On how to take advantage of biggest real estate gold rush in 20 years.

[jon.a]

@smartman
It's OK to loose as long as you lost doing the same as your competitors - but if you sat on the sidelines during a run-up your toast.

What?

 

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[MKHB]

I am all ears @MKHB i am just confused like everyone else

I am 18

@smartman @BlakeIC

I will type really slow, for those still confused...

Commercial Real Estate transaction volume is on pace to surpass the record breaking year of 2007, and of this activity, a lot of the transactions are in the sub 5M range. The deals are too small to get any attention from the big-players (CBRE/Cushman etc.) and are usually handled by the local, part-time, jack-of-all-trades commercial-residential realtor. These part-timers are usually the slowlane types, semi-retired, the soccer mom that does a little real estate in between PTO fundraisers, or old folks that just need something to do until they move to Florida.

And therein lies the need (opportunity); be proactive and reach out to that undeserved segment of the market. They are waiting to hear from you, so you can solve their problem; i.e., my property has gone up...should I sell, should I buy more, should I renovate and sell for more, should I tear down and build brand new, or retrofit to a more popular use???

How does someone with little resources, education, or experience take advantage this? Simple...action.

1. Learn the basics of commercial real estate, youtube, globestreet.com, REIT.com, MIT/Cornell opencourseware;
2. Contact a local boutique brokerage and tell them you're hungry, eager, and want get a real estate license, they will gladly assist you;
3. Get a RE lic. it will cost anywhere from $200-500 for the RE school and the application fees - depending on your jurisdiction.
4. Contact every recent buyer (5 years or less) of commercial real estate in your area and ask them what their acquisition parameters are;
5. Go to the county and get info to build a data base of every parcel of commercial real estate in your area-according to use MF/Office/Industrial/Retail. Make friends with the people at the county - get insight on new or proposed - roads, zoning changes-scuttlebutt.
6. Contact the owners of this RE, inquire about any plans to sell, if so can you meet with them to give them some free, no obligation market analysis;
7. If you do not have a license at this point, inform them that you are working with buyers who are actively seeking and can you meet with them;
8. If you've obtained your license, tell them you are working with buyers and would like to talk about listing their property.
9. Now, if you get any owners interested in selling or you secure the listing, go back to the potential buyers (#4) attempt to secure a buyers agreement from them, if you are licensed at this point. If you are still not licensed at this point you need to secure a finders fee agreement from them.
10. You will be compensated by either commissions (licensed agent) or referral/finder fees (unlicensed agent).

And, after you get a couple of transactions under your belt and you are truly a fastlaner, you can reach out to @Andy Black on how to implement a savvy adword/SEO strategy, and scale it up to the next level (other areas, bigger deals).

This is not an invention, there is no need for a prototype, or significant seed funding or learning code or copyrighting, is simply an opportunity that comes around when the commercial real real estate market overheats-just like it did in 2005-2007. You don't own anything, you're not buying anything, there is no risk, you are simply selling picks and shovels to people coming (buyers) and and people going (sellers).

 

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[jon.a]

@Jon Now I'm talking fund managers, acquisitions guys, corp tools, salaried 9-5ers that are paid to find deals with OPM.

Not private investors with their own money.

I'll go back to lurking.

 

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[smartman]

I am going to change my username to Confusedman

 

[MKHB]

Landlord leasing + commercial development.

Landlord Leasing:
I could go on all day about the opportunities that exist with agency leasing opportunities. Suffice to say the product in demand, e.g., high tech, we work type space, creative office, now accounts for nearly 30% all space in CA, and the rainmakers at all the big brokerages are not the types (like me) that are real savvy on this stuff. For the first time in agency leasing history, (anecdotal observation of course) most of the clients are now younger than the leasing agents. And almost all the new ground up space being built has some technology influence to it.
This creates a an opportunity to secure more agency assignments that a younger person would not of stood a snow balls chance if the Landlords prime tenant base was your typical financial/legal tenant a few short years ago.


