All Forum Posts by: Rodney Lorenzo

The building is commercial, so the value is based on all units filled. Right now I have 2 out of 6 filled and the previous owner filled them with riff raff so he could get it sold. In wanting to turn it around to a cash flowing status, I've had to evict non-paying tenants because I thought I could flip them. Now I realize it's taking longer than expect because no one wants to live in the neighborhood. I don't see any gentrification reaching that area any time soon. A partner would balk at the idea of partnering with me for obvious reasons

The urge to get into real estate pushed me to invest in a 6 unit building in a neighborhood that I didn't think was that bad. I thought, the cash flow could be good so why not. This was a year ago. Now, my PM is struggling to fill the units from bad tenants that I've had to evict and I can only pay the mortgage out of my own pocket by so much. I'm very worried of defaulting on this property. 

To make matters worse, I have a 5% penalty on the loan if I sell it before 5 years. If I were to sell it, I'd have to not only pay this penalty, but the 6% realtor commission on top of that. What would you do in my case? I'm thinking of selling it off market to avoid the realtor commission and possibly paying someone a 1% finder's fee for bringing me a buyer. I would then pay 6% in total in ridding myself of the property, which is the same amount I would be paying a realtor. 6% is better than 11%. I've learned that bad neighborhoods tend to attract bad tenants, while good attracts good. I may just have to have my PM fill the units with whomever, just to boost the value of the property, which is what the previous owner did, hence, me inheriting his bad tenants. Yes, I'd hate to do this to another investor, but at the end of the day, I don't want to see my first investment go down the toilet. What would you do in my case?

Quote from @Joshua Thang:

Hi Everyone,

Does anyone have experience or frustration with CMHA not paying back rent during the inspection period? In my scenario, Sec 8 came out to do their inspection on the property around end of March but it didn't pass inspection after several tries until end of June. I paid my property manager in April for the repairs that needed to be done on the property as soon as I knew about it. Now that inspection is cleared, CMHA refuses to pay back rent for May and June. Some of the reasons why it got delayed was because tenant got covid and it had to be delayed for another several weeks. Is there anyway I can recoup back rent I didn't get during the inspection period?? My PM said it's not possible.....even though everybody says Sec 8 provides guaranteed rents...

I had a situation where they used the failed inspection to avoid paying market rent. Because the tenant wanted to move out anyway, this opened up the unit to the general market. This is the part of Sec 8 housing that other investors don't talk about. Just because they pay you on time, doesn't mean that's always going to be at the market rate. The govt will screw you over when they get a chance

I was just informed that the insurance for my 6 unit building will almost triple in value. They claim it's because the cost to rebuild from scratch would be significant, but my question is, why didn't they do this from the initial phase instead of waiting a year to figure out rebuilding costs? There's no way the rent roll from all 6 units will cover such a high premium. Other insurance companies are being shopped, but if I can't get a lower premium, or at least something that the rent roll will cover, I may lose this property. Never knew that in real estate, an insurance company can completely wipe out an investment, all because they can.

Quote from @Ben Firstenberg:

I can answer a few of these questions. 

About the HELOC: you can find this in your loan documents. Look for anything that references a second lien. Commercial lenders typically don't allow them, but sometimes they do. If it says something like "second lien will be an instance of default" then it for sure will trigger the loan to be called.

5% prepay is pretty tough. I'm really not sure if that's the standard for smaller commercial properties or if your lender took advantage of you. Typically it's the greater of yield maintenance (the interest they would have received) or 1% of the loan amount. So that prepay penalty would diminish over time. My experience is mostly with larger, commercial properties so maybe 5% is the norm. 

From your description, it seems like you're a little bit stuck here. You can't really refi or pay off the loan without incurring that prepay so unless your loan docs allow a second lien, your best move is probably to stand pat, save cash and be ready to expand when the loan term expires. 

In the future: you can negotiate with the lender and request 1) second liens, 2) "releases" so that if it's a portfolio you can sell off a couple of the properties to free up some cash and 3) lower prepay penalties. You can also pay upfront for better prepay privileges. The price for this is typically an additional 5-25 bps on your interest rate, depending on what privileges you ask for and how your lender calculates them. 

Thanks for bringing my attention to these words "second lien will be an instance of default". I'll look out for them. I think the PPP was implemented because I'm a new investor and my property is a 6 unit building.

My goal is basically to use the loan of my first property to back up one for my second one. Then I would make improvements to force appreciation and "untie" the properties in about a year. The risk with collateralization comes when the properties are still tied and if things go South, you can lose both. If my DSCR is good and the properties cash flow well, then it may be possible.

When you say wait till the loan term expires, what does this mean exactly? Wait till I pay the loan off in its entirety? I'll be dead by then. I don't want to wait too long to acquire a second property. In other words, i want to grow my portfolio and wondered how most did it. Some flip properties. Some refinance. Some cross collateralize. I'm just concerned about the 5% PPP that I would have to pay within the next 5 years. If the loan doesn't get called, then maybe I can avoid paying it

Quote from @Randall Alan:

Quote from @Rodney Lorenzo:

I closed on my first commercial property last November - a 6 unit all residential. To those that have successfully expanded your portfolio, what strategies worked for you the most? I want to avoid having my loan called and/or having to pay 5% pre-payment penalty up to 5 years. I've been told cross collateralization can be risky, but what if I "untied" the properties 6 to 12 months in? What about a HELOC ? Would it trigger the loan to be called? Or should I just do it the old fashioned way and wait till I have enough equity to refinance. This would be the last resort as I don't want to pay a 5% PPP, nor do I want to wait 5 years to buy my second property. Please note that 30% was my down payment. Any suggestions or advice would be helpful.

