Charles discusses working with multifamily lenders on today’s Strategy Saturday.
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Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing how to work with multifamily real estate lenders. So there are a few main questions that your mortgage broker or lender will ask you when they first speak to you about your property is the property stabilized. So is it 90% occupied for the last 90 days, or is it a distressed asset? What are you doing with the property? Are you doing a light remodel, or are you doing a heavy lift? They’re going to ask about you. What is your commercial multifamily real estate experience? That means when I say commercial multifamily five plus apartments in one property, what is your net worth and liquidity. You’re going to have to submit at some point a financial statement and schedule real estate. They’re also going to ask us if you have any partners, what is their experience and what is their net worth and liquidity.
So make sure that you’re aware of that. Now rule of thumb for different properties is that stabilized properties. So 90% occupied for 90 days are going to be able to receive non-recourse and non stabilized properties. We’ll usually need to use a recourse bank or a bridge loan or recourse, meaning that if you do not pay it, the lender is able to come after your personal assets. If it’s not recourse, they’re not able to do that. Now speak to a lender about that. We’ll get into an episode just about recourse debt, but there’s a lot of different carve outs with this. This is just going to point you in the right direction. You can speak to your specific lender about the options that they have or your broker, and they’ll point you in the right direction. There air stabilized properties that are going to be under a million dollar loan size.
You’re usually just going to be using a regular commercial bank or local credit union. And if it’s going to be something that’s non stabilized, you’re going to be using that bridge loan product, or you’re going to be using a, a local credit union or commercial bank as well, depending on what products and services they offer. If you’re planning on syndicating a property, there are going to be four main things that a sponsorship team we’ll need net worth and liquidity, multifamily ownership experience there in any deal sourcing. So finding the deal, raising the equity is the fourth part. So what are you bringing to the table? What else do you need help with? So are your partners bring to the table, make sure that you have all four parts of this covered. By the time you go speak to your lender, you need to be start building the relationships with lenders and brokers.
Right now, you’ll need to reach out to them, the broker and lenders before making an offer after you’ve underwritten the property so that you’re able to submit the term sheet you received from the lender. When you present the offer to the real estate broker, this makes it look very serious and a very solid offer. A few common mistakes that multifamily incomes virtual borrowers make are going to normal traditional lender to lend on their investment property. Okay? Residential lenders are not commercial lenders. I can’t stress that enough. Okay. Find commercial multifamily brokers and reach out to local banks and credit unions yourself. That’s a very easy process. I’m going to, I’m going to do an episode just on local banks and credit unions, but that’s something that you need to do and you need to do right now. Brokers verse lenders directly. So brokers are usually going to be charging you a 1% fee.
Commercial brokers are usually gonna be charging you a 1% fee or $10,000 minimum fee. They’re usually not going to lower the 1% fee unless you’re paying for, unless you’re applying for a $50 million plus loan, local lenders for small properties, you’re able to source yourself so you can go and you can find those lenders yourself and avoid that fee because maybe on a million dollars to $10,000 fee, isn’t that bad. But when you’re going for say a $300,000 property, $300,000 loan, and you have to pay a $10,000 fee, that is quite expensive. So you’re going to look for these lenders for these local banks and credit unions. Usually within a one-hour drive the property, the closer, the better you, you want to be working with a bank where the bank officer you’re working with drives by your property, pretty much on the way to their job.
They’re so familiar with it. When they go back to get it signed off, people go, Oh, I know that property. Oh, I know that street. It’s right next to this place. It’s very, very local. And it’s very relationship driven. Brokers have built relationships with Fannie and Freddie underwriters and know who’s the best and send loss of business to them, which helps to get their deal done. So when you’re dealing with larger properties, right, we’re talking about the non-recourse deals, $1 million plus commercial multi-family deals. These brokers you want to work with. They have these relationships already and they know how to get the deal done. So that’s why you’re paying them the fee to go there, to get the loan and to not have any other issues. If you find a lender that says they lend on your target asset has the person you are directly working with at the lender actually closed on a loan for similar property.
This personally happened to me about a year and a half ago, I was refinancing a small commercial property and the lender worked with the property. It was my mistake though. I did. I had to make sure and I didn’t do it. That the person I was working with directly actually had never closed a commercial loan is a huge mistake. I made it wasn’t a problem. It was a refinance. It wasn’t a purchase. And we ended up all the extra fees. It wasn’t a big deal. It ended up just being a couple hundred dollars more, but it could have been a huge disaster. If I was purchasing a property, I was under the gun and I would have had to sign the term sheet and accept that right on the spot. And that’s something in a position you do not want to be in. You want to ask for references of borrowers.
