All Forum Posts by: Joe Fritton

It sounds like you're talking about a semi-attached condo structure where the two units are titled separately. I've had many clients convert a multifamily property into condos, but only 1 request to change use from condos to MF. If that's really what you want to do, be careful of a potential loss of total property value from a retail perspective. 

To answer your question, there are two ways to get a single mortgage on the entirety. First, you could do a cross-collateralized, or "blanket", loan on the 2 separately titled properties. I do these loans all the time and they're easy. Otherwise, if you want to legally change the property to a singly titled duplex, then there's a change of use process that you'll need to perform through the local municipality. This is quite a lot more complicated and costly.

I am a commercial loan originator. Although comparable sales are wonderfully straightforward, they are super hard to find for commercial properties. 

When I'm analyzing a deal for my clients, I use the methods below to estimate the ARV:
1. Entrepreneurial Profit - A bare bones, dollar for dollar, return on investment in a commercial rehab can be estimated by applying a standard 15% to 20% "entrepreneurial profit" to the cost basis of the deal ((purchase price + CapEx) * 1.15) Note, cost basis is generally just the purchase price plus the total budget, but it can be good to include the total cost of capital as well. This is a low ball, worst case estimate, but it's the easiest.

2. ARV per market average cap rate - this will give you a more attractive result for your ARV, but you'll need to do more homework. Commercial property value = NOI / cap rate. That's a simple equation, but you need to calculate a proforma NOI to get an ARV. To get the improved NOI, you'll need to have a firm understanding of improved market rents after rehab, direct expenses, future tax and insurance costs, etc. Once you have a reliable proforma NOI you'll need a reliable cap rate. You can often find good info from a Google search, but just as often you can't. If you can't find a good local cap rate online, then call a couple of local commercial R.E. brokers to get their advice. It's also very valuable to build your network, so don't be hesitant to call people. I also recommend stress testing the deal by adding another 1-1.5% to the cap rate.

Best,

I've done this as well, so I can provide a bit more color on everyone's advice to farm info from Crexi, etc. I prefer Crexi far more than LoopNet. The search quality is just better. Some of the listings on Crexi will have a couple of docs that you can download. Usually, that's limited to an OM, but I've seen P&L statements, proformas, etc, and each will have varying amounts, and quality, of information. Here's the real key; call the brokers. Have conversations with the brokers and agents who are the contacts for those listings. Be candid about what you're looking for and why. There is always some level of protection for non-public information, but if you develop and care for some network relationships, you'll get the practice info you want. But not only that, you'll also get a network of experienced professionals who already know you and your goals, ready to help. Relationships are the lifeblood of business.

Best,
Joe

Offering a perspective from business purpose lending, we use the credit score that is highest among the borrowers. Business purpose mortgages are strictly for non owner occupied investment property, though. So you would not be able to use a loan like ours for a house hack where you intend to live in one of the units. Additionally, we disregard DTI and base our approvals on your investing experience, credit-worthiness and the asset that you are buying.

The more important minimum for MF properties is per door value. Most lenders seem to want $50K per unit for MF, so unless you're buying class C- properties, the min value won't be an issue. I should also mention that many 30 DSCR loans can lend on small MF and offer I.O. periods up to 10 years.

There's options!

Best

Those are excellent points, Jorge. Who would you contact for the best loan terms these days? My understanding is agency lenders a way low on LTV these days and private lenders won't allow 2nd position.

There are a couple of savvy solutions that I'm seeing my borrowers use. On the refinance, most of the market analysts that I follow are saying that we will see interest rates only begin to come down again in 1 to 2 years after the Fed stops tightening. So, my borrowers are asking me to set them up with 2 to 5 year interest-only loans with little to no prepayment penalty. When we compare the PITI payment of an amortized loan to an interest-only payment, the I.O. helps support maximum revenue in the short term.

5 year loans are offering less LTV, but also offer a better rate and the security of not needing to disposition for a longer term. 24 month loans will see the highest rates, but will provide greater LTV, if needed, and the most prepayment penalty you'll usually see is 3 months. Either will allow us to wait out the worst of the volatility and target new solutions when we see a rates come down.

Regarding a value add purchase, this can be approached with by a prudently conservative underwrite of the deal. I use some very pessimistic assumptions for the future NOI, cap rate, loan rate and rent growth. If the deal still works with some worst-case values, then we've protected ourselves against poor future outcomes. I can still close loans at up to 85% LTC, so the purchase LTV is typically workable and the full budget is provided. Currently, it's hard to cash out on the refi, so it would also be a good idea to get quotes from a takeout lender ahead of time so that you can better predict your future cash position.

Best,

Hi Michelle. Private lenders will be your best option on this because our loans are asset backed. Experience is more important to us as well in this uncertain market, but an approval could be based on the impressive fact that you bought, rehabbed and then leased up the asset all with cash out of pocket. Given the timeline and absence of debt, this would actually be shown as a purchase transaction on paper. That's good news as it would likely provide more LTV than a refi. Though, be aware that LTVs are down and rates are up everywhere.

Best,

Once you get more information about the property, such as the expected purchase price and reasonable estimates of the rehab budget and the ARV, you should then reach out to some local pro's like @Abel Curiel. Experienced professionals will let you know if the deal has any flawed assumptions and if there's room in the deal for your exit strategy. 

If the deal looks good to your realtor, then it's time to look at financing. If you have a decent credit score and some cash liquidity, then you'll have no trouble finding a rehab loan. My pro tip for finding a good broker or loan officer is to reach out to several sources, but go with the guy who returns your calls and knows his stuff when you ask questions. 

This goes for contractors as well. Start establishing those relationships by emailing them pics of the property and ask for their input on rough budget and scope of work. 

Best,

Hi Eric. I went from being a remodeling contractor to a loan officer for a large institutional investment lender. This is hands down the best W2 for relevant experience. As an LO for such a company, my job was to analyze a huge number of deals from rehabs and GUC to rentals and rental portfolios and a good bit of large multifamily. The job is really to problem solve your borrowers' deals all the way from appraisal to UW and closing. It's a stressful nightmare if a clients' deal falls through for something you should have caught. So the immediate need is to know the property and the borrower profiles as thoroughly as possible. You think it's stressful handling your own money in an investment? Try handling OPM in real estate investments. You get super good at seeing the weaknesses and creative ways to solve problems. You learn how to read appraisals, title docs, insurance, budgets and construction drawings, etc. And more importantly, you learn how to effectively communicate with all of the people in the industry.

Non QM, business purpose lending doesn't require LOs to be licensed, but if you already have the NMLS license you can just get MLO licenses for the states you want. They're typically 2 hours each and easy. There are tons of lenders hiring. I made 6 figures almost immediately and started getting huge commission checks after my book of business was filled out with happy clientele. 

Best,