 @Rodney Lorenzo

Your post tries to explain your problem without explaining what or why you have the problem.  Are you wanting to extract equity back out of your newly purchased property? Why are you worried your loan would be called?   What do you mean by “untie” the properties?  Like separate them with your county into individual parcels?  

I think we need to understand your objective and specific issue with acquiring your next property.  

If I tried to answer your question it would seem you want to leverage your existing property to buy your next?  Most lenders would want to refi the first property because no lender wants to be in second position.  My best advice would be to go back to your current lender after 6 months of good payments and say “this is working great… now I want to do this other one as well”.  

As for equity, most lenders are looking for 20-25% of your own money in the deal.  We had 5 properties collateralizing a single $500,000 commercial loan.  We went back to our lender and said “hey, these 5 properties are worth $1.2 million and we want you to release 3 of the cheaper properties(still leaving about $800,000 in value securing the loan.)  They agreed to release the 3 units after we paid for appraisals proving we were over-collateralized.  But I think working with your same lender (presuming it isn’t a hard money lender) would be your best bet!  You have the relationship, they see you are good for it, etc.  you could certainly tie your same property to another loan with the same lender with less issues than a new lender.  Also, if going for a larger loan with the same vendor I would think it would be highly likely they would waive a prepayment penalty if you are going right back into another loan with them.  I see prepayment penalties as a bank saying  “you wasted our time  with this”… which if you are borrowing more from them that isn’t the case… so I think you could probably get that waived  (with the same lender).

if 30% was the required down payment I wouldn’t see any ability to extract any equity though.  If they only required 20% and you chose to put down 30 that might be different.  But keep in mind banks really look closely at debt to income levels, as well as loan to value levels.  (They love their metrics!)… but if you have good cash flow on your properties and a good income otherwise  there is probably a chance there. 

all the best!

Randy 

 Sorry I lost you in the explanation. What I want to do is extract money from my property to acquire a second one like most investors do after a certain amount of time. The issue is the type of loan I got has a 5% PPP attached to it and all I want is to avoid having to pay 5% of the loan if I buy within 5 years (it's not a step 54321. It's 5% every year up to the 5th year).

Since the first property is used to back up the loan for the second property, I would use a 6 to 12 month period to make improvements and force appreciation. Then I would refinance and "untie" the second from the first. Doing this would reduce the risk of losing both my properties if things were to go South. Of course, if I refinance I risk having the loan called and I don't want that to happen. 

"If I tried to answer your question it would seem you want to leverage your existing property to buy your next? Most lenders would want to refi the first property because no lender wants to be in second position. My best advice would be to go back to your current lender after 6 months of good payments and say “this is working great… now I want to do this other one as well”. This is exactly what I want to do. Leverage my first property to buy a second, if that's possible. Maybe 6 months would be too short. Shouldn't I allow more time for appreciation?

I could go back to my lender (not hard money) and ask him for his advice. 30% down payment was required because I was a new investor and it was a 6 unit building. My goal is to acquire a larger property than the one purchased before it. 

I closed on my first commercial property last November - a 6 unit all residential. To those that have successfully expanded your portfolio, what strategies worked for you the most? I want to avoid having my loan called and/or having to pay 5% pre-payment penalty up to 5 years. I've been told cross collateralization can be risky, but what if I "untied" the properties 6 to 12 months in? What about a HELOC ? Would it trigger the loan to be called? Or should I just do it the old fashioned way and wait till I have enough equity to refinance. This would be the last resort as I don't want to pay a 5% PPP, nor do I want to wait 5 years to buy my second property. Please note that 30% was my down payment. Any suggestions or advice would be helpful.

I closed on my first commercial property last November - a 6 unit all residential. To those that have successfully expanded your portfolio, what strategies worked for you the most? I want to avoid having my loan called and/or having to pay 5% pre-payment penalty up to 5 years. I've been told cross collateralization can be risky, but what if I "untied" the properties 6 to 12 months in? What about a HELOC ? Would it trigger the loan to be called? Or should I just do it the old fashioned way and wait till I have enough equity to refinance. This would be the last resort as I don't want to pay a 5% PPP, nor do I want to wait 5 years to buy my second property. Please note that 30% was my down payment. Any suggestions or advice would be helpful.

I closed on my first commercial property last November - a 6 unit all residential. To those that have successfully expanded your portfolio, what strategies worked for you the most? I want to avoid having my loan called and/or having to pay 5% pre-payment penalty up to 5 years. I've been told cross collateralization can be risky, but what if I "untied" the properties 6 to 12 months in? What about a HELOC ? Would it trigger the loan to be called? Or should I just do it the old fashioned way and wait till I have enough equity to refinance. This would be the last resort as I don't want to pay a 5% PPP, nor do I want to wait 5 years to buy my second property. Please note that 30% was my down payment. Any suggestions or advice would be helpful.

Quote from @Taylor Dasch:

I say go for it. Be sure that if everything were to go wrong, you wouldnt ruin your cash flow on the first property though. HELOCS are hard to get on an investment property but some lenders will do a second lien loan on it so that could be an option as well. 

 This is why I only want them tied together for no more than 12 months. What's a second lien loan and at what percentage could I borrow? Is this state specific?