All Forum Posts by: Chris Mason

Quote from @Mark Walker:

Quote from @Mark Walker:

Quote from @Chris Mason:

Just sent this over to a client, in place NOI yields a ~9% cap rate on this park, which of course feeds into making 75% LTV doable. All are at less than 1.5 points. Blacking out just enough so that the exact property can't be looked up. Note one of them is at 65% LTV.

Good hunting!

 Thank you for this, I'm looking at a MHP currently. 

I'm looking for Mobile Home Park lender. Do you have any suggestions?

Of course, that's what I do for a living. Feel free to reach out. 

Home loans for second homes have high rates.

Commercial multifamily loans have rates that are similar to SFR owner occ.

If you bundle 3-5+ STRs together, you can get such a commercial loan on them, as a refi. You will have to put them all into a single LLC a week or two before closing, ideally they are geographically close together.

So if you can cashflow at all at the residential mortgage 2nd home interest rate in the 'short term' (see what I did there?), then you can bundle them together into a commercial refinance each time you have a batch that's ready to ship to the land of "good positive cashflow." 

Commercial mortgage lenders don't like doing small loans, so this will be a lot more viable if the total debt amount being refinanced has seven digits instead of six digits. 

Quote from @Konstantin Komkov:

Quote from @Chris Mason:

Quote from @Konstantin Komkov:

Thank you very much for detailed explanation! So basically what appears to be going on in commercial real estate is if two identical offices are leased for different amount of money they have different market value. Does resent comparable sales impact office values in same building at all or we only need to look at CAP rates and determine the value based on CAP rates alone?

You can/should look at comparable sales if you can, but you're using that mostly to determine appropriate cap rate.

Suppose the unit in the building you are looking at is, in fact, in the middle of a 15 year lease with a strong tenant. What if there are no other units of similar size similarly situated have recently sold? Great, find one that's 5x as big that has recently sold. Cap rate lets you normalize that. 

Thank you very much! Your information put a lot of clarity! How could I learn more about commercial real estate and valuations and CAP rates? Maybe there is a book you could recommend?

 No book, I just do the mortgages and talk to folks.

Quote from @Konstantin Komkov:

Thank you very much for detailed explanation! So basically what appears to be going on in commercial real estate is if two identical offices are leased for different amount of money they have different market value. Does resent comparable sales impact office values in same building at all or we only need to look at CAP rates and determine the value based on CAP rates alone?

You can/should look at comparable sales if you can, but you're using that mostly to determine appropriate cap rate.

Suppose the unit in the building you are looking at is, in fact, in the middle of a 15 year lease with a strong tenant. What if there are no other units of similar size similarly situated have recently sold? Great, find one that's 5x as big that has recently sold. Cap rate lets you normalize that. 

SF as in San Francisco? 

Nothing 3 or 4 unit will pass the FHA self-sufficiency test, unless you are going to get the property for at least 30% off of fair market value. And, yes, there are years of data points to validate that just within my office, tens of thousands of dollars of wasted appraisal and inspection fees for deals (mostly not mine, thankfully) that had 0.00% of going anywhere but the "Loan Application Declined" bin.

At some point you may need to consider the following:

- The website that's monetized based on clicks and advertising and page impressions says this is a super easy thing and everyone should do it. Cool, that's nifty. 

- The people that are monetized on actually closing deals are all saying this thing is highly implausible. 

Maybe no one is an idiot, maybe they are simply being responsive to incentives. No click-bait website cares if you do or don't actually close, they care that you are clicking and generating advertising revenue. To wit, people might find this thread and exchange for years to come (I am cognizant of that future audience as I write this). The people who actually have an incentive to ensure you make it to the closing table are all telling you 5% down conventional, maybe there's a reason for it. That actually is your solution, if you are open to a solution. 

A lot of the podcast episodes from the early 2010s were based on that market at the time, biased both temporally in favor of the early 2010s, and geographically in favor of Colorado. Yes, you could easily buy a fourplex in Colorado in 2012 with 3.5% down using an FHA loan. And, at that time and place, it would arguably be silly NOT to do so. 100%.

This post was biased towards San Francisco, and California more general to include Los Angeles and San Diego, today in 2024. The FHA rules/regs (in particular the FHA self-sufficiency test) are applied the same across all markets, and I know for a fact that in rural communities across the country, and big cities that are not particularly desirable places to live, it's not a deal-breaker, I am not commenting on those areas.

"My question is how it could be explained?"

Some might have a strong NNN tenant in place with 10+ years left on the lease, and it might be a big corporation that you can take to court if they ghost on paying their rent, while others might be office suites broken up into small offices on 6-36 month leases with shaky tenants like a nutrition supplement MLM that uses the office for 3x a week rah rah meetings on how to recruit more people into the pyramid scheme, that are immune to law suits b/c you can't squeeze juice out of a rock. In the middle of those two extremes might be a small business with 3 years left on their lease, but they've made improvements to the property that aren't cheap to remove, such as perhaps a dental office (dentists might be pissed that I put them in the mid-risk category, but all the dentists going out of business in 2020-2021 taught us that American consumers apparently regard dental care as an optional and "luxury" spending item). 

