All Forum Posts by: Michael Worley

Also to clarify, Freddie / Fannie loan rates and terms are for fully stabilized properties. It's not comparing apples to apples to work on financing for a value add property with these rates / terms as context.

The math I posted in my quote shows you how it's very low. 5.7% on average for rent increases is just a hair over historical average growth for rent. Considering your starting point, that is to say you're starting from a trough, the expected growth rate SHOULD be above the historical average. We all know that things don't decline or increase in a straight line. So if something is at a peak, then to regress to the mean it must advance at less than the historical average in the future. The same is also true, if something is well below trend line, then to progress to the mean it must advance at greater than the historical average in the future. Given how much below trend line the recession put everything, the 5.7% growth rate point to point is arguably lower than you would predict it would have been.

Your financing numbers are way off. No way you get 360 month amortization on this deal at 5.25% with zero skin in the game for a dinged credit borrower. You need to rerun the senior secured debt at 20 year amortization at best, more likely 15 year. Also, a seller second at 360 month is very unlikely, and certainly not at 5.25%. Any seller worth their weight in salt is going to want a much higher rate than the senior debt (junior debt is riskier, and therefore should command a higher rate) and the likelihood he'll want to amortize that over anything greater than 10 years is low.

That being said, if you can even cash flow 1 dollar with zero skin in the game the CoC return is fantastic. (Which is also why it's unlikely to work out that way).

I also think it is worth noting several other factors that go into what makes a market 'overpriced' 'underpriced' or 'fairly priced'.

First, let's think about cap rate compression. If a property, all things being equal, was trading at 8% cap two years ago, and is currently trading at 6% cap, then you have to ask yourself why? It's not magic, it's not some mysterious third party deciding what the proper cap rate is, it's a market. The market forces which move prices imply many things. (Not that everyone agrees with the implications, which is causes there to be both buyers and sellers) One of the things cap rate compression tells you is that there is implied rent appreciation. As an example, let's say that a property of a certain type has historically traded at a 8% cap in that market. If you believe in reversion to the mean, and it's currently trading at a 6% cap rate then the 'market' is telling you that rent appreciation is expected to be above the historical rental appreciation for that market, such that it will make this property have an NOI that reverts to a historical level close to 8% in the future.

It might seem counterintuitive at first to think that buying at a 6% cap today to 'grow into' an 8% cap later makes sense. If you think of the cash flow and the 'rate of change' of rents in the future, it makes sense.

Secondly, since rent appreciation isn't the only thing that matters and because real estate investing isn't in a vacuum, then it must imply other things as well. It may imply that the premium over the risk free rate of return is a constant (i.e. if 'normal' is 4.5% 10 year treasury rates and 'normal' is 8% cap rates, then the 'normal' premium over the risk free rate is 350bps) so that the expected 10 year treasury rate + 350 bps is 6%. This means that the expectation is that inflation is tame (the 10 year treasury rate is a historic inflation + gdp market expectation). It may imply that availability of credit for first time homebuyers is limited in the near future (which leads to rent appreciation). It may imply that buyer preferences are for rental properties instead of home ownership (i.e. geographically closer to work, a preference for community living instead of suburban living, home price unaffordability, etc) which again leads to rent appreciation.

You can debate these implications, but the information included in the price movements definitely means that more people / more money believes those implications than do not. It's also worth noting that changes in how the market views the implications do not happen over night so the odds of the 'bubble bursting' are very low. In fact, in my lifetime it's happened ONCE (2008 crisis) nationally. Locally, it happens more often, but then again, real estate has always been considered a local market up until the crisis.

Side note: Isn't it funny that people refer to the 2008 crisis as a ONCE IN A LIFETIME MAGNITUDE CRISIS, but then fear it happening again all the time.

I don't think that's crazy high at all. Based on a simple time value of money calculation, that's an annual increase in rent of 5.7% on average. Seems very reasonable considering that 7 years ago we were coming out of a recession. In fact, I'd argue that is very low considering what you'd expect from a recovered market that was so battered.

You need a residential loan (less than 5 residential units is not considered multi family in banking). There are many banks that are NOT huge banks that lend on 1-4 investment properties. You need to ask that question " Does your bank's loan policy allow for 1-4 investment properties" (it's pronounced one to four). Just ask the lenders, they'll know.

He came to conclusion based on the post itself and later posts. First, you said 'larger multi family deals' then a few responses down you said (paraphrasing) $1 Million size. For multifamily that is not larger, but quite small. It indicates your sense of magnitude and your language don't mesh, which leads to the conclusion that you're not informed enough to make a good judgment. Second, you refer to whether lenders look at rental income only or personal income (paraphrasing) which indicates your understanding of the credit underwriting process is not developed enough to make a good judgment. Ben just said it in his succinct manner.

Chan,

The CREFCOA links I posted above would fit your request, but you can just call banks in your area that sell loans to Fannie. Those guidelines are Fannie Specific so any bank that sells to Fannie will likely have guidelines similar (although they can be more strict than the upline correspondent bank/lender they are selling to).

There is non recourse financing through Fannie Mae on the Multi Family side, the programs are readily available.

The following links are not an endorsement of a particular lender, but just a quick googling of terms / rates (terms are all going to be similar as they have to comply with Fannie U/W policy regardless of originating lender) for Fannie programs:

http://www.crefcoa.com/apartment-rates-main-fannie...

http://www.crefcoa.com/fannie-mae-multifamily-small-loans.html

The tl;dr version is that you can get 80% LTV/LTC, 30 year fixed, on properties with non recourse financing on fully stabilized properties (90% occupied is a requirement).

The issue is that people think you can START with that financing on a non-stabilized/value add/new construction/rehab type property. The truth is typically you can't. You start with conventional bank financing, on the commercial loan side, and then proceed to get Permanent (or in our banker parlance, take-out) Financing that is put in place to improve cash flow and/or to assume/sell to investors. You don't need 50% down for the non-recourse, you just need a stabilized property.

Doing the 'conversion' doesn't matter to the bank as long as the original note was guaranteed by personal guarantees. If you guarantee a note you're on the hook for the whole note either way. All you're doing is adding legal costs to create LLCs. The 'in case I get sued' thing is in my opinion over blown and could easily be ameliorated through umbrella policies. Everyone has their own opinion of that so it's not worth rehashing, but suffice it to say, from the bank's perspective a property owned by XYZ LLC with the loan guaranteed by John Doe personally is exactly the same thing as owned by John Doe with the loan in John Doe's name from a likely hood being repaid stand point.