All Forum Posts by: Brian Fung

Aloha Julian, 

Just to add onto what everyone has said, 1-4 unit deals (residential) are typically underwritten differently from 5+ unit deals (commercial). 1-4 units are easier to close and you get more money for them because of how DSCR is calculated:

- Residential (1-4 units) DSCR = Gross Rents/Mortgage Payment

- Commercial (5+ units) DSCR = Net Operating Income/Mortgage Payment

It's important to note that in both cases above, there are exceptions. There are niche lenders that can do Residential DSCR underwriting on properties that are 5-10 units but this is relatively uncommon today.

Regarding ARV:

The only way your rents are going to be affecting your ARV is if you go with a commercial loan loan that is going to allow for the appraisal to be an Income Approach appraisal as opposed to Sales Comparison approach. With the Income Approach, the appraiser is going to evaluate the income and expenses of the property to develop the Net Operating Income, then they'll apply a market Cap Rate to the deal. You can ask your agent what the range of cap rates are in your market so you can get a range of value. Your ARV = Net Operating Income/Cap Rate.

Hope this helps. Aloha and good luck!

 Aloha @Michael Vernese, 

Portfolio/Blanket/Cross Collateral Loans can be great so long as you are aware of the longer term implications of having that type of loan in place. These loans are great for consolidating a payments and allowing you to close multiple properties under 1 loan closing which helps to save money on processing fees and closing costs. 

The biggest item that lenders and loan officers don't educate their customers around is the "partial release clause". You definitely want to be asking about this with any lender you're talking to about this. If they say there's "no partial release", then DEFINITELY get that in writing and be SURE it's not otherwise stated in your loan documents at closing. I have met many loan officers that have misinformed their clients on this. The industry standard is a 120% Partial Release. 

Let me explain in an example: 

You have 2 properties worth 125k each. You get an 80% LTV cross collateral loan to buy both properties 125k x 80% = 100k loan amount for each property.

Total Loan Amount = 200k

In the future, let's say you decide one of these properties is not worth keeping and you want to sell it. Here's what happens if you have a 120% Partial Release Clause: 

Assume the property for sale, Property A, appreciated to 140k. The unpaid balance associated with that property is 100k. Because you have the Partial Release Clause, you have to pay off 100k x 120% =120k payoff. Since you're selling, you'll have selling costs and closing costs (assume 10k). You're walking away with only 10k in your pocket after you sell in this case. 

The property that still has a loan balance against it, Property B, only has a 80k loan balance now. What you can always do in this case to avoid the Partial Release Clause is to refinance the Property B and close the refinance on the same day that you sell Property A; however, at this point you're now paying for the 2 closings that you were trying to avoid when you cross collateralized in the first place. 

The Takeaway

If you're going to get into a cross collateral/blanket/portfolio loan, make sure that you don't see any future where you're going to want to sell 1 of the units. If you have the mentality of: once a together, always together, these types of loans are great. That said, after learning this, many investors opt to pay the extra costs to have 2 separate loans just to have the option in the future to separate them. 

If you ever want to chat about this in more detail, we're happy to jump on a call to discuss your actual scenario/numbers. Either way, we want what's best for you and wish you the best of luck and aloha. 

Aloha Daniel, 

Can you define further the following: 
1. When you say "Cash Flow" how much cash flow are you looking for your $1M to be providing you on a monthly or annual basis after expenses?

2. When you say you must have "future appreciation" how much appreciation are you looking for and over what period of time? 

I think your answers to these questions will help everyone give you more pointed responses. Until you reply, the best things I can come up with are: 

1. In this market, if you need cash flow, have you ever considered lending your money out as a private money lender or hard money lender? 

2. If you want to invest in A/B markets, a common strategy I'm seeing for investors in highly populated metros is to find large lots with a single family home and add 1 or 2 ADUs onto them. In this strategy, it's important to note that appraisers do not consider the ADUs to be actual Dwelling Units so an SFR with an ADU is not the same as a Duplex, even if all of the features (bed/bath, GLA, etc are exactly the same). The SFR + ADU is worth less than a Duplex because the ADU is viewed as an amenity rather than an additional unit so your appraisal will look for other SFRs with ADUs and provide line item adjustments for homes with and without ADUs much like having or not having a pool or a garage. It would be abnormal and outside of normal appraisal standards of practice to use duplex comps.

