The Smartest Way to Finance Your Next Real Estate Deal (What the Banks Won’t Tell You)

When you are in the multifamily investing game, you are playing the financing game. Okay, Today we are going to be sharing what is the best debt you can get on your next deal and what you need to know exactly to make sure you are getting the highest return with the least risk. Today we have Chris Litzler on. He is the senior vice president at Marcus and Millichap of Capital Markets and he will be sharing exactly what to look for in terms of loans and, and loan terms. Let's get into it.

The most favorable financing that's out there is with Fannie Mae and Freddie Mac. So stabilized deals, over $1 million of loan amount, must be 90% occupied for 90 days, etc. Etc. Those loans are 5 year loans, 7 year loans, 10, 12, 15, various different terms. But I'll quote you a very vanilla structure. So a 10 year loan with a few years of interest only followed by a 30 year amortization, non recourse, best pricing is probably about a 150 spread today. So index is 460 which would put your rate in the low sixes. About 610 plus or minus would be probably the best pricing out there for a modest leverage apartment loan. Okay, that's, that's a stabilized deal with the agencies. Another way to finance finance these deals is with, with a bank. Banks tend to do shorter duration loans. So either a floating rate loan or maybe a five year loan. Okay. The bank's not going to have as good of a spread as the government agencies. Right. They are holding these loans on their books and they need to make some yield. So a fixed rate bank loan today, probably five year loan, maybe one or two years of interest only followed by a 25 year amortization probably has about a 250 to 275 spread. And five year index today is about 440. So you're looking at like 6.90% maybe in the low. So somewhere between 680 and 720 for a five for a bank loan that's, that's fixed rate. Okay. You don't necessarily need to fix your rate with a bank. Some banks make floating rate loans. So that would be priced over SOFR with a similar spread. So sofr today is 430 plus maybe a 250 spread puts you at 6.8% floating rate. That floating rate can go up or down depending on what SOFR does. So SOFR goes, SOFR is the equivalent of the federal funds rate. So Jay Powell goes out there next week, he says I'm Going to cut rates, 25 basis points. Then your floating rate loan would go down. Conversely, over the last couple of years, they've done nothing but shoot up at the fastest rate in history. So your rate could then go up. Right. So floating rate loan, roughly the same, call it like 6.8%. Okay. Then you could do a bridge loan. Bridge loan is just bridging you from lower cash flow to improved cash flow. Right. Shorter duration loan. But it's usually with a, you know, some sort of debt fund or you know, Wall street, some type of investor. So they're inherently going to need more yield because they're taking more risk. Those loans price, you know, bigger deals, probably pricing in the 8% range, smaller deals, probably in the low double digits. So you're probably 8 to 12 depending on, you know, the situation. There's one main difference, and that's an agency loan is non recourse and a bank is full recourse. With a bank, you're fully guaranteeing repayment regardless of if there's a deficiency. So bank makes you a loan, 10 million bucks, no fault of your own. Something goes wrong, you gotta sell the property. You sell it for $9 million. In theory, there's a deficiency of $1 million. You're on the hook for that. With a non recourse loan, they're only looking at the subject property as collateral. A bank can do whatever they want. So if you say, you know, they're holding these loans on their balance sheet, you know, if you have a good relationship with a bank, they can do, they can do whatever you want. In that scenario though, the stock account, marketable securities account like they're probably gonna want, they're gonna going to take some sort of pledge or they're just going to put a first mortgage on it. Anyone can sign on the loan. You could have 1% ownership, you could have 99% ownership. Anyone can sign on the loan, but anyone who owns more than 20% of the loan must sign on the loan. Depending on what your economic deal is with your sponsor, he may or may not have more than 20%. He must sign on the loan because they're looking at his financial strength and experience. On the guarantee. You absolutely can sign and probably should sign on the guarantee because A, you're probably having decision making ability or authority and B, you want the experience, right? So you can say Mr. Bank on the next loan. Well, I was on this first loan over here, the lender, because they're making a non recourse loan, they're only making the loan Based on actual current in place cash flow. So they're basically going to say we're making this loan 80% based on. Well, we're making it 100% based on the property, but we're still going to look at the sponsor. We need them to hit these minimum thresholds. The spread is the premium that the lender receives in rate above the index. So they could buy a 10 year treasury today at 4.60% but they'll lend you this money and secured by a first mortgage in real estate for a 160 spread above that. So they're actually achieving a 6.10% rate versus that. So that's what the spread is. The other thing is loans that small are, there's very little institutional money available for them. Right. Because these guys have million, you know, hundreds of millions of dollars to put out. It's hard to put it out in that, those size increments. So the best home for, for a property that size is either just hard money, right. Local guy hard money, or a community bank. In our industry, standard mortgage brokerage fee is 1% of the loan amount. Okay. Anything under, call it 7, 8 million bucks, we typically get 1% of the loan amount. You start going 8, 9, $10 million will kind of come off that percentage a little bit bigger. Loans we start coming down. We just try to charge like an industry standard fee. Right. The lender fee varies based on type of type of loan, size, etc. So you know, an agency loan can range from no fee to 1% to even higher if we need to buy down the interest rate. Right. A bank, an industry standard fee is probably half a point. So 0.5% of the loan amount, it may be less, it may be more depending on size. But half a point is probably a good place to start. And then a bridge lender is probably going to start at 1% and could go a little higher from there. Probably wouldn't be anything less. 90% of our deals are east of Texas. Typically the bank's going to ask for two months of account statements for the two preceding months of closing. Right? So we sign up the loan today in January. They're just going to say, give me your November and December bank statements. The easiest, cleanest way to do seller financing is when you contribute equity and they carry their note as a first mortgage. Right. That's the easiest, simplest way. Right? So you pay a million dollars. Right. They own the property free and clear. You give them 100 grand in cash and then they carry back a 900,000 notes as a first mortgage on the property. That's very simple seller financing. I don't need to get involved. Keep in mind what the development cycle is. The development cycle is I buy a piece of land, takes me 18 months to entitle it, you know, do some demolition. So the process is two years. I have a property with a couple of partners up here in Cleveland and we had a casualty event. One of the buildings burned down. There's five of the same buildings, one of them burned down. The proceeds for the insurance claim were not enough money to retire the full loan amount. And our lender, Freddie Mac said, if you don't pay us off, you need to rebuild that building. And we said, well, we don't want to rebuild that building because it doesn't make economic sense for us to do so. So we're at a standstill here, right? So in that scenario, what we did is we just found, I just found one of my buddies who owns other deals in the area and we said, you come in and buy it from us, we will credit you, you pay probably the high end of market. We will credit you for 100% of the equity required to do this deal and improve it. And we'll stay in as limited partners at a predetermined pref interest rate. And once you improve the property, refinance it, pay us back our accrued preferred return and principle, we will relinquish our shares. In that scenario, we put that in the purchase agreement, we put that in an operating agreement and we fully disclosed it to the lender. Right. And in that scenario it worked out fine because I'm in the operating agreement. I don't have a second lien. You know, those returns will be dictated. And it worked for my client and buddy because he's buying a deal without using any of his own money. Worked for us because we're getting, you know, half of our money back today in cash. We're carrying a note. We'll get that back in a few years. We trust him, right? It's all friendly. So that works.

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