You wouldn't pay more for a home with a really strong tenant b/c even the strongest tenant typically has <12 months left on the lease.

Take a look at the cap rates. Made up nice round numbers, and yeah these are extreme just to highlight the concept:

MLM tenant: 8% cap is appropriate based on comps, paying $100k/yr. $100k / 8% = $1.25m.

Dentist: 7% cap is appropriate based on comps, paying $100k/yr. So $1.428m

Edward Jones Financial Advisor, and Edward Jones is the guarantor of the lease (not a franchise owner[1]): 6% cap is appropriate based on comps, paying $100k/yr. $1.67m.

You might say "that's bs, the offices are identical!" -- and someone more cynical who has been around the block a few times might say "yeah but Edward Jones is a solid tenant, that's super low risk, and they've been there for 15 years already, and are 2 years into another 15 year lease." 

To make it equivalent to a house or a triplex, you could think of the tenants as the "neighborhood." Both your tenants and other tenants contribute to what that "neighborhood" looks like.

Other things that come up are neighboring businesses. To switch to retail in order to use an extreme/silly example, take an organic vegan gluten free small grocery store with 1 year left on their 10 year lease. Six months ago, the property owner was silly enough to let a cigarette store move in next door. That's a giant red flag for that grocer potentially declining to renew their lease, vegan gluten free customers don't want to walk through a cloud of cigarette smoke to get to their ethically sourced non-GMO organic avocado, and obviously the "no smoking within 50 feet" sign is going to be ignored by the customers of that neighboring business, who are all a bunch of smokers. A residential landlord doesn't necessarily have any influence over the financial success of their tenants, nor do they care b/c they can just re-fill the unit in a month anyways. 

A commercial landlord DOES care, and CAN impact the success of their tenants, and may NOT be able to re-fill the unit in a month. Back to your office space, are you going to let an optometrist rent the space next to a law office? Sure, why not, that actually adds to the professional community, I'm sure the accountant one unit over wouldn't mind either. Are you going to let an optometrist rent a space next to another optometrist? I don't know, but you would 100% want to check in with the existing optometrist, maybe they don't get "walk in" business anyways and do not care and wouldn't mind the like-minded neighbors (I've had mortgage neighbors before, and do not care -- I do mortgages they don't, case in point office mortgages across the country, so I wind up getting business from them), but an ice cream shop is going to be LIVID if you rent the unit next store to a frozen yoghurt shop, since that's a LOT of walk-in business that's now getting split two ways

And then to make it really fun, here's the question I'll throw back at you. Say it's 40% vacant. How do you determine the value now? 

[1] I have no idea if Edward Jones locations are franchise or corporate.

I know that some mobile home park owners will offer this financing themselves. They round robin cash out refinances to maintain the liquidity. It's not perfect, but it winds up being an additional revenue stream to them. Borrow at 7%, lend at 12%, collect the spread, something like that. Also nice because in the event you are forced to take back the asset, well, it's already on your property. There's a remote chance that the person who can't afford their payment can somehow afford to relocate the mobile home, but that's a VERY remote chance, offset in part by the higher interest rate, and in part by the surplus revenue received from the low vacancy produced in the park itself. 

Because the mobile homes aren't real estate, none of the onerous mortgage regulations come into play.

Let me know if I can be of assistance. 

The goalposts have moved. 

A decade ago it was all about buying a fourplex with 3.5% down, and the rents from just 2 other units would cover the entire mortgage. No brainer. 

Then we had a decade of appreciation. 

But the bills etc still have to get paid, from all the people clicking around on random websites. 

So now it's about buying a SFR with a room that you rent out for a minor fraction of your mortgage payment... and that's now called "house hacking."

One quick solution that jumps to mind, until a bigger opportunity presents itself, would be food/coffee/beverage truck or trucks. 

A lot of times there's some base rent, plus a cut of their gross revenue. 

Quote from @Ronald Rohde:

"parking near me"

thats what people search for

 +1 for putting things in the name that people are google searching for. You aren't trying (at this point) to create some nationwide brand, so being found on google, and when found knowing instantly exactly what you do, is top priority. 

Not to "do your homework for you," but this is fun, let's take the GPT suggestions above from @Kristi Kandel

VersaStorage: Vehicle Parking and Self-Storage

Long-term vehicle parking is what you do, that not everyone does, so it comes first, when markets find equilibrium you will find higher profit margins on that, for that reason, so that's the priority. That way if google truncates, it becomes "VersaStorage Long Term Veh..."

And then for my main picture, the first thing people see, I'm making sure a boat is prominent, a semi or RV (whichever is a bigger market in my area), and a traditional self-storage space.

And then you are going to look at the marketing copy of your competitors. If you see a bunch of them offering something similar, like say a discount for a 12 month storage contract, or multi-vehicle discounts, then there's a really good reason they are all doing it (likely from lessons they had to learn the hard/slow/long way), so you are going to copy those ideas first and foremost. We aren't Jeff Bezos or Steve Jobs here, it's a storage facility: Impersonate, then iterate, then innovate.

Good luck! I smell a refi in your pipeline a year or so from now, remember this isn't a home loan, so "two years of tax returns showing a profit" is NOT a hard/fast rule at all to get the best terms.