All of this can be summarized as, "this strategy will improve your cash flow and give "some" appreciation but not the same appreciation as officially converting the home to a duplex". 

3. Convert Apartments into condos: You'll need to work with professional team to help you execute on all of the paperwork for this but you can find a duplex, triplex, quadplex, and convert the units into a small condo and sell each unit off individually. This may not provide you with much of a cash flow improvement but it will help you with appreciation and allow you to sell or refinance those units to reinvest the new equity into other deals. 

I hope this is helpful, if you need clarification feel free to reach out. Either way, good luck and we wish you lots of aloha in your endeavors. 

Aloha Tara, 

I think what you're inquiring about is the "unicorn by a rainbow sitting next to a pot of gold." Let me explain:

If you're looking for a lender that isn't going to be looking at your credit score or ordering an appraisal, then you'll be looking at higher interest rates and lower LTVs. All lending is based on "risk". When you don't allow a lender to pull your credit or order have an appraisal, then you increase their risk. They will counteract that by having you put larger down payments or leave more equity in the property so you are less likely to walk away from your asset. 

When it comes to long term debt, lenders need to make sure the loans can be sold on the secondary market after they are originated. It's typically not a good thing for a lender to have a loan that is only getting a 6-8% return, sitting on their balance sheet. If there's no credit report or appraisal, then those loans cannot be sold on the secondary market (at least I don't know of any buyers for those types of loans). Therefore, since this loan will end up sitting on the lender's balance sheet, you should be prepared to pay an interest rate that would make sense for that lender to have their money tied up without earning the additional income they would earn from selling their loans at a premium on the secondary market and being able to re-lend and keep flipping the money. 

If you want to chat about your specific portfolio and investment strategy, feel free to DM us. It's hard to give the best responses without diving into the specifics of your portfolio. 

 Aloha Todd, 

Awesome that you have partners. I tend to categorize investors into 3 groups: 
Group 1: Too much deal flow and bandwidth but not enough money - (Lending is the key to this group's success/scalability)
Group 2: Too much money and not enough deal flow - (All cash investing is the right decision). 

That said, if you're partnering with people for expertise and sweat equity it makes sense to partner. If you are partnering with them for their cash, then partnering for that purpose is likely more expensive than financing if you actually execute according to your plan. If that is not found to be true, then I'd be weary of the entire deal and its profitability altogether. 

We always offer to do strategy calls to go over numbers with our clients to take an objective approach on whether it makes sense to finance or not. Either way, I hope this is helpful. Good luck! Aloha. 

Aloha Carlos, 

This is a question that a lot of investors (in my opinion) get wrong. They look at the interest rates and say, rates dropped X% so now it's time to refi. This doesn't make sense because there are so may costs to refinancing a property that, when you do the math, depending on how much your property is actually worth, the monthly improvement in cashflow does not substantiate the costs to refinance. 

@Jason Park hit the nail on the head in terms of "it depends on your goals". What I'd add onto that is that it depends on how much cash out you're going to get from refinancing and what you can reinvest those cash out proceeds into once you have them. If you're just looking to lower your payment, then take the total costs its going to take to refinance (at the very least 5k) and then divide that by the monthly cash flow improvement you'll have by getting lower rates. That's how many months its going to take you just to break even and for it to START being a good decision to refi. 

If you can't get cash out, consider the likelihood of your market appreciating further/bouncing back from where the market currently is, as well as whether you can do any value add to your properties to boost their values. In most cases, if you're trying to grow your portfolio, doing a cash out refinance without getting enough cash out to be able to reinvest to majorly help you with the down payment on your next deal is probably going to slow your growth and ability to scale. 

We're always happy to chat numbers with you to help you through these decisions. But either way, we wish you the best of luck! Aloha. 

Aloha Todd, 

You'll want to talk to your lender about this. 

