All Forum Posts by: Ben Firstenberg

Atlanta is huge and sprawling. We have 4 major office districts (Downtown, Midtown, Buckhead and Perimeter) as well as lots of other commercial centers. Because it's so spread out, it makes the suburbs very attractive places to live. You can get away from the noise and hassle of downtown while still being close to jobs and retail. 

It also makes the suburbs great places to invest, as the inventory helps keep prices from getting too high, but they're attractive places to live so the rents support the prices. 

@Richard F. That's a pretty useful chart. 

Anecdotally, I've heard a lot of people use 600-660 as a baseline. 

Which part of Georgia? I'm guessing Atlanta?

 Sounds like you got the idea, just a couple of clarifications.

The words may not actually be "second lien will be an instance of default". It might be more fancy "legal" terms than that. You'll probably know it when you see it. "Subordinate" is another word they often use for "second lien".

The other risk with tying properties is you may not be able to "untie" them as easily as you think. Commercial lenders on fixed rate product generally don't allow any changes to the collateral or other terms unless you refinance with a whole new loan, which would incur the prepay penalty. If untying them is important to you, make sure to negotiate prepay terms or "releases" upfront.

Loan term is not when you pay off the loan in its entirety. It's the initial term of the loan, in this case 5 years. What you're thinking of is "amortization term". 

The strategy you're talking about does sound like a good one though! Force some appreciate, then when the time is right, do a cash out refinance and use those extra loan proceeds to purchase the next property. Some lenders will even allow "future funding" meaning you can borrow additional money for improvements/repairs/renovations. The risk there is that it's generally floating rate debt which is very risky. Many borrowers who used floating rate debt 1-2 years ago are in hot water now. 

I believe you will if she has had her full time job for 2+ years. You starting a W2 job will help as well. If for some reason you don't qualify now, I bet you would if you tried again 6-10 months in to that job. 

Commercial offers are more of an art than a science. 

There is indeed a premium for higher quality, but assets with "value add" potential often trade for lower cap rates! The idea being that you're paying a little bit upfront for the opportunity to achieve the upside. It's a little bit silly to me, since you're essentially paying the seller for work that YOU are going to do... but it's the way it works. 

And if you're talking about industrial, office or retail, the calculations get even more complicated as the lease structures/quality/length factor into the negotiations.

I think what you did was fine though. Take current NOI and divide by the cap rate you think is appropriate. Based on their ask, they obviously think the cap rate should be lower or they should be given credit for the higher rent potential. You're spot on with "why don't they have higher rents to begin with."

You might ask them how they're calculating it. Maybe they ARE using a lower cap rate or maybe they have rent increases scheduled into the leases that you don't know about. Any number of things could be happening. 

You can look in your seller's loan documents to see if this is possible. Look for a "due on sale" clause. If such a clause is there, you cannot assume the loan.

Regardless of what you find, I would still talk with the seller's lender.  

Hi Michael, I have clients who are buying.

I can answer a few of these questions. 

About the HELOC: you can find this in your loan documents. Look for anything that references a second lien. Commercial lenders typically don't allow them, but sometimes they do. If it says something like "second lien will be an instance of default" then it for sure will trigger the loan to be called.

5% prepay is pretty tough. I'm really not sure if that's the standard for smaller commercial properties or if your lender took advantage of you. Typically it's the greater of yield maintenance (the interest they would have received) or 1% of the loan amount. So that prepay penalty would diminish over time. My experience is mostly with larger, commercial properties so maybe 5% is the norm. 

From your description, it seems like you're a little bit stuck here. You can't really refi or pay off the loan without incurring that prepay so unless your loan docs allow a second lien, your best move is probably to stand pat, save cash and be ready to expand when the loan term expires. 

In the future: you can negotiate with the lender and request 1) second liens, 2) "releases" so that if it's a portfolio you can sell off a couple of the properties to free up some cash and 3) lower prepay penalties. You can also pay upfront for better prepay privileges. The price for this is typically an additional 5-25 bps on your interest rate, depending on what privileges you ask for and how your lender calculates them. 

I think it all starts with the agent. Find a good agent who understands investing and they'll be able to help you connect the rest of the pieces. 

It's also important to get very clear on what you're willing to put in (money, effort time) and what you're hoping to get out (cash flow, appreciation, tax benefits). 

The clearer you can be about what you want, the easier it is to find. 

I had two expenses that were higher than expected. First was turnover/rent ready cost. I thought it would be like $1000-1500 to get the units ready to lease and my PM quoted me $3000. Granted, they were suggesting I do work that didn't need to be done (which eroded my trust but that's a different story). So I ended up spending about 2500 on each unit, which was more than double what I wanted.

The other was property taxes, which about doubled from what I was expecting. It's because the value was reassessed on purchase/sale. That went from about $200 -> $400 per month. 

In both cases, I sort of just chalked it up to bad luck and inexperience and did the best with what I could. I was lucky that I had some extra cash reserves to pay the turnover cost and that my property was cash flowing well so the extra property taxes didn't kill me, they just ate into my margins. Now I know to watch out for both of those things next time. 

To answer your question, I did actually try another tactic. I converted my property to section 8. The rents are higher now and theoretically more stable. I'm not sure if that's good advice in all situations, as section 8 is challenging and the rents aren't always higher, but it may be something to consider.