Lenders! Lenders! How Do I Choose?

For new real estate investors finding a lender is like searching for a needle in a haystack. I know...it's an old cliche! I would imagine a new investor would perhaps search online, go to their bank or they might ask another real estate investor whom they use. Whew! I'm overwhelmed already! An experienced real estate investor can sometimes face the same challenges. Why does that happen? Simply put: You don't know what you don't know! In this edition I want to explain and explore the differences between Bank financing and Private Money financing for Multifamily investments and other commercial properties as a whole. In our continued discussion of Multifamily purchases, refinances and rehabs, I want to bring to light a few misconceptions as well as help you decipher which type of lender - Bank or Private Money will meet your individual goals. First, an analysis of each lender type. Second, matching your goals, financial situation and experience level to the right lender.

Banks: First of all, don't go to a bank for a commercial real estate loan unless you are an experience real estate investor. Banks are conservative by nature. They have processes in place which put them in the best position to make a profit. Period. (I know that's redundant!) Know this: Even though a bank may publish an acceptable credit score at 680, very few Commercial Real Estate applications are approved if your credit score is not at least a 720. Other things to understand are the banks offered loan-to-value (LTV) and loan-to-cost (LTC - this is considered in rehab and construction loans). The preceding will MOST ALWAYS be lower than any other lender. If you thought 75% LTV for MF or another Commercial Real Esate purchase was the norm, think again! A bank will be closer to 60% LTV and many times at 50% LTV. Remember when you use to see 90/100 (which means 90%LTV/100%LTC)? If you go the bank route, those numbers are closer to 65/65. Also, banks have what they call a Stress Test. The Stress Test involves lowering LTV's and LTC's while raising the vacancy rate from 5% to 7% as well as raising the cap rate. An acceptable cap rate is 5%. If the property is still able to show it performs with these metrics in place and the borrower qualifies, the bank may make the loan.

As you can see, it's NOT easy to qualify for a bank loan. With the current state of banks failing, it's even more difficult.

Below is a list of some of the required documentation:

• Tax Returns: Last 3 years business and last 3 years personal tax returns
• Profit and Loss (P&L): Minimum last 12 months
• Balance Sheet: Last 12 months and Year-to-date (YTD)
• Bank Statements: Last 12 months
• Recent Credit Report: Pulled within the last 2 months
• Schedule of Real Esate (SREO): A list of your currently owned properties stating Current Market Value, Expenses, Rents and date Leases began
• Resume: Borrower and Co-Borrower detailing real estate experience
• LLC Entity Documents
• Rent Roll: If occupied - otherwise Appraiser will use Market Rents
• Operating Statement: Last 12 months and YTD for the property
• Executive Summary: Outlining the purpose for the loan request. This includes detailing the current state of the property and what you - the investor intend to do with the property.
• Personal Financial Statement (PFS): Discloses your assets and liabilities to determine Net Worth
• Commercial Real Esate Application

You may be wondering why do I need a P&L or Balance Sheet if I am a W2 earner? The answer is simple: Banks want to know that your real estate investment business is profitable. So again, you must be an experienced real estate investor to do business with a bank.

Disclaimer: Banks will vary on the required documentation and differ on their qualification criteria. The above is not a complete list.

Private Money Lenders: The Private Money Lenders are known for their flexible underwriting, multitude of loan products and higher rates. First, let's distinguish the difference between Private Money vs. Hard Money. Private Money Lenders include real estate investors, family offices, hedge funds and other organizations. Hard Money Lenders focus on the hard asset: the real estate asset when deciding to make a loan and the rates are very high. With that being said, Hard Money Lenders get their funds in similar places as Private Money Lenders. The biggest difference is Hard Money Lenders fund entirely on the value of the real estate asset and very little, if any, on your qualifications as a borrower. Easy to qualify in that sense, but low LTV's/LTC's and very high rates starting at 11% in most cases. For our purposes, I will focus on Private Money Lender financing.

Below is a list of some of the required documentation:

• Personal Financial Statement (PFS)
• Two to three months Bank Statements
• Schedule of Real Estate (SREO): A list of your currently owned properties stating Current Market Value, Expenses, Rents and date Leases began
• Recent Credit Report: Pulled within the last 2 months
• Resume: If an experienced real estate investor
• LLC Entity Documents: If applicable
• Rent Roll: If occupied - otherwise Appraiser will use Market Rents
• Operating Statement: Last 12 months and YTD for the property
• Executive Summary: Outlining the purpose for the loan request. This includes detailing the current state of the property and what you - the investor intend to do with the property.
• Commercial Real Estate Application

Disclaimer: Each Private Money Lender differs somewhat concerning application and documentation procedures.

For most Private Money Lenders, this is all that's required to apply! Of course, once the underwriting (UW) process starts, there most likely will be more documentation required from the borrower to complete the loan package as with banks. These can include: Letters of Explanation (LOE), Verification of Employment (VOE), Verification of Deposit (VOD) and so on.

Now we come to the question: What are the major differences between Banks and Private Money Lenders when financing MF and other commercial real estate investments? I have outlined it below:

Banks:

• Interest Rates: Lower than Private Money and based on the SOFR, Treasury Bills, Federal Funds Rate and others
• Closing of Loan: 60 to 90 days - possibly longer
• Recourse or Non Recourse: Always Recourse
• MSA: Only large MSA's are considered such as Sacramento, San Francisco and Los Angeles in California as well as other MSA's Nationwide.
• Debt Service Coverage Ratio (DSCR): At 1.25%+
• Points: At 1% for most banks and possibly higher
• Terms: Bridge - 12 months and 18 months, Arms: 5/1, 7/1, 10/1 and 25 years
• Amortization: 25 years and 30 years

Private Money Lenders:

• Interest Rates: Based on the SOFR, Treasury Bills, Federal Funds Rate and others plus the lender's margin
• Closing of Loan: 30 to 45 days
• Recourse or Non Recourse: Recourse & Non Recourse available depending on the lender
• MSA: Depending on the lender, no less than 150,000 population is usually considered. Also, the property should be located close to major infrastructure
• Debt Service Coverage Ratio (DSCR): Some are available at .75% depending on the lender and go no higher than 1.25%
• Points: A minimum of 1% up to 5%
• Terms: Bridge - 12 months and 18 months, 24 months and up to 36 months for ground-up construction, Arms: 5/1, 7/1, 10/1 and 25 years up to 30 years
• Amortization: 25 years, 30 years and 40 years

There you have it. These are the major differences between Bank financing and Private Money financing for MF and other commercial properties. I hope this edition has been enlightening, enspiring and informative to help you in your real estate investing journey. As always, reach out to me with any questions concerning this and other editions of my Newsletter: [email protected]

In my next Newsletter I will be discussing the ins and outs of the construction loan process. You don't want to miss this! Until then, be safe and be well.