All Forum Posts by: Ethan Wagner

@Ali Clark That's what I'd do. At 10% I'd push for a 5% rate on the seller financing

@Ali Clark as a follow up, I would structure your capital with both bank and seller Financing. Bank financing at 75% and then 10% seller financing. You might get ~3.75% rate through the bank and then with that 7.00% seller financing your cost of debt is going to be much cheaper then with all 85% seller financing. Alternatively, you could have the seller bring in that 10% as pref equity with the same rate. That way when you refi you don't need to cover all 85%. Maybe share 5% of the sales price with him on the back as a teaser.

@Ali Clark It really depends on the property and business plan. If this is a value add then, depending on your purchase price and renovation costs, it shouldn't be too tough to refi out of that leverage point if you can significantly increase the value.

If you are buying at market now, and then just holding it to cash flow without repositioning or adding any value, then refinancing out of the seller financing with permanent debt through a bank or the agencies is going to be tough with your 85% leverage. You would likely have to put $s in at closing.

@Ethan Wagner the DSCR was 1.2 on the second deal btw, to add some relevancy to my rant as it relates to your actual post.

@John Bradley in my experience, lending based on ONLY the appraised value is not a thing in commercial.

Things to consider are:

Execution method: life company, CMBS, agency (best terms for stabilized multifamily), banks, debt fund

Product type: construction loan, bridge loan, permanent debt (balance sheet or securitized)

In general, lenders typically size their loans based on the below:

- LTV (loan to value): loan amount/appraised value; in most cases they are looking to be in the 60-75% range based on the asset class, product type, and execution method

AND EITHER

DCSR (debt service coverage ratio): NOI/ debt service payment; typically 1.20 - 1.35 depending on execution method, product type, recourse/non recourse, and the loan terms

OR

Debt Yield: NOI/ loan amount; typically 7 - 9% again depending on the lender, execution, product type, etc.

I hope this explanation helps. Like I mentioned, it l depends on the asset class, execution and product type, and how aggressive the lender is willing to get.

I just ran into a scenario where our DUS lender (delegated underwriter and servicer) for a Freddie Mac loan more or less f$@+&d up a $68 million loan on multifamily and drug the process out for 9 months. During that time, US treasuries went from 50bps to 130bps and drastically changed the quality of the deal in many ways. Despite closing anyways, we were pissed off. That same DUS lender is also a bank, and we are now working with them on another deal where they offered us crazy good terms in order to fix the relationship after their previously botched deal. 75% LTV, 30-yr AM, sub 3 rate, on an unstabilized mix use asset with a release provision NON RECOURSE AND ON BALANCE SHEET FOR 7 YEARS!!! The value of a relationship is often the most important factor in getting the best deal. Never pass up an opportunity to have a lender owe you a favor!

Cheers!

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@Dean B. For multifamily you're gonna get the highest leverage at the lowest rate from the agencies. I closed a deal with them in 60 days. As long as there are no nuances such as historic tax credits or anything like that the 60 day target should be achievable.

Feel free to PM me if you have any further questions.

Cheers.

With the information that you have provided, I wouldn't pay more than $780,000.  That is based on the following assumptions:

Rent: In-place rents are at market

Vacancy rate: 10%

Expense ratio: 50%

Cap rate: 6.5%

Loan Interest Rate: 5.25%

Debt service coverage ratio: 1.2

Down Payment: 20%

Best practice would be to ask brokers for cap rates and market rents to support some of your assumptions.  I think $825,000 is too high.  $780,000 would be my maximum price as the cash that you would be left to pay back your down payment financiers at that price would be about $9000 annually.  As mentioned above, that doesn't leave you with much room for error in case any significant capital improvements are necessary.  Please don't hesitate to reach out if you have any questions.

Ethan Wagner

@Sumny Kapila

Also please note that my explaination is very general as for the purposes of this post. If you need a more granular description please don't hesitate to reach out.

Just to add to the above, average vacancy is 8%, assume 10% to be safe.

The important thing here is to realize that the more conservative your assumptions, the less you will be willing to pay, the less risk you have in your deal, and

less sellers will be willing to sell you their property and vice versa. It is up to you to determine your risk tolerance and balance that with what sellers are asking. That is the real hard part.

@Sunny Kapila Look at the market and determine what you can get for rent per unit. Ideally, look for rents that are for similar buildings to your target and also recently signed as those are the best determinants of what your building will get. This gives you potential rent.

Then, look at market vacancy rates and apply that to your rents. ([1-vacancy rate] x potential rent = rental income).

Next comes expenses. In general, your expense ratio will be 40-50%. If you don't know and/ or have the time or resources to figure out what your expenses will be, use 50% to be safe as this assumes you will incur more expenses than average. Multiply your rental income by .5 and you arrive at your net income, or net operating income (NOI).

Multiply your NOI by a cap rate. The easiest way to find an applicable cap rate is to ask a broker that often is involved with your target asset class and describe your target. This gives your a general price, but remember that this price has your assumptions baked in to it.

One thing to remember too is if you have to finance the property, to ensure your NOI per month is above your loan payment per month. That difference will be the cash going in to your pocket.

@Frank Patalano Financing