Commercial Development
E-commerce: The need for ports to become Panamax capable and the infrastructure costs needed has created added opportunity in towns that are upgrading their facilities, Savannah, Charleston, Jacksonville, Newport News, Baltimore. This ripple effect is creating a demand for new commercial development to serve these areas. Aslo, the need for state-of-the art fulfillment centers and huge data co location facilities to handle the increased demand is creating little boom areas springing up around developments being build by Duke Realty (Amazon) Digital Realty (Data Storage), as well as near remote facilities built by Facebook, Google, and the NSA. In addition towns within the Google Fiber plans are now getting even more interest than usual Atlanta, Charlotte, The Triangle NC, Charlotte and speculators are upping their bets there.
Development success has always been in trying to determine the path of progress, go there and tie up the dirt - now it is a lot easier. All you have to do is call the help line.

Urban Lifestyle: due to the demand from millennials migrating to urban areas and the desire for cities and CBDs to be more environmentally friendly,municipalities are actually up zoning. Large developers (Boston Properties/Avalon Bay/Mack/Federal Realty) are taking advantage of this little known phenomenon and securing entitlements through independent operators out there beating the bush and dong the assemblage work.
That crappy area where the drug dealers and prostitutes loitering in front of the tow salvage yard is now going to be a 7M 200 unit mixed use development site.

Suburban: The suburbs are dead for now. If you own commercial real estate especially traditional office/retail you are fxxxed. Every developer, every speculator, is already aware of this, the only thing that is keeping suburban properties from becoming the next major distressed class is gas. The average gallon sits around $2.50, when China recovers and gas heads north of $3.50 this shoe will drop. So therefore, big money (funds/REIT/Private Equity) are rotating out.
The opportunity lies in securing entitlements for building the next generation more walk- able, self- contained, urban style mixed use developments in the suburbs-bringing the city to the suburbs and with it the demand for that sought after segment 18-35 year olds, all at a bargain price.

 

[MKHB]

Ask me how to take advantage of the coming tsunami of activity in :

Commercial Development
Landlord Leasing
Tenant Rep Leasing
Asset Management
Property Management
Construction Manager
Asset Management
Energy Management
LEED Consulting
Energy Star Modeling
1031s
Reverse 1031'
Sale lease backs
Build to suits
Creative work space
Live work space
Recapitalization

 

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[SteveO]

Too volatile in terms of CF in the Mid-West, with not enough appreciation.

Ben,
You are getting lazy on us.

Real estate investing is very complicated. What works in the west or south may not work in the midwest or northwest. There are few general statements that can be made.

But when it comes to single family, you must either be able to time the markets or buy well below value. The typical landlord that buys and rents for a few dollars of profit a month will be eaten up in the long term by capital improvements. You cannot escape this unless you see appreciation or rent growth.

Some areas lend themselves to growth better than others but there are no guarantees.

I feel like apartments lend themselves to more ups and downs in these cycles. They are also more predictable. Then to top it off, more people screw up the operations on these and end up selling them as a distressed asset.

Then you also have economies of scale. I don't want to take a project on if there is not 200K or more of profit to be made. That is harder to do with single family.

 

[MKHB]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

Ahhh...we have a winner! You are correct it is more about taking advantage of the gold rush, not necessarily finding the gold itself.

However, the latest crop of up-market gurus and the suckers who listen to them, think ownership
of real estate is the quickest and only way to riches for those with no money or experience.

All they need is the 29.99 a month for the latest "Cash Flow Mastery Seminar/Website/E-book/Personal Coaching special.

If it's such great info and you can make millions doing it why are they selling it so cheap?

 

[biophase]

Sorry,
I misread his post, I thought he was asking how his friend could still own the property while producing cash flow and the bank holds the note. I'm not familiar with a bank buying leases, and if they did, I assume it would be more than a year at a time!

I read this to mean, don't buy a property just because of its cashflow.

