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Global Investors Podcast
GI75: Obtaining Financing for Your Deals; Even as a Foreign Investor with Eric Johnson
November 26, 2020
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Eric operates Shoreside Realty Finance, a leading company dedicated to working with investors day-in and day-out to provide streamlined finance services that emphasize execution & integrity. Eric is also an active investor in the Chicago market.

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Transcript:

Announcer:
Welcome to the Global Investors Podcast, a show that focuses on helping foreign investors enter the lucrative US real estate market. Host, Charles Carillo, combined decades of real estate investing experience with a professional background in international banking to interview experts in all areas of US real estate investing. Now here’s your host, Charles Carillo.

Charles:
Welcome to another episode of the Global Investors Podcast; I’m your host Charles Carillo. Today we have Eric Johnson. Eric operates Shoreside Realty Finance, a lending company dedicated to working with both US and foreign real estate investors. He is also an active investor in the Chicago market. So thanks so much for coming on Eric.

Eric:
Hey Charles, I appreciate it, man. It’s great to be here.

Charles:
So please give us a little background on yourself prior to starting your current business.

Eric:
Yeah, absolutely. So, you know, in, in it really, it all started in 2015. And I was really, really pumped about getting into flipping. That was like my, my first I guess, you know, step into real estate. And it just really interested me at the time because just the entrepreneurial side of it and, and hunting for deals and stuff like that. So that’s really how I got started. I linked up with a couple of more experienced investors at this time. I was actually living in, in LA, so, you know, what a market to get started in, you know it’s and, and, you know, 2015, 2016 was just, it was just so hot. You know, the, the deals were just flying off the shelf and I’m talking like 12 offers on every property like cash. And I’m not talking like hard money. I’m talking about families that have trusts and it’s like money in the bank. And you know, the fixtures in LA were at least half a mil, if not more, you know, and that’s, that’s unlike the cheap end. So that’s really how it started. I just, you know, kind of used that as a launchpad. I kind of got more into, you know, we, we did some projects out there. It was great, you know, to, to participate in. I actually was kind of spearheading acquisitions for, for these, you know, more experienced investors just because I, I wanted to learn, but, you know, I was kind of like all in on it. So we, you know, we, we did a couple of deals some larger ones too with, you know, you know, not just cosmetic, but we did extensions, you know we added master suites you know, to, to the properties we did some 80 years and stuff like that. So it was a pretty good, you know, gamut and range of products, you know, that, that, that we did. But that’s really how I got my start. And you know, since then you know, flipping here, here and there you know, it’s, I, I’ve kind of drifted more, you know, away from that and, and kind of into rental and, and, you know, really my primary focus is on financing. So but yeah, that’s just a little background on how, how I got started.

Charles:
Nice. So your company, Shoreside Realty Finance offers financing for a number of different real estate asset types and small, large multi-family commercial properties, bridge loans fix and flip loans. I want to dig into a few of them and see what normal terms are available for both us and foreign investors. So I imagine the majority of our listeners are going to be most interested in multifamily, whether that’s small residential, one to four or commercial multifamily, five plus units. So can you kind of give us a little overview of what programs are really available for a multifamily investors?

Eric:
Sure, sure. Yeah. This, this is a relatively you know, complex topic with a lot of different moving parts, you know, you know, I mean, we could probably have, you know, a whole episode just on just multifamily and talk literally about nothing else. So,

Charles:
Well, let’s say from an investor standpoint, because obviously, obviously if someone has one to 40 units, they’re going to go like an FHA route, most likely if they’re going to live in one of them, but let’s say for a investor that is already owned is not going to be living in it and it’s going to be something that’s completely you know, and we’ll get into, we can go into agency stuff later on, but mainly the stuff that we would be, I guess, imagine going through banks and having it on their balance sheet.