Response to #1: Some lenders allow for layered entities while others want warm bodies/natural persons to be direct managers. If you guys wanted to layer the entities, you can potentially do that where each of your entities are 50/50 owners of the new vesting entity. In this case, you'll need to turn in the entity docs for all 3 entities for the underwriters to review. Make sure your lending team knows how to put this together. 

Response to #2: It's going to be cleanest to have a new bank account but it's still possible to do the deal without having to do this. Again, make sure your getting these answers from your lender. 

Response to #3: Ideally you run it through the new LLC but for the purposes of the loan, it may not be required. Ask your tax/legal counsel about ramifications for not doing this though as there may be implications I'm not qualified to speak to.

Response to #4: This is again something to talk about with your partners, tax and legal teams. You don't want to be getting this advice from the forum unless its from a qualified professional. From a lending perspective, it this wouldn't affect your loan approval. 

I hope this helps. I'm happy to dive deeper into any of these items if you DM me or we set up a call. Either way, good luck and Aloha!

Aloha Duane, 

Do you have access to any private lenders? Instead of asking for a full 100% from a partner, just raise money from private lenders to cover the down payment and make sure you work with a hard money lender that allows you to get your down payment from somewhere other than your own bank account. A lot of people stifle their growth by using private lenders to fund 100% of the deal. Instead, a better way to scale is to take that same money, and split it over 3-4 down payments to then be in a position to do 3-4 deals. At that point, money is not your problem. Sourcing deals and bandwidth (managing multiple projects) becomes your problem. This is where you want to be and where experienced investors are. 

I hope this helps! Aloha. 

Aloha J, 

I noticed no one responded to you here. If your ITIN borrowers are looking to purchase the home as their primary residence, I don't have a good answer for you. I work exclusively with real estate investors so can't speak to consumer loans. That said, if you have clients that need long term debt and are investors, there are programs for foreign national real estate investors that could work. 

I hope this helps you. Mahalo. 

Aloha Krishna, 

I'll address each point for you: 

1. It's unusual to have be questioned by an underwriter about why he financed a loan with a private lender with a poor reputation, however, if it's a concern that he'll continue to be asked about it, I recommend creating a letter of explanation that clearly explains the situation. Every loan you do, you can just update the date and sign it. If it's well written and well documented, this will take <2 minutes for every loan you do and solve your problem moving forward. 

2. It is true that traditionally commercial loans are going to have 10-15 year terms (most commonly 10 years) with a balloon payment. This is also depending on the type of CRE property your father has. On a multifamily apartment building, getting a 30 year fixed for the life of the loan is possible and more available.

3. DSCR for commercial properties will be calculated on NOI/PITI. The NOI from your last 2 years of operating history will be looked at in comparison to the commercial appraisal. If your operating costs are below the market, your NOI will likely be matched closer to the appraisal's market rents. If your NOI is greater than the market, they'll work off your actuals. Depending on your market, you'll have to underwrite to a 1.15-1.4 DSCR. 1.15 would be VERY aggressive and uncommon.

4. The down payment is going to be completely dependent on what your DSCR allows for. You'll want to ask each lender you work with how they calculate the DSCR. They're all going to use NOI/PITI, but you'll experience a range of DSCR requirements which will directly affect your max LTV and you'll also experience a range of rates. Some lenders will underwrite off of the "Note Rate" and some will "Stress Test" the rate to a rate higher than the "Note Rate" which will give you even less leverage/lower DSCR.

5. 70% LTV on a 1. Strip mall 2. Cash out 3. Only 1 CRE property on the schedule of real estate all increase risk, so your lender would combat each risk point with offering lower leverage. Being at 65% or less would be more common.

6. Regarding purchase or cash out first, you should really run this by your both the lender you want to refinance with as well as the lender you'll do the purchase with. Anyone from the forums here is going to give a "best guess" because you're not going to post all of the financials/details/documentation that you'll need to turn into your lender to make the decision. A common metric they'll look at is your Global Cash Flow/DSCR which will be affected by your cash out refinance (higher mortgage payment than you've had in the past.

7. Your lenders should be willing and able to work for your business. So ask them to pre-underwrite your deal and give you a feel for what their best plan would be. If they can't do this for you, consider it a blessing that you learned they are inexperienced prior to going through a full loan process with them. 

Hope this helps. Aloha.