All Forum Posts by: Javier D.

@Javier D. 

Non-Recourse is the term I think you're looking for.  That's great to have.

12% Sounds like hard money, not bridge.  I'm seeing bridge at WSJ Prime + 0.5-1% (5.5-6%)

Yes, 1% broker fee for this size deal sounds about right. Lender may also charge 0.5 - 1% on top of that.

@Javier D. Some great advice above, I'd like to add some thoughts regarding your financing.  I haven't fully underwritten this myself, so this is just at first glance.

I think you're a bit aggressive on your financing. Your numbers are certainly possible, but I would recommend you add some cushion in case things don't go the way you have them here.  If you have this already locked in, more power to you, and I want the phone number for this lender!

In no specific order, some initial thoughts:

- 4.87% with 30 year am over 10 years is a fantastic deal in today's market.  I've really only seen these kinds of numbers with an Agency SBL program, on a borrower with extensive multifamily experience, in a primary or secondary market.  You'll need to be able to fit in their requirements, including significant liquid reserves & net worth.  

- You mention the property is ~4 hours from Miami.  I'm imagining that this is still somewhere in FL, but not in a primary or secondary market.  Agency lenders will cut your terms solely on location, based on their own internal guidelines.  You not living in the market may also affect you, but 4 hours away is better than across the country.  If you own properties in the same town and have good operating history, that should help.

- This is your first deal of this size.  In a lender's eyes, residential rentals (1-4 units) don't carry much clout as far as experience.  This will probably affect your terms.

- As mentioned above, your management numbers and reserves need to fatten up. Lenders will do their own underwriting and use market rate assumptions (i.e. 10% for management). This will affect your NOI and therefore reduce your maximum LTV. Make sure your cash flow still works if you get less than 75% of the purchase price.

- IO costs money.  Usually 4bps added to your annual interest rate, per year of IO.  So an extra .08% on your rate, over 10 years.  Calculate that out and see if it's still worth it for you.

- Any CapEx work you're planning in the 10 year term will need to come out of pocket if you don't include it in the original loan. I'd consider looking at doing all of your renovations up front, under an IO bridge loan, then stabilize with an agency program that will underwrite better than it does now. (or find a bridge lender that will roll it into a perm loan)

@Javier D. Operating reserves need to be considered, not just $ for capex, renovations, etc. Many businesses go out of business (or get themselves into a lot of trouble) because they just run out of money. For example, when you look at the gross income/expenses for a year a lot of people are not factoring cash flow on a month by month basis. You will have some months where expenses are much higher, like when taxes/insurance are due. Or when you have 5 unit turns in one month and have much higher than average R&M costs. Or when you have an emergency roof repair that costs you $5K. I could go on.

This is up front money that you should have to operate your business. Different people have different ways of calculating what their starting operating reserves should be. One month operating expenses is a minimum ($12.5K based on your expenses above) but I would start with a higher figure. For this deal I would have something like $40K-$50K operating reserves. This is cash that sits in your bank account to cover the ebbs/flows of income/expenses on a monthly basis and emergencies. You can start with less, but the lower you go the more you're gambling with your investment.

Maintenance is outside of CapX -

Both @Scott Skinger and @Ed Matson had good feedback! 

You should have 50-55% expense ratio to Gross Rent to start you review.  You can always bring it back a little if you know for a fact it will be less, but you want to make sure you are conservative on the initial review.

I don't have time to go through and thoroughly underwrite this deal right now but a few quick things stick out:

-looks like the above is straight from a broker's pro forma in their OM, not based on actuals

-your expenses are at 38% including capex reserves, almost definitely too low for this property

-there's a lot you're not considering with you CoC figure of 13.42%. What about up front repairs? operational cash flow to get started? up front cash for emergency roof fixes, etc.?

-you need to consider disposition of asset, exit cap rates and valuation at key points like refi (if that is part of your strategy) and end of loan term 

Overall, I would say that all of the above needs to be put into a MF underwriting model as there are a lot of factors missing that will blow this investment up (in a bad way).