Debt Vs Operations: Where’s The Vulnerability?

Reader Rick M asks a common (and very reasonable) question about deal financing:

The [bridge loan] makes me a little nervous. I understand the dilemma of prepayment penalties with long term debt, but what if you can’t sell at the price you want, or can’t get refinancing because of some shift in the market within that 5 year window?

Now, like I said, it is reasonable to be concerned about debt.

But in my experience it's not as big of an issue as you may think.

On most deals our target value-add period is 18 months. That gives us another 42 months to either refinance or sell the asset. 

Ask yourself: would an extra 6 to 12 months really save a sponsor who is unable to refinance/sell a stabilized (post value-add) Class B asset in one of the hottest property markets in the country?

(our last deal was also in a high median income area with supply-constrained demand, which factored into my answer as well)

In other words...

If a sponsor can’t refinance/sell in 42 months, they suffer from operational -- or perhaps intellectual -- issues.

Never invest with that person to begin with.

* * *

For more straight-talk real estate investing advice (and opportunities), join our mailing list at https://www.boardwalkwealth.com/