All Forum Posts by: Tim Milazzo

I'm going to echo @Joel Owens and caution that @Jeff Kehl's advice may not be correct on prepayment. On commercial loans you typically have a prepayment penalty, so you can't freely pay back extra principal if you feel like it.

But I'm also going to be contrarian to the rest of the commenters here, and say that you shouldn't be making a loan decision after talking to "the bank". If you said you talked to several banks and these were your two options, that would be another story. On a multifamily deal, you should know the following before making  decision:

1. If I go with a bank, is this the right bank? Can another bank make a better offer?

2. Is my deal eligible for Fannie Mae or Freddie Mac financing?

3. Would a national lender be able to provide a competitive offer to my local bank in this case?

4. Is this property eligible for HUD financing?

#2-#4 will depend on a few factors including the size of the loan you're looking at. #1 is something you should do in almost all circumstances. Feel free to PM me for some more resources.

@Andrew Acuna - are you asking for a potential residential (1-4 units) or commercial loan?

Hi Anthony,

 Can you share more details about the property (number of units), location, and value of the property? Those three points will start to get you somewhere - there's no single lender that's right for every rental scenario.

 - Tim

Hi Chris,

 Everyone starts as a noob, so don't feel bad! I'll weigh in on a couple of your points.

Commercial loan terms - not all commercial loans are the same (10 years with amortization). You can get some great, long-term financing from Fannie Mae, Freddie Mac, or HUD (40 year amortization!) once you're looking for a loan $1M+. If your loan will work out to be smaller than that, local banks are more the typical route.

Pre-payment - it is true that commercial loans are less flexible that residential (1-4 unit) loans. One of the big differences is that commercial loans typically carry a pre-payment penalty, meaning you're disincentivized from paying the loan back early. Shorter-term financing is available, and is generally more expensive, if you want more flexibility.

I'll leave it up to some more experienced investors or potentially a lawyer on the "when to create an LLC" question, but in short, you always want an LLC for a commercial loan (lenders will require it).

Hope some of this is helpful!

- Tim

There are a few key points you want the lender to come away feeling comfortable with:

- Who are the players? Is the sponsor an individual, a group, fund, or joint venture?

- What is their track record? Do they have experience in real estate investing? In commercial real estate investing? How many deals have they run and have they been successful? When did they start?

- What is their financial backing? This can simply be giving an idea of Assets Under Ownership or Asset Under Management.

- Where are they based? Two reasons to give this - 1) Are they close to the lender (matters to local and regional banks). 2) Are they close to the asset (matters if you're planning on managing the building yourself).

Hopefully this is helpful!

Hi Brett,

 The answer is Yes! As soon as you hit 5 units, you're in Commercial loan land and your personal finances and credit history are no longer the driving factor behind a lender's decision. Ideally, you'll want to submit a pro forma (financial projection) to potential lenders which is defensible. The lender will want to see that the money they lend to you will result in cash flow that covers the interest and amortization you owe them by a safe margin. You'll also be showcasing to the lender that you're prepared to be managing the property like the business that it is. The less of a track record you show them, the more they need to be convinced that the deal can stand on its own.

 Once you can prepare the story and the financials, the best next move is to reach out to several lenders simultaneously to see who can provide the best financing. Relying on one lender's opinion is tempting, but this is a free market and you should take advantage of that. A local lender might be the best choice, but not always - sometimes a national lender can come in and provide a great quote.

Last note, on "house hacking" - that's a strategy that's advantageous for 2-4 units, but it won't do you any favors in financing 5 units where it's now commercial. You won't get a better deal, and if the lender hears that's your plan, they may be concerned that it will lower your DSCR - the ratio between the property's income and the payments you owe to the lender. The lower that ratio, the riskier the lender sees the deal.

Hi Cody - what kind of properties? I'm assuming single family homes?

Hi Casey,

Not a direct answer about getting a line of credit, but have you looked into potentially adding Mezzanine debt to the property in question? That would be a second loan on the same property, typically for a higher interest rate, and you could match the maturity of the second loan with when you plan on refinancing the first loan. Then when you refi with a larger first commercial mortgage, it pays off both existing loans.

Feel free to PM me to discuss further. Thanks!

- Tim

Hi Devin,

The problem would be efficiency - you'd lose far less money trying to set up and maintain that structure than the $1M you collect.

However, the last few years has seen the rise of Crowdfunding for real estate deals through platforms like Fundrise, RealtyMogul, ShareStates, RealtyShares, Patch of Land, Money360, and several others. These platforms select projects that are a good fit for their platform, and then syndicate the investment opportunity out to their own members. The money would come to you from a single entity, so you don't have to look after and provide reporting to the individual investors yourself. $1M is well within the range of several top crowdfunding portals.

If you're interested in taking a look at potential crowdfunding options, shoot me a PM!

- Tim

Hi @Rich Thomas - does the lender have to be local, or just have to lend where your deal is located? I'm assuming the latter - in which case, PM me as I have some info that could help.