Fun and informative, this real estate investment talk show has been broadcasting on conventional radio since 1997. Hosted by professional investor Robert Helms and financial strategist Russell Gray, the show delivers no-hype education and expert perspectives in a fast-paced, entertaining style.
Publish Date: Dec 27, 2020
you speak to that? Why is it that multi family tends to have the lowest interest rates and the best kind of loans? Yes. So I think there are two primary reasons for that. One is It's a very stable as a class when we look back at the various recessions we have gone through, including the great recession in 2008 to 2010 11, depending on when you say we were out off it, uh, multifamily. We cover much faster than the other commercial asset classes, right? So that it's one off the reasons that, yes, you always have tips to, but you recover relatively quickly Compared to the other asset classes, three Order are elements that plays into it is the availability of financing in commercial real estate. There is no order as a class that has that broad off access toe financing debt financing, and that's primarily thanks to, and you refer to it earlier in in your show Fannie and Freddie that it's readily available on the single family side. You also have that availability on the multifamily side, right? So you have Fannie and Freddie providing a massive amount roughly half of all the multifamily financing in the in the US, and you do not have that for hotel. You don't have it for retail. You don't have it for officers industrial. So that's a massive benefits, so that creates additional competition. And on top of that, obviously this quasi government agencies, they want people to have affordable housing. So they are really pushing hard toe provide developers as well as property owners with financing that is attractive so that tenants have reasonably priced housing available to them well. And there are is we're going to talk about a variety of sources. But having some big sources like that just tells you that it's going to stay competitive and that they always say You can look at a country's tax law and figure out where they want you to invest when you look at the financing that's available and it shows you what's in favor there. So I think let's do this, Anton. We have a variety of listeners with people that are aspiring to be real estate investors. We have very season sophisticated a credit investors, fund managers, folks like that, and then there's the people that are just acquiring a portfolio. Maybe they bought a single family home or duplex, but they've never bought multi family. So rest and I talked about some of the differences. But when you sit down with somebody to talk about financing, multi family, um, one of the major differences between that kind of, ah alone and you know, more of a residential loan won off. The big difference is really right when you start out for on the residential side you're used to, and you mentioned it earlier than to income ratio and your credit score and your personal income stream. That's what drives essentially the landing decision Lander has. You can buy a property even at 50% leverage. If your personal income stream is not sufficient, they're not lending to you, right? Eso that's you are essentially restricted by your own personal cash flow. When it comes to commercial real estate, including multifamily, it's a very different stories are now the properties. Cash flow drives, the lending decision that determines how much that property supports for a loan amount. And we where am I really use a term called that service Courage. There's a model terms, but for most loans and multi families the debt service coverage ratio. Usually it's 1.25 or higher, which means that the cash flow has to be roughly a quarter higher than the debt service that it has to. It has to serve, and obviously also that net operating income, as it's called, is also then used with the cabaret to come up with the valuation off the property. And that also needs to be a reasonable level, usually 70 to 80% in most instances. So that is what's driving the underwriting off the loan. At the property level, However, there is another aspect to it. And there's also the financial strength off property buyer or property buyers, and that is a combination off net worth. So typically you need a net worth off that is equal or higher than the loan amount, and you need a host closing liquidity after you make the down payment and closing that loan off, roughly speaking 10% off the loan amount. So if you have a $5 million alone as an example, your network should be five million and your post closing liquidity 500,000, right? So that may sound like a pretty steep held to climb when you start out and you may only have a million in network, right, however, and that's another massive benefit compared toa single family investing. And I call it the power off stacking right you in single family, it's essentially you on your own. It's your personal cash flow, a multifamily you are able toe. Combine your network with ordering the weevils that want to join you. So if you have a let's say toe, take the same example off a million net worth. But you have a property that requires alone for five million. You may have to bring in 12 or three order individuals that have to get with you that net worth and liquidity that can support that long. You don't have that on the single family side, so that's really the beauty about partnering up with people. Now that's on the financial strength site now. The other aspect, and you alluded to that earlier, too, is that you also need to bring experience to the table with bank loans. Sometimes there are a little bit more flexible that you are willing to provide you a multifamily alone without any past experience, but only when it comes to the agent Lee sees. Like Fannie Mae and Freddie Mac, they definitely want toe. See that you end Or one of your partners has experience in multifamily, typically at least one property for at least two years off a similar size, ideally in the market that you're looking at. But it's not always necessary again when it's when it's, Ah bank that it's more flexible with agencies. You have to expect that that requirement, Ismet now for some of your listeners to may have for me before and I talked about Freddie SPL that it's more flexible there that waas the case in the past, when they were willing to essentially lend to someone who doesn't did not have any multifamily experience as long as they used the third party property management company. That's no longer the case, so now you need to have that experience that you bring to the table