Financing Flashcards
3 types of lenders:
Local, National, Conduit
Local lenders’ strengths:
- they like to deal with local people
- they know the market
- they know the players and properties
- they can get things done very quickly
- they will give the best construction and bridge loans (usually 70-80% of property value, 70-80% of construction cost, at cost of 1-2 points, interest rate will be higher than conventional rate)
Local lenders’ weaknesses:
- Rates tend to be higher than national lenders
- Shorter amortization schedules (15-20 yrs compared to 25-30 yrs for national)
Best way to work with local banks if you are from out of state:
They may initially be cautious and not want to lend to you. Go to them and get lunch, then stay in contact with them to develop a relationship.
National lenders strengths:
- comfortable with nationwide investments
National lenders weaknesses:
Need the deals to package properly based on standards of Freddie Mac/Fannie Mae:
- Occupancy 85% or higher for 3-6 months
- Debt service coverage ratio of 1.2 or better (many times 1.25 in tighter markets). DSCR = NOI/mortgage debt service. Put another way, for every dollar you have in debt service, you have $1.20 coming in to cover it.
- Buildings with minimal repairs
- Stable P and L sheets for past 6 months
- Stable or improving income an Expenses
- They don’t like flat roofs either
Conduit lender
Like national lenders, but more flexible, get their funds from major lenders on Wall St, then sell loans to others.
May use one if your deal is a little messy, numbers aren’t totally complete, or if you just started to stabilize over the past 2-3 months , or have a flat roof. Their rates may be a little higher.
Most will finance flat roofs.
How many lenders to cultivate?
As many as possible
Construction loan
Needed when repairs exceed 3% of the purchase price.
Bridge loan
Needed when the property is less than 85% occupied. You’ll get the best loans and rates above 85% occupancy.
Six month trailing report
Fannie Mae and Freddie Mac like to see an upward trend in the financials for the past six months
When to use mortgage broker?
Always. Will charge 1% but will usually save you that much anyway.
How a good mortgage broker helps
Will have a number of Fannie Mae, Freddie Mac, local lenders, etc. that they work with regularly, can you take a quick look at your deal and tell you who will finance it and fight for you to get it done. Typically awarded one percent of the total financed amount.
MM author says that banks love:
Apartment buildings
Loan package to submit to lender (also know as underwriter) should include:
- Your resume
- Description of the deal
- Key dates such as due diligence timelines, expiration of contingency, close date
- How you’re going to manage, when it will break even, plan for pay back.
- Last two years of financials
- 2 years P and L
- Current Rent Roll
- Include pictures and an aerial map
- Sell them on the strengths of the project: on main road, lots of open space, etc., solid structure, etc.?
- Especially if it’s your first deal: resume of your property management company, with its marketing plan, and 5 year profit and loss projection (even though you don’t have management experience, you are a pro and handing it off to a management company with lots of experience)