Eric:
Sure, sure. Yeah. So, and again, even within the multifamily realm, so you know, we’re just gonna stick to five plus units right now. But you, you know, even within that, you mentioned agency and non-agency right. So I, I would like to go back and I guess unpack that agency you know, for those who are listening, aren’t aren’t sure, but you know, just, just to kind of start from the beginning Freddie and Fannie, the government sponsor know sponsored entities who essentially purchased most of the loans on the secondary market in the U S also finance multifamily. So they, you know, have their own programs for financing multi-family investments. And that’s really the key difference, you know, and that’s, that’s what we mean by, you know, non-agency and agency, right. And to, to kind of, I guess, dive into the context agency has, you know, Fannie and Freddie offer really good terms and, and really good deal structures for investors. However there’s always a caveat, right. Is you have to check every one of their boxes, right? Like, so just, just like, you know, you would go to you know, for example, FHA or whatever, if you’re doing just a small house act, you have to check every one of FHAs boxes, but Fannie and Freddie on the apartment side are the same thing. They have liquidity and net worth requirements, right? So net worth has to equal loan amount. Properties usually have to be at 90% occupied for at least 90 days. And Freddie Mac has a minimum, a hard minimum loan amount of a million dollars and Fannie Mae 750,000. And it’s, you know, it’s, it’s one of those things that if, if you don’t have deals that, that fall within that realm, you can’t really talk about them. Right. So but nonetheless, you know, just to give people an overview, you know, I mean, right now we’re talking 75% LTV, even with COVID they’re traditionally 80%, right. I mean, there were 80%, like all day, but with COVID they have, they dropped 5% and they also require reserves. So that can be anywhere from six to nine months of principal and interests. So you have to bring that to the closing table, in addition to your down payment and still have liquidity in the bank, you know, leftover. So it’s like, it’s not, you can’t just knock on their door and and, and get approved because it has to be, you know, want a great asset, and then you really need to have your ducks in a row as, as a sponsor. Right. So that’s kind of what I would say about agency too.

Charles:
Let’s say now let’s, that’s perfect. Thank you. The, why was it someone can’t they’re not able to acquire that, let’s say for one or many reasons, most likely it’s a, an unstabilized property and what, what are the options that someone has now? Let’s say for a five-plus multi-family, that’s over this loan amount, seven 50, but they just can’t get agency. Where would they go with that?

Eric:
Right. So, so my, my next, the next bucket would, would be conventional that would be the next bucket of money that I would choose from. Usually, you know, you kind of just go down the list, you can go agency, conventional CMBS I mean, life insurance, if it’s a bigger, bigger deal, life insurance companies have, you know, they’re, but they’re more conservative. Right. But, so it just depends on the LTV that, that you need, but if you want a higher LTV and just less red tape CNB you know, CMBS is going to be like, definitely your next best route, just because of it’s easier access to capital. They don’t have as many overlays, you know, in, in underwriting. And they’re more operating statement based. So if you actually have a solid deal, you can maybe get away with some things on, on the sponsor end. You know, if, if it’s not, you know, not all that solid you know, in terms of, you know, maybe your experience or FICO score or something like that, and where you needed, maybe a little more leeway you’re, you’re more likely to get that approval if you go CMBS. And just to clarify, CMBS is stands for commercial mortgage backed securities so much like the residential side, which is MBS or mortgage backed securities, where essentially there are pools of many loans separated into credit tiers and sold on the secondary market. It’s the same thing you know, with, with essentially multifamily loans. So that’s how this I guess loan product works very similar in, you know comparison, but that would be the next you know, best bet. And then usually they do go lower loan amounts to probably talking down to 500 K anything below 500 that that’s going to be true, small balance, right. That’s going to be like, non-agency small balance in which case, you know, really just have to find a you know, a shop that, that does that kind of thing, because really in order to, to make those kinds of loans, you need to have an investor who is willing to purchase those notes. Right. So,

Charles:
All right. And when we’re going in, how does that from conventional and let’s say if you went to doing a bridge loan and is that going to go through a regular bank? Is that going to go through a separate lender? How does that usually work?

New Speaker:
Yes. That’s probably going to be a, just a private you know, debt fund or something like that, which are, I mean, they’re just direct lenders. That’s pretty much all the direct lenders you see are private debt funds. And, you know, bridge lending is something that as, as the term implies it’s to bridge the gap, right? Like if you have a non-performing asset, that’s the very essence of, of using a bridge loan, right? Either it needs cap ex and rents are severely under market. Those are all, you know, exact scenarios from which, you know, you would use bridge financing just because you need to get the asset to be stabilized in order to even think about putting permanent debt on it, you know, at, you know, in which case when the property is stabilized, you can analyze, you know, which credit, or I guess, which capital bucket, right. Which pool of money you want to pull from once you have the property to where it is. But ideally you would have thought About that before you, before you purchased the deal. So.