They’ve worked with previously. This is huge. This is a, this is a two way relationship, right? They want to make sure that you’re serious. You want to make sure that they’re serious. If they’ve done these commercial loans, if they’ve done these loans for similar properties to the ones you’re looking for, you want to speak to these, speak to the borrowers and make sure that everything went smoothly. The more unique your situation, the more important a broker is to work with now paying upfront fees. You should own, you’d be paying upfront fees for third parties, right? We call that for engineering reports, inspections, environmental phase, one reports. Now brokers and lenders are paid by performance, right at closing, you’re not going to be paying them up front usually. Okay. Some might have an application fee here or there. You’ve had to be very careful and make sure that you have references before you’re sending any lender money upfront.
Okay. And what you can do is ask what properties they have finance. And if you have questions about the legitimacy of that lender, when you get a list of properties, they financed check the County records to see who financed it. If they didn’t finance it, that’s a huge red flag. Obviously. Um, try not to sign any type of an exclusive agreement with anyone, right? You want to keep your financing options open. If you find a better deal, don’t be pushed to have to work with a broker. Okay? Um, now one of the miss, another mistakes that happens is that not negotiating on terms, right? Right. You want to, you want to make sure that when you get a term sheet back from a small, usually small multi-family property or small commercial property, and you’re going to get a term sheet back from them. And these lenders are good to keep it on their books.
That means that they’re not sending it to a secondary market. So when they send you back the term sheet, you can so many words, Mark it up and send them back with what you want to do. They say it’s two points to close. You say, you want to do one point, um, or you’ll say you’ll pay higher points, but you want to have a longer term, all these different things. They can now go back to their board and they can see exactly what they’re able to do. A lot of negotiation can happen with small local commercial banks and credit unions do not go to a large, huge national lender. They only want to deal with you. If you’re doing hundreds and hundreds of millions of dollars, uh, alone, they don’t want to be dealing with a small loan. They’re not going to help you. If you’re not going to return your calls, they don’t even specialize in that.
So you also want to have a complete business plan. This is a huge mistake. People make executive summary. You want to have the product property description, the location, the demographics, property economics. Okay. Markets and sub market data. Who’s the sponsorship, right? That’s you, you need to be serious about the deal. Make it as easy as possible for the lender to approve the loan. Okay? You don’t want them having to come back to you every half hour for missing paperwork. Give them a complete package upfront. Okay? You want to create a rehab budget? It’s a huge mistake that people don’t do this. Okay. It’s it’s going to have interior expenses. First exterior expenses, a timeline of the rehab. Okay. Third-party management. Now it’s great to have third-party management give their on your rehab budget. Well, that is a huge plus. Now that shows that they agree with the budget, the performance projections, the timeline, be very conservative with your projections.
Just like you’re dealing with your investors. You want to be conservative with them as well. And the projections you’re providing to them, you want to be conservative with the bank. Don’t tell them that you’re going to renovate all a hundred units in a, in eight months. Okay. But you’re not going to have any, uh, difference in cashflow or anything like that. Okay. Do not forget about your working capital and reserves. It’s a huge thing as well. Another mistake people make is not having their equity and investors lined up. Right? You need to oversubscribe what that means is that if you are raising half a million dollars, you want to make sure you and your partners have raised a million dollars. Okay. Especially for your first deal, because you’re going to have people fall out just because they’ve said they want to invest. It doesn’t matter until the wire hits the escrow account.
You need to have the right team in place. You need to have partners with experienced net worth and liquidity. This is a huge mistake. If you don’t have this, if you’re going to them and you don’t even have some of the basic qualifications, you’re not going to have this person take you seriously. And they’re not going to want to do business with you in the future. Um, make sure all three of your partnership team, right, is you have everything experience the net worth and liquidity. Um, the rest of your team, you’re going to need a real estate attorney, a property management team, company, insurance broker. Okay. Another mistake is not acknowledging that your lender is your largest partner. This is huge. Okay. If you’re getting a 75% loan to value, 75% of your money is coming from the lender, not from your investors. Okay? So this is your largest partner.
You have to treat them like that. You need transparency, no surprises. Okay. If it’s a hairy deal, put it out there, front, put it out there first, right? If there’s something that you know is going to be a problem while you’re getting a deal on that property, put it up front. Okay. They look at deals all day long. They’re going to know if something’s odd. If you’re getting some amazing deal on it, they’re now going to be wary of what’s going on with it. Okay. Regular communication. Okay. With your broker, timely reporting, any type of updates, you’re building a relationship. And that’s why it’s so important. If you’re upfront and you’re transparent, it’s going to be much easier for the bank to keep that relationship going with you and lend on future properties. Okay. Be professional and be prepared. Okay. So I hope you enjoy this episode. Please rate review and subscribe, submit comments and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See you then
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 Syndication Superstar incorporated exclusively.
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