I can easily find $50k houses in small towns with $300-$400/mo cashflow. If I was going for maximum ROI, these would be it. Or, mobile homes probably produce better cashflow ROI. However, I'm not just looking at pure cashflow. I want (in my mind) the best overall investment for ME.

So I purchase 1br condos that are around $100k and cashflow $600/mo, near my home. While I don't get the best return on my money. I know that I can get some appreciation, due to the area. I know the type of renter I will get in this area since my unit commands above average market rents.

Everyone is different. Some people own 50-100 tiny homes in tons of small towns across the country, cashflowing like crazy. But those homes probably have small chances of appreciating. Then I have friends who have break even homes in southern Cali that jump a few hundred thousand dollars in a good market and that's all they wait for.

 

[MKHB]

why is there a tsunami coming?

@smartman

CRE is at an inflection point.

There has been considerable amount of wealth generated in the last 48 months, with some markets now showing overbought. This will continue because we now have supply in the pipeline because development is back and it takes years for this inventory to get in the system. For every crane (dev. project) you see in your area - there are 6 more in some stage of inception ( finance stage/entitlement/plan check/per permit).


This period creates a tremendous amount activity (selling, buying, leasing, building, recycling,re purposing) a "need" is created where the big players cannot handle all of the activity and creates opportunity for eager, ambitious newcomers to take advantage of opportunities that would not normally be as easily had. Also bear in mind that despite what you may think, big players (CBRE/Cushman,etc.) capture less than 10% of all transactions the rest is performed by non institutional operators.

In other words it is like a stock market run up - winners want to lock in their gains by selling/re-positioning and those still on the sidelines (new capital) is now desperate to put it in place (buy). You have to understand the mindset of the slowlaners in this business (I was one) , this is no place for independent thinking, all you want to do is hide. Buy what everyone else is buying.

It's OK to loose as long as you lost doing the same as your competitors - but if you sat on the sidelines during a run-up your toast.

 

[MKHB]

Is there any way to get involved in this without having a real estate license? For someone who wants to jump in, are there any legal hurdles or tricky legal issues/taxes to be aware of where to read about them?

Do you think there are any digital/tech opportunities related to this boom that haven't caught up with the technological advancements in other industries? Or is this opportunity mostly confined to going out with a physical, local presence?

Do you see any major problems, annoyances, frustrations or issues with the way this market works, typical lead generation, analysis of a property, buying/selling transactions ...work?


Also, considering your involvement in the real estate market, do you think there's any advantage speaking Mandarin (Chinese)? And if so, how valuable is that... to be able to leverage potential Chinese buyers or is that mostly just overhyped buzz?

Thanks.

By the way, the "globestreet" link redirects to CNN for some reason.

Yeah your right, globest.com, my bad.

Great questions.

Is there any way to get involved in this without having a real estate license? For someone who wants to jump in, are there any legal hurdles or tricky legal issues/taxes to be aware of where to read about them?

This depends on your statutory regulations, but even then they are not that tricky. Just get a RE lic. First thing to do would be contact a local brokerage in your area they will help you get licensed and keep you abreast of the rules. And yes pay all your taxes, but consult your tax adviser on how much

Do you think there are any digital/tech opportunities related to this boom that haven't caught up with the technological advancements in other industries? Or is this opportunity mostly confined to going out with a physical, local presence?

Absolutely there is a new app or service coming on line daily - but I don't have the experience in the really high tech stuff to comment on - I come from a different generation - I can only help you with my experience and how it relates to the asset side of the business and the trends and how they stack up or compare to previous actions or what I think will happen or more importantly (the people I follow, Zell, Simon, Sulentic, White) think will happen.

Do you see any major problems, annoyances, frustrations or issues with the way this market works, typical lead generation, analysis of a property, buying/selling transactions ...work?

There is always room for improvement is that is what you are saying, another great question.
This is a business ripe for technological disruption, but it will probably be different generation that the one that runs it now to come up with it.

Also, considering your involvement in the real estate market, do you think there's any advantage speaking Mandarin (Chinese)? And if so, how valuable is that... to be able to leverage potential Chinese buyers or is that mostly just overhyped buzz?