Charles:
What kind of, in terms of someone looking at, for a bridge loan from a dead fund?

Eric:
Yeah, sure. So, you know, bridge financing is very similar to like fix and flip, right? It’s, it’s pretty much private, private capital. So, you know, you’re going to be anywhere from eight to 11%, you know, two to three points origination 18 month term, 12 month term interest only, you know, so it’s just and you, you know, usually you’ll, they’ll fund acquisition plus a portion of the rehab, you know and if you have some good experience, it’s, it’s not that hard to get, you know, a hundred percent, so maybe you’ll get 75 acquisition and a hundred percent construction of the rehab, and depending on how you want to structure it, right. Like that’s, that’s what it will be. And it’s pretty flexible. You know, if, if you think you’ll need a longer term, you know, it’s not especially with multi-family because they’re just bigger, they’re bigger assets, right. So sometimes it’s really common to ask for 24 months interest only need to get this property to where it is, and, you know, w w we’ll you know, refi after that. And that’s the exit. The only thing we need to check on the side right, is to make sure that the area cap rates and the NOI give us the value that we need. Right. And so when, when you refi, we need to make sure that all of that debt is, is taken out. And at that point, you know, it’s just a first you know, permanent first lien either, you know, five, 10 year term, 25 year and 30 year M and M from there, just hold it.

Charles:
Yeah. When I speak to some investors, I always tell them that the bridge lending is like the hard money lender of multi-family or commercial

Eric:
Essentially. Yeah. I mean, it’s direct parallel to like fix and flip stuff, like, even like the rates and the terms and stuff are, are very, very similar. It’s just, it’s just about the different execution, right? So for multifamily bridge, you know, we got to get a full appraisal, which for a multifamily building, you know, starting at a couple of grand and we need to comb through, you know, that, that appraisal make sure all the data is, you know, what, you know, per underwriting guidelines. So but yeah, the, the bridge, the bridge lending side you know, it’s, it’s less about the pricing and more about the execution is like really what it boils down to you know, because it’s all relatively going to be the same, you know unless you need like true hard money at, you know, at which point, you know, you’re going to be talking you know, they, they don’t really care about you as a sponsor, like at all. It’s really just about the it’s really just about, you know, how they analyze the deal and where the asset is, because at that point you know, they’re, they’re okay with, as long as you have the equity to come to the table with down payment closing costs, and they liked the deal, they’ll lend on it because that’s true hard money, but again, true hard money is going to be, you know, double digit rates kind of thing.

Charles:
So one of the things is I’ve looked at deals before that are unstabilized with partners. And we’ve seen some before that would be prime candidates for bridge lending and what would, and then we’ve, we’ve gone and actually worked with local banks on it. And I imagine every local bank or conventional lender is going to have a different different level of interest in different assets. So let’s say so it’s, you can find a similar asset, maybe get financing with a, you know, maybe use both of them, is that right? Or,

Eric:
Yeah. You know what, it really depends on your options, you know, at that point, because, you know, there are some, some local banks, maybe they have a portfolio fund, a division of their bank, and they’re like, you know, let’s do bridge, you know, let’s do bridge debt and, and, you know, some of them actually have, you know, approved programs for that. And but usually it is, you know, it’s, it’s very, very case by case. Eh, you know, it really depends too, because a lot of local banks like local investors, you know, and they only lend literally in their, in their physical geographic footprint. Right. So it’s not like you can have one, one partner for all the deals that you’re trying to do. Or, you know, even if you do contact local banks, there’s no guarantee that, you know, they’ll, they’ll, they’ll do or they’ll have bridge lending. Right. And even then it might be more conservative than, you know, going, going through like a, just a direct lender for it, for example. So it just depends.

Charles:
Yeah. I’ve seen that. It’s, it’s amazing when I’ve spoken to local banks before doing and how different their, what their risk profile is, what they like. You’ll, you’ll speak to some banks. They don’t want to do anything with multi-family and then they, they only want to do something like certain asset classes and then you’ll speak to others. And they’re like, we love doing multi-family and we have these great deals for stuff that’s within this radius of us. And it’s very interesting if you, if you contact a bank, that’s maybe not local to the area, and maybe it’s even an hour or two away, they’ll be like, Oh, you can’t find a bank in your area. Why are you contacting us? And it’s so weird. It’s like Laura, it’s in the same state, but it’s very interesting how it’s very local. You’re right.

