrary timelines before they give credit for market equity such as 12-24 months.

Lenders with greater risk appetite, such as private/hard money lenders, will be more willing to lend against short term market appreciation.