I would not pretend to be an expert on Sino trends, that might be best gotten from Globestreet (globest.com) or the Wall Street Journal. I can tell what I have been told: almost 30% of all interest coming thru the big brokerages for Class A office, flagged hospitality and very high end condos in NYC/West LA/Vancouver is from the mainland buyers. The new Chinese Gov't rules removing some of the restrictions on offshore investments for main landers has created a real surge. Will the sagging economy hurt this trend...who knows..some say it will only intensify as there is a flight to quality in US hard assets (real estate). I have also heard that Chinese main landers are now even heading into secondary and tertiary markets, where before they would only buy in the Gateway cities (NY/CHI/LA/SF/Miami) along with other strong Chinese areas: Torrance/Irvine/San Gabriel Valley.

do you think there's any advantage speaking Mandarin (Chinese)?

LOL^^^^^^Are you kidding-I would rather speak Chinese than have an MRED fom Marshall (USC)

Great questions feel free to PM me on anything else would love to hear your progress.

 

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[CommonCents]

I bought my commercial building not long ago from the bank. Former CRE owner went belly up on a sizable light industrial portfolio in the crunch and the bank had it awhile. The bank got tired of the headaches trying to raise our rent (I never drove my Bentley to work! Esp when the banker would come by). The former owner actually approached w/a partner deal 50/50 to buy, he'd do all the paperwork and get mezzanine financing(insurance companies do this). Bennies were he does all the work, and we reduce our annual lease/rent cost now in form of a mortgage. I ended up just paying him a referral fee and did it myself, and reduced annual costs by nearly $70 grand. I just had to put a little down and our biz bank did CRE lending and did the deal. Building in good shape, good roof report. Good thing is I knew the tenant well (me) and the shape of the building. The risk is taking on all building expenses but in many leases the tenant ends up paying most of the CAM/improvements anyway.

But for most business owners, who are concentrated on their business, his partner deal was an intriguing pitch, I almost bit. He is going to make a passive fortune on his own belly up portfolio doing these deals. It is a very intriguing business that I'm going to look into more for on the side. He's done 4 of them. A 50/50 partner in 4 buildings with nothing down out of his pocket. "saved" the owners on rent, gave them equity upside and security in owning their own building, not vulnerable to a rogue landlord jacking up rent forcing them to move operations(a pain in the arse). He does a little paperwork, accounting/legal for the new LLC and cashes checks.

 

[Mark Anthony Le]

@JustAskBenWhy I can't help but realize that youre the same Ben Leybovich from Bigger Pockets. Astounding how small the world of entreprenuership is. Awesome that youre on the main forum I frequent.

I've recently started dipping my feet into real estate investing on triplexes and have listened to your podcast from BP. It's helped me a bunch.

Thanks brother.

 

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[JustAskBenWhy]

@JustAskBenWhy I can't help but realize that youre the same Ben Leybovich from Bigger Pockets. Astounding how small the world of entreprenuership is. Awesome that youre on the main forum I frequent.

I've recently started dipping my feet into real estate investing on triplexes and have listened to your podcast from BP. It's helped me a bunch.

Thanks brother.

Haha - I'm not doing so good at hiding my identity, am I?

Thanks for reaching out, man. And thanks indeed for the kind words! I'm glad to help. Understanding RE really opened some doors for me. Glad to help

 

[JustAskBenWhy]

They don't call real estate market inefficient for no good reason - it's freaking off its' rocker...lol

I've stopped trying to figure it out. The only way I've ever gotten a deal was to rescue a distressed owner - nothing has changed. The market is overbought if you buy retail. I'd rather sit than pay too much - people have burned this way!

 

[MyronGainz]

Nice thread... any thoughts on Canada?

 

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[MKHB]

Nice thread... any thoughts on Canada?

I am not that up on Canada, but I assume it is experiencing the same activity and speculation as we are in the states, especially you're area- Toronto.