Eric:
They’re, they’re, they’re, they’re, hyper-local on their stuff. Like even, you know, just like you said, just to like a couple miles outside their footprint, they’re like, Nope, we don’t do it. Like, you know, you, you get, you get a hard, no, or just specific asset classes. And, and, you know, that’s what makes I think, like navigating all of these products is just kind of overwhelming at one point, you know, especially if you’re trying to you know, if it’s your first couple of deals or something like that. It’s, and you don’t have those established pathways, I guess, you know, that, that you can just kind of go off of from, from, from previous experience. So it’s it definitely takes, you know, a lot of research and, and commitment just to, you know, line up the right option.

Charles:
One thing to before we kind of opened this up to other other borrowers, like foreign investors, but what, what I found with with local banks as well is that it’s much easier agency is kind of, this is what you get, and this is, this is what it is with local banks. I kind of see it’s like Mark up the term sheet and send it back kind of thing with certain banks. Is that, is that something common that you’ll see with conventional lending? Where, what, I mean, what kind of leverage do people have on this when they say this is, this is what we’re offering and they can kind of send it back to underwriting and say, listen, can we, you know, modify this or that, is that something that happens normally?

Eric:
Yeah. I mean, as far as deal terms and deal structure there’s, I mean, everything is, is movable, right. If, you know, you want to take off points on the front end and add them to the back as like a payoff, so you can defer and bring less cash to close because one of your investors pulled out, you know, like just, you know, little structures like that is, is definitely, I mean, especially in multifamily and commercial you know, it is business purpose lending, and you know, those type of, you know, structures that, that fall may be just outside of the guidelines, if, if it’s a solid deal and the deal makes up for it, and you’re solid as a sponsor you can always make the ask and, and, you know, no matter what I always encourage especially my clients, you know, I, I, I present them with different deal structures and, you know, you need to analyze which path to, to kind of go off of, and if something is like, Oh, this, this option is really good, but like, we’re missing, you know, this and I’ll be like, well, you know, we can make the ask for it, you know? And at that point it’s, it’s, it’s open.

Charles:
So what happens if with you have an investor that’s a foreign base that wants to invest in, let’s say us multi-family and they’re working through someone like yourself. What, how does the deals differ and in, in sense of how it’s gonna be structured, the requirements, what the lender wants to see from you from the, from the borrower?

Eric:
Yeah, absolutely. So, so this is kind of going to, this is going to be more like a you know, a small balance scenario where we’re really is operating statement based, right. As a foreign investor, there’s, you know, personal income, et cetera, is isn’t, I mean, you really don’t even have a phyco, right. So it’s, you know, it’s like, how do you, how do you underwrite that? Well, it’s pretty simple. They go to the lowest credit Bureau, you know, credit bracket of, of whatever that program is. And then that’s kind of a placeholder, so to say, right. And, you know, since COVID, and, and what I call the liquidity crisis, because that’s really what happened. A bunch of investors pulled out funds on the secondary market, stopped buying notes from non QM and, you know, just, you know different investor loans and foreign nationals was probably one of the most you know, probably the most, one of the more heavier hit programs, just because it was like, okay, well, no one knew what was happening. And they all kind of literally within like 24 hours, everyone was like, yeah, we don’t have that anymore. And, you know, and I was still getting scenarios and, and really you know, what it boils down to, but before COVID, you know, I, I did some deals in, in Detroit, some multi-family stuff with some foreign nationals, they didn’t have any us VIKO. And essentially what, you know, the requirements there were the, the, the DCR of the property, right. So for anyone listening, if you don’t know what DCR is, it stands for debt coverage ratio. And that’s really the main, I guess, underwriting factor in, in seeing how well a building actually covers its debt and how it pays for itself essentially, right. Because that’s the point of, of you know, buying multifamily and, you know, that can just be calculated by your, your gross income divided by a P I T I, or for multi-family you need an NOI number, right. So to divide by your, your, your P and I and then that will give you your debt coverage ratio. And then I can get into, you know, an example of that a little later, but yeah, just to finish up on the multifamily side, I mean, you know, they were at a a 10 year term, 30 year amortization high sixes interest rate no credit operating statement based building cash flowed, you know, very well. It needed some repairs, but those were done before closing. We were able to clear those conditions and essentially just, just closed it and, you know, as is and, and they, you know, they took they took title. And as far as I know that that property is still is still going, you know, going strong, no issues there, but I, I will say insurance and loan costs are something that catch foreign nationals off guard because yeah, especially these foreign nationals were, were from Canada specifically, but they only had Canadian credit. They didn’t have any, anything US-based. So we had to run them, you know, pretty much from zero. And, you know, they, they, as Canadians, I know this, you know, from, from, from working with them and, and doing deals with them, their, their rates and their fees, there are so low, you know, that they get in Canada and they’re so used to it. And it depends on your country. Right. And, and, and where you’re from. And so they come to the U S and they’re like, yeah, I want to buy this building. And, you know, they’re I believe the points were I believe it was two or two and a half. And they’re like, well, what are these? And, and, you know, I have to explain to them, and, you know, origination is just pretty much the cost of, of putting the loan on paper. You know, and that’s just a percentage of your loan amount. So I do want to make sure that, you know, especially foreign nationals are aware of us lending is, is more fee-based. And I feel that I’m, I’m, I’m having to, to just convey that point or emphasize that more, just because people have questions on that. And then buying the multifamily, building, getting insurance, the requirements, you have actual cash value versus replacement costs, right. And depending on the lender, you get, those two premiums can vary drastically. Right. So we got to a point where, you know, we, we had a, a replacement costs, you know, in, in place and the vendor we had right now that the, the premium was just so out there, it actually like made the deal significantly worse. And it was, it almost killed the deal until we found another provider that had a much lower premium for, for replacement costs, you know, costs that we were able to get that across the finish line. But that is, that is something that is a very real issue.

Charles:
Yeah. Especially on older properties, that’s where I found it. It can really differ.

Eric:
Absolutely. Absolutely.

Charles:
What kind of down payments, or how to rates usually, is it usually a couple of points higher? And I’ve usually heard, like, you’re, you’re talking five to 10% more down and a couple of points higher. Is that normally how it works for foreign investors?

Eric:
Yeah, absolutely. So they, they were at 70 LTV. Okay. I was able to get them an acception for an additional 5% I think based on their liquidity. So we, I was able to bump them up to 70. I, I don’t think that’s available right now. And even in one to four units right now, I believe four nationals are kept around 60. I’m hoping that, you know, this will go up back to 65, 70 in Q1 of 2021, because things are starting to come back. But yeah, I mean, generally, you know, if you’re probably going to be at least, you know, 150 basis points, if not 200 basis points higher than someone with a US-based credit. Right. So if you know a us investor, you know, you’re, you’re going, you know, mid fives, you can expect to be at least mid sixes. Right. So, okay. Something like that as, as a foreign investor

Charles:
Now one more question, too, in regards to, obviously they can partner with someone in the U S and that kind of alleviates a lot of these issues, and I imagine they have to have just not like on the co-signer basis, it actually has to be a sizeable owner in this entity that they’re purchasing in.

Eric:
Yeah, absolutely. So, so that would be an arrangement where you have, for example, you’re more of a passive foreign investor, right? So you have a GP here and you’re, you know, as a foreign investor, you’re kind of behind the scenes. So what you need to find is, you know, essentially that, that cohesion with a deal operator here in the U S that can take care of the, you know, the quote unquote sponsorship side. Because as soon as, you know, you are a, as, as a foreign investor, you know, you’re, you’re a GP or something. And, and, you know, rather, rather than LP or a majority owner, then you need to send in docs. Right. And at that point, it’ll get dicey and they’ll be like, well, there’s one foreign national here. So we have to downgrade the whole program, you know? So you, you kind of want to stay hidden in, in, in that regard.

Charles:
Yeah. And we’ve, we have a lot of LP, we’re an investors and it’s pretty straight forward. The only, like you said, it gets dicey. If someone wants to bring in a sizable amount and they’re, even if they’re limited, they have to, I’m not sure what the percentage is, maybe 10% of the dealer or whatever it is. And they have to go through like a whole thing. Like we’re going through at the bank where they, they check everything. Or if it’s much, if it’s smaller than that, it’s usually not a problem. And in my experiences of working with them is that anything different than how you guys have worked with them before?