Toronto is the coolest city on the planet, went once and absolutely loved that place.

 

[MKHB]

Thanks for the info.
What would be the top 10 books to read?

None, real estate is not a spectator sport.

Stay away from "info for sale crowd" when it comes to RE. What works in Ohio or Illinois or Germany last year doesn't work in CA or NYC today. Unless this person has 20 years experience or at least a 50M net worth don't bother, they will be out of business when the recession hits.

The magic is in knowing when not to buy, anybody can buy when everything is going up.

There is tons of free info on the internet from reputable sources, CCIM, NAIOP, NAREIT, REI, MIT and my favorite source... real estate brokers.

Location...don't by in the country, don't buy in middle America (except in 18 or 24 Hour markets),
Keep your investing to in-demand areas coastal markets, CA, NYC, large urban areas.

And despite what you have been told, never buy for cash flow, unless you already have a lot of it.

RE is an appreciation not a dividend play; if you want a dividend buy a REIT they pay a 6-8% yield and you can be out of them with one phone call.

 

[MKHB]

As a general contractor in downtown Chicago, what should my company be doing to take advantage of the commercial real estate runup? We work with individual investors on the West Coast to flip houses for them in the city, but would like to ramp it up to the next level. Thanks for taking some time to do this!

Downtown Chicago - you are ground zero. I am assuming you meant to say west side not west coast.

In any event, if you haven't done significant ground up I would focus on securing TI contracts. I am not that well versed on the Chicago market and do not now the labor rules, I would assume most significant ground up is Union and if you are not a Union shop you don't want to mess with trying to be a "dual gate' operator - that never works.

There are a of tech and progressive companies migrating out of the suburbs and into the loop and downtown areas, you should focus on becoming the a go to techno friendly contractor,i.e., up on all things sustainability/shared work practices/LEED.

Or, become a reposition expert - the Chicago area has a lot of old Class B & C buildings that need to be renovated too compete for credit tenants- become well versed in facade/MEP upgrades/LED retrofits.

Use these value add skills to seek out more third party contracts and eventually leverage your talents for equity participation.

 

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[theag]

Just buy residential.

Whats your experience investing in residential RE?

 

[jon.a]

I agree with everything you said, except for one thing:

I am not only lazy, but bored too! I get OMs in email and I still look at them. But, everything I've ever bought that turned out any good has been a function of relationships. For me, right now, buying is inherently more risky than not buying. So, I will only take action on something that makes so much sense that I can't let it go. The marginal stuff - not interested

Funny thing is - I still see small deals that 5 years ago I would have jumped on. But, I can't get the same financing I got 5 years ago. And besides, the impact of smaller deals is just too marginal. The result - Ben is bored...what to do?

Keep building your tribe. Be ready to strike.

 

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[MKHB]

I bought my commercial building not long ago from the bank. Former CRE owner went belly up on a sizable light industrial portfolio in the crunch and the bank had it awhile. The bank got tired of the headaches trying to raise our rent (I never drove my Bentley to work! Esp when the banker would come by). The former owner actually approached w/a partner deal 50/50 to buy, he'd do all the paperwork and get mezzanine financing(insurance companies do this). Bennies were he does all the work, and we reduce our annual lease/rent cost now in form of a mortgage. I ended up just paying him a referral fee and did it myself, and reduced annual costs by nearly $70 grand. I just had to put a little down and our biz bank did CRE lending and did the deal. Building in good shape, good roof report. Good thing is I knew the tenant well (me) and the shape of the building. The risk is taking on all building expenses but in many leases the tenant ends up paying most of the CAM/improvements anyway.

But for most business owners, who are concentrated on their business, his partner deal was an intriguing pitch, I almost bit. He is going to make a passive fortune on his own belly up portfolio doing these deals. It is a very intriguing business that I'm going to look into more for on the side. He's done 4 of them. A 50/50 partner in 4 buildings with nothing down out of his pocket. "saved" the owners on rent, gave them equity upside and security in owning their own building, not vulnerable to a rogue landlord jacking up rent forcing them to move operations(a pain in the arse). He does a little paperwork, accounting/legal for the new LLC and cashes checks.