Eric:
No, that’s, I mean, that’s pretty, you know, in, in, in alignment of, of, of what happens just because it’s just, it boils down to equity dilution, right. Of LLC, the equity splits of, of how this thing is actually being structured. So, you know, I, I would say that’s very much in line it, yeah. If you want to put in a sizeable chunk of change, you might want to, as a foreign investor divide, that chunk of change into Mo maybe multiple single asset entities with a different deal. So, you know, with your same target returns. So at that point, you’re, you know, you have the same cash outlay and hopefully the same ROI, you know, that, that you expect, but it’s not diluting just like, it’s not all in one place.

Charles:
Yeah. And you’re not also under the microscope for the exact Navy’s underwriters, which will make everybody in the deal. It will be harder for everybody in the deal to, to get it done. So one question I hear all the time is purchasing in an LLC changing terms of alone. I mean, how does that work if I obviously I think this is much more for a one to four unit question, residential compared to five-plus, I’ve never had any type of issue purchasing a refinancing five-plus with LLCs. How does that work? Does it really change a lot of stuff? Can you just kind of give us a little overview on that?

Eric:
Yeah. So I mean, you’re, you’re right. And prefacing the one to four versus the five plus that’s definitely right. Because, you know, you know, one of the four were where that really comes into play is the consumer side. Right. So if you want to buy, you know, a one, two unit, three unit building house Hackett with FHA or something, you can’t really buy in an LLC. Right. And if you want to transfer it to the LLC, then all the investors get scared of the acceleration clause. And they’re like, well, and that was going to come do it. And it’s like, that rarely happens. But what you could do is put it in like, you know, like a land trust and then have the trust, transfer it to the LLC. But that is not legal advice by the way. But you know, that, that definitely plays in the consumer side. So where, where I’m dealing, you know, with is, is one to four units, but it’s business purpose, commercial loan on non-owner occupied investment properties, right? So that’s the main determinant, because as soon as someone is occupying the property, it becomes a, essentially like a primary residence loan, which immediately falls under the Dodd-Frank you know, act. And, and now all of a sudden, all of those laws open up right where this is more asset based for investors who they will never live in the property for a day. And that’s the difference and you can definitely purchase an LLC. In fact, we require it just because it mitigates risk. And it’s just from a business standpoint, it’s just a better thing to do. So you will only really run into that on the consumer side, if you try to occupy the property, but, you know, on the asset based side where we’re just using, you know, just the, the rents and, and the property, the cashflow of the property itself, as, you know, the main, you know, underwriting, then that won’t, that’ll be a non-issue.

Charles:
Yeah. And anybody that’s interested in doing that one to four, definitely speak to an attorney and speak to someone that a lot of wholesalers do it and they call it subject to, and that’s moving stuff from land trusts to other stuff, and they’re taking over payments. So you have to find an attorney that actually understands it, if you want to do that. But definitely check on it before you start filing, filing paperwork and doing it, or a figure or buying the property in your name and hoping that you can do that. What are some of the most important factors of a real estate transaction that investors should be focused on one obtain the financing? So like having the complete financials or they should be focused on the credit score, or, I mean, what do you, what do you think is most important?

Eric:
Yeah, no, I, I love this question because it, it really is just, so if you were, if you, if you want to qualify the, I mean, the best step is to really reach out to someone and see what you want and, you know, and, and explain to them your scenario. Right. So I there’s, there’s not really any, any you know, magic formula other than, you know, if, you know, don’t have like a five 80 FICO you know, but just have your strategy clear, like, Hey, I want to buy, you know, properties to fix, and then I want to refi and I want to rent them out. And here’s my market. That is information. If you have, you know, if you know, your, if you have clarity on your strategy that is a phone call that, you know, we can have, you know, that’s, that’s something that we can dig into further. So now, now it’s about the asset, right. You know, just as you, as, as you analyze deals, we, you know, we need to make sure that the DCR of, of the properties you’re looking at will in fact qualify. Right. A good deal example. Yeah. For, for like, just for a foreign investor, let’s say, you know, assuming 60% LTV, you know, and let’s assume the following numbers, we have a one 30 K purchase price on a single family easily attainable in the Midwest, somewhere 1,050 a month, and rent a 200 a month in taxes, a hundred a month in insurance. And at 60% LTV on the one 30 value you, you’re going to end up with about a $78,000 loan. And now your principal and interest monthly payment, and a quarter interest rate with the 30 year amortization is $4,480 and 26 cents. So if we take, if we add the principal and interest and also taxes and insurance, we w you know, we get a total pit, I have seven 80, 26. And so now all, we, you know, all we have to do to get the DCR is divide the income by the total, right? So that’s the a thousand by the seven 80, 26, all we get are 1.4. So we know that the income covers our ITI expense by at least 1.3 for the common ratio, common underwriting guideline is the property have at least a 1.2. Right. So if we don’t have that margin, we can’t, we can’t really work with it in that capacity, but a deal like this would qualify.

Charles:
Okay, awesome. Yeah, that was going to be my next question. What people like to see for the DSCR. So that’s that’s very helpful. What would you suggest to a new investor that wants to start preparing themselves for working with a lender?

Eric:
Sure. Again, going back to the clarity of the strategy, right? So just, just knowing exactly like what you want to do faster, because I can help me be tweak things. And in terms of, you know, if you come to me and you tell me, you want to flip, for example, then, you know, maybe I can help you steer, but if you really don’t know, like what, what you want to do as an investor that’s definitely something you, you need to have down you know, and preferably maybe even a sample deal of, of some numbers that you can, that you can present, because the easiest way to get feedback is to just send me a deal with, you know, with the numbers. And, you know, that’s something that I can analyze really quickly I’ll know if it works and boom, you have feedback from, you know, an actual source firsthand. And you’re not just saying, well, what if, and, and, and this and that. And and again, it comes down to yeah. Really knowing your numbers and get it, and again, get it from a primary source too, because you don’t want to be overly optimistic and then put a deal under con find out, you know, your, you know, origination points or whatever to whoever you went to is, you know, three points higher than you thought and this and that. And now the deal’s like, well, then you don’t know what to do, and you’re spinning your wheels. Right. It’s better to have all of that sorted, send a sample deal. Even if you don’t have it under contract and say, Hey, this is what I’m going to do. And then, you know, from there, it’s a much easier path forward.

Charles:
Yeah, definitely. Anybody out there interested you, you know, building the relationships with your team are the most important thing in the beginning that you have to do, and it takes time to do it. It’s not something that you’ll just do in an afternoon. So reaching out and having someone on the finance side and having him starting that relationship, even if you’ve never done a deal before, or if you have done a deal before, even if it’s a fix and flip, you can put this together in a, a little PDF or something, or a word doc, and send it off to potential people that you want to partner with or work within your team, including a finance person and let them know this is what I’ve done. This is what I want to do. And then when you’re actually sending over deals, you know, review them and not just sending over a broker’s performa and actually reviewing them. I mean, you’re, you’re, they’re supposed to be buying it and underwriting it not Eric or the finance person. And they’re just gonna, they’re just gonna, you know, put your email to the side because it’s not, if you send over, Hey, this is the property. And then this is my underwriting, and this is like my assumptions, and it’s not going to take them, you know, hours for looking at it and they can look at it and be like especially if they’re, you know, if they’re knowledgeable about the area, they’re going to say, yeah, this looks fine or doesn’t, and they can pass it forward. And it looks very professional. And then I would say, last thing I’ve seen before when I spoke to people was just having the correct terminology when you’re talking to it. And it makes it so much when you’re talking to someone and you know about the ratios and it it’ll take you an hour reading it up online, and you can actually learn the terminology that he’s using. DSCR LTV all these different ones that are, aren’t very complicated, but just when you’re using them, when talking to people, they understand that you’re knowledgeable, you’re educated and you’re going to be most likely less hassle when you’re dealing with them. And you’re actually going to probably close on the loan. So just a couple, couple things tidbits I’ve I’ve learned from doing this.

Eric:
No, no, that’s, that’s, that’s absolutely perfect because I, right. If you, if you, if you don’t know the terminologies or you don’t know how, like, how do you communicate what you want, if you can’t, you know, and how do you, how do you tell, you know, how do you ask the right questions too? Right. That’s a big thing in, in communicating is, is how do you, how do you dig deeper if you don’t know the, the surface level terminology?