This is was one of Trump's favorite strategies.

Kind of a non-arms length distress "sale leaseback," only with tenant participation. The tenant gets the benefits of partial ownership and security (no rent increases) and participation in any future appreciation. This strategy works great, because as you state, industrial buildings are mostly structured on a triple net or industrial net lease basis and their is little risk for the landlord.

So as I understand: the landlord/owner (if you had agreed-you didn't-that's awesome) would be putting this deal on without any out of pocket cost, because he would be placing high interest mezz debt (7-9%) and as you pay your rent and the loan gets amortized, the LTV will drop and he would swap the high interest mezz (8-10%) with long term fixed debt (4-5%) and engage in a form of financial re-engineering or arbitrage.

The CRE owner would basically be monetizing your good credit (history and ability to pay rent) to fund his share of the ownership.

Brilliant, because as you say... most successful operators are busy with their enterprise and do not want to play landlord.

 

[CommonCents]

yep, pretty much. after my busy holiday season i'm gonna snoop around to see how many of these deals are around.

This is was one of Trump's favorite strategies.

Kind of a non-arms length distress "sale leaseback," only with tenant participation. The tenant gets the benefits of partial ownership and security (no rent increases) and participation in any future appreciation. This strategy works great, because as you state, industrial buildings are mostly structured on a triple net or industrial net lease basis and their is little risk for the landlord.

So as I understand: the landlord/owner (if you had agreed-you didn't-that's awesome) would be putting this deal on without any out of pocket cost, because he would be placing high interest mezz debt (7-9%) and as you pay your rent and the loan gets amortized, the LTV will drop and he would swap the high interest mezz (8-10%) with long term fixed debt (4-5%) and engage in a form of financial re-engineering or arbitrage.

The CRE owner would basically be monetizing your good credit (history and ability to pay rent) to fund his share of the ownership.

Brilliant, because as you say... most successful operators are busy with their enterprise and do not want to play landlord.

 

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[John Monarch]

I live in the southeast on the I85 corridor (Greenville) - been looking at getting involved since this is the fastest growing part of the country. Any tips on multifamily via USDA financing (have a good area with a college that fits the criteria), or generally raising funds for apartment building purchases?

 

[MKHB]

If you had $1M in cash and we're in NYC, Richmond VA, or Orlando FL where or what would you allocate most of the money too?

It all depends on your experience, abilities, time horizon (your age) and appetite for risk; and if you are considering making money "in" RE or making money "owning" RE.

If you're new to RE: don't over complicate it. Get educated, complete the CCIM curriculum (about 12K/6 weeks) and get a RE license (1K/3 weeks), seek our successful RE investors/developers in your target areas and find them deals, learning the biz while paying the bills with brokerage commissions. And while doing this dip your toe into the "ownership" side via crowd funding with other vetted investors with proven track records. This will allow you to take small stakes 10K and be privy to sophisticated deals of all types of food groups MF/Office/Retail/Development and how the reporting and waterfalls (investor/sponsor) payouts are structured. Avoid the "real estate advice for sale" crowd, unlike crowdfunding or syndicates, they make money "from" you not "with" you.


If you're experienced in real estate: I would lend to the clients of the get rich flip crowd in non-judicial foreclosure states. You can't beat hard money returns of 8-9%. Obviously you will need to do proper underwriting LTV/DSCR etc and be ready to take possession of the asset so you need to have some operational ability. Get prolific at selling picks and shovels and be ready to pick up a gold mine or two

Richmond- experiencing a renaissance but minimal job creation expected in the near term.
NYC- about as overbought of a market as you can get.
Orlando- great job growth prospects, but it is Florida - and when Florida corrects - it corrects like nowhere else.