Charles:
Yeah. And Eric, yeah. One last thing before we we close up since you’ve been on both sides of the transaction and I didn’t know that you were so in-depth with real estate investing prior to getting into financing. What are common mistakes you see investors make when they’re purchasing? Actually obviously you’ve gone through a few things that people can do to prepare themselves, but there’ve been mistakes maybe before or after the closing that you might want to share. I imagine you’ve heard it you know, horror stories and grand slam. So

Eric:
Yeah, absolutely. I mean, just from my own experience, so flipping houses that are too large, so that’s one. So if you want to, you know, don’t take, you know, don’t take down like a 2200 square foot, five, four house, you know even if the numbers pencil, because like your con your costs are going to be like triple, you know, you might think, Oh, well, it would be like double or like times, and know, like, you know, your, your labor is going to skyrocket. And then, you know, and that’s not even factoring in, you know, the additional contingency you know, greater than 10% that you should have for, for something like that. So th th that’s probably my first thing is any flippers do like small projects, like cap it at plain vanilla houses you know American houses, which is, you know, three to two ones, you know, 1400 square feet, like really just simple stuff. And you know, on the finance side, if you have a deal where you’re flipping it, and then you want to rent it out and it requires essentially two stages, right? So you have the first stage, which is your acquisition, and you have your construction and then you have your finance exit, and then you have, you know, obviously just renting it. You want to make sure that you have the, the, the, the, the forethought to put both of those pieces in place. I I’ve seen that mistake where investors come to me in, in a jam and they’re like, Hey, I thought I could refi this and this like is not working out. I’m like, Whoa, like, you know, you, you, you need to make sure that that option is there, you know, and no matter what, right. And, and if you want to go conventional and it doesn’t matter what route you want, right. If you want to go, acid-base, if you want to go conventional either way, you need to have that person in your corner before you even put the contract to purchase, you know, in, in, and that’s, that’s, it’s so critical because it leads, that’s probably like 30% of all the, of all the jams that, that I get are just, Hey, I can’t refi this. And the loan is due. What do I do?.

Charles:
That’s crazy. I mean, that’s something that you definitely have to look forward to, and, and knowing that you know, if you were buying something earlier in 2020, and then COVID hit, and you’re trying to refinance it, obviously, if there’s not secondary market for the people you’re trying to get loans from they’re not going to have money to loan to you.

Eric:
Exactly. Yeah, no, it’s a great lesson in in you know, essentially liquidity and how conservative things can get literally overnight. Right? Cause I mean, people were, people were 80, 80% LTV, you know, all day, you know, 70% foreign nationals all day, you know, and all of that just got cut by at least 10% overnight. And that’s, you know, 10% is a sizeable number, you know, could, you know, easily put a dent in, in, in your, in your ability to pay off alone, that’s coming. Do you know, especially if you have a five-year balloon on a multifamily or a ten-year and that’s like, right at the cusp, you know, your people, you know, you probably just have to go back to your bank and get an extension. Yeah.

Charles:
Which goes back to your relationship with your lender and how important it is when you’re going through it. And because they’re the ones that are going to say, yeah, we’ll just, you know, we can push this out or they’re the ones that are going to be a little bit more aggressive, which is not going to be good for your whole business plan. Eric, so how can people learn more about you?

Eric:
Yeah. so my website is shoreside finance.com. And my email is Eric E R I [email protected] So, you know, any anyone who’s, you know, on the fence about getting started or, you know, they have cash. And you know, they’re looking to put it into an investment and it sounds like something that can help with, you know, you’re more than welcome to, to reach out to me, you know, with an email. And I’m happy to talk. And I also just released my own podcast called house acts for flipping stacks. So hopefully by the time that this is, this is live, that that’s something you know, anyone who’s listening can check out as well. And that’ll have, if you like what you heard here on the financing topics, then there they’ll definitely be a lot more that you know, in, on, on my show as well, so awesome.

Charles:
Okay, Eric? Yes. Send me out those links. I’ll put them in the show notes as well. And I wanna thank you so much for being on it.

Eric:
Awesome. Yeah. Thank you very much, Charles. I appreciate your time, man.

Charles:
Have a great day.

Eric:
Okay. You too.

Charles:
Hi guys! It’s Charles from the Global Investors Podcast. I hope you enjoyed the show. If you’re interested in get involved with real estate, but you don’t know where to begin, set up a free 30 minute strategy call with me at schedulecharles.com. That’s schedulecharles.com. Thank you.

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Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of harborside partners incorporated exclusively.

Links and Contact Information Mentioned In The Episode:

About Eric Johnson

Eric operates Shoreside Realty Finance, a lending company dedicated to working with investors day-in and day-out to provide streamlined finance services that emphasize execution & integrity. Eric is also an active investor in the Chicago market.

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