CRE is all about job growth. And job growth is all about millennials and millennials are all about TTS (transit/tech/science). Follow the
the TTS - SF/LA/SD/AZ/TX/Boston/Raleigh-Durham and you willl propser. And yes some of these markets are overbought but if your
time horizon is long enough, location always trumps timing/entry.

 

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[TheBaker]

Are you happy with 8-10% returns?

If so, since you know the residential market and you already have investments, I would 1031 the SFRs, along with the cash you have on-hand, into a larger investment. Perhaps an 8-20 unit residential building. You'll get lower returns without leverage, but unless you're able to get a fully amortized loan, I wouldn't be excited about leveraging commercial real estate today knowing that interest rates are likely to rise in the next 60 months. Keep in mind that when interest rates rise, cap rates will likely do the same thing.

In many areas, a cash investment on an 8-20 unit stabilized building with decent management should generate at least 8% returns. Take a little more risk, and 10% shouldn't be impossible either.

I'm averaging about 14% Cap on these SFR.
Literally the management company makes or break you in this biz.

Kudos on the 1031 idea had it in the back of my head but never took action. Would be pretty neat to wrap it all into a portfolio and let it go.
Right now in my deal pipeline I have a 88,000 sq ft office building in the heart of north florida completely vacant for $2M. Problem however is serious water damage I estimate atleast $1M to fix and reissue any certificates needed. I never dabbled in commercial real estate or office buildings so I have no clue. Broker is telling me on avg lease rate per sq ft is $16 seems to good to be true.

 

[Greg R]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

 

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[VESTED]

Tons of value in this thread, I was talking to a real estate entrepreneur, he mentioned how he was building an apartment building 100+ units and he was going to lease the apartments and then the bank was going to buy the leases and he was still going to own the complex, could you explain how this works, it was going over my head and I'm trying to learn as much as possible as he wants me to help him

There really is a lot to this answer, but I would suggest studying the term Net Operating Income (NOI), Debt Service Coverage Ratio (DSCR) and Loan to Value (LTV),and Equity Financing Vs Debt Financing.

In a nutshell, the bank or lender will do a Pro-forma to estimate what the NOI will be on the property if it is a multifamily unit. This will allow the bank to come up with an estimated value of the property (using different methods such as Cap rate). The bank will also use the debt service coverage ratio to determine the max loan amount. The DSCR is the ratio of NOI to annual debt service. This ratio is important to lenders because it ensures that the property has the necessary cash flow to cover the loan payments. Once all of these are factored the bank will determine a Maximum Loan Analysis based on the NOI, the DSCR, and the LTV requirements. Once a lender calculates the correct net operating income they will then calculate the above mentioned loan to value and debt service coverage ratios. Next, the lender will then take the lesser of the two loan amounts calculated based on the LTV approach and the DSCR approach. The "bank" will usually provide debt financing at around 80% of the maximum loan value.

This leaves the owner to find the other "20%" financing, either through an investor with equity financing, preferred returns, debt payments, etc. This 20% is higher risk, since the bank will be paid first, in addition, this 20% will be required to be used first for the construction process. Once construction is complete and the property has around 90% Occupancy, the value of the property can be re-evaluated based on actual pro-forma numbers, and this will usually allow the owner to obtain 20% equity if the construction was done correctly, and the rents are equal to what was projected. This will allow the owner to convert the construction loan to a commercial loan (using same methods above with ACTUAL numbers) and hopefully he can pay off the "20%" investors, which will allow him to hold the property with a 80% LTV (having 20% equity), and produce cash flow while paying down the commercial loan.

There is A LOT more to this and many different variables to financing, this is just the basic overview. Typically the owner will be required to have at least a net worth equal to the property (or his investors) and be required to put in around 1%-5% of his own money.

Check out the book "Finance for Real Estate Development" from ULI, if you want to dig into the weeds.

 

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[devine]

Does the saying; "when everyone is digging for gold, sell shovels" apply here?

This needs to be the first sticky quote on TFLF.

@Vigilante what do you think about it?

 

[MoneyDoc]

Landlord leasing + commercial development.