Curious how you all would finance your CRE investments as a first-time investor?
I'm curious how you all think a first-time investor would source debt financing, say for an acquisition. Ideas that come to mind are hitting up a local bank or credit union. Are there better ways? What are the challenges associated with financing a CRE deal?
[{"id": "h0k04bl", "text": "Have you tried having rich parents?", "replies": [{"id": "h0kv8dp", "text": "yeah, I just took a small insignificant loan of $1 mill. I don't think they'll even ask for it back", "replies": [{"id": "h0ky0fo", "text": "Your parents aren't rich if they ask for it back.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h0k1mzu", "text": "My first one was seller financed.", "replies": [{"id": "h0k1np8", "text": "**seller financed, my first one was.** \n\n*-fattailwagging*\n\n***\n\n\n\n^(Commands: 'opt out', 'delete')", "replies": [{"id": "h0md02g", "text": "Delete", "replies": [], "depth": 3}], "depth": 2}, {"id": "h0ka1gx", "text": "Often times, the best option!", "replies": [], "depth": 2}, {"id": "h0ky6bn", "text": "What LTV ?", "replies": [], "depth": 2}], "depth": 1}, {"id": "h0k3rij", "text": "Save equity from your day job. There is no shortcut", "replies": [], "depth": 1}, {"id": "h0k9k6k", "text": "CRE deals are either mostly about the tenant(s) &amp; their lease(s) or the guarantor. You might look at a 5 unit strip center and say \"Great! Five tenants paying 5x rent and my debt service is 3x, great deal!\" \n\nA bank looks at it and says \"5 local tenants on  month to month gross leases, anyone of them moves out and this coverage goes from 1.66 to 1.33 before expenses\". It's just the nature of underwriting to be more conservative.\n\nIf you have a guarantor that can cover the note out of liquidity or payments out of other cash flow it gets easier. Since it doesn't sound you'll be in the guarantor lift segment you'll need more equity. Have you done any other type of projects before (first time or first time CRE)? Track record is not unimportant if other factors are going to be marginal.", "replies": [{"id": "h0kfx5a", "text": "This. \n\nOn my first CRE deal I had corporate tenants, corporate guarantees was making 300k/yr and still had to get a USDA B&amp;I backed loan while working with a local bank -", "replies": [{"id": "h0ky4dr", "text": "Sure, maybe 50% ltv and personal guarantee from one of the investors or all of the investors if it goes belly up", "replies": [], "depth": 3}], "depth": 2}, {"id": "h0kyxs5", "text": "&gt; month to month gross leases,\n\nJesus Christ what a shit show. How does this happen? Unsophisticated landlord or unsophisticated tenants or both?", "replies": [], "depth": 2}], "depth": 1}, {"id": "h0k9xbu", "text": "There are some banks that will do it. In my experience, they\u2019ll only do it if the property is within their footprint. Interest rate guaranteed for 5 years, then adjusted, and adjusted every 5 years after that, up to 20 years. Again, my own unique experience. I started with a google search and began making phone calls. If someone can\u2019t help you, ask for information on another bank that may be able to. Took a couple days but eventually I found a solution.", "replies": [], "depth": 1}, {"id": "h0kb3mo", "text": "Yes banks lend money for CRE deals, just need to prove to them that they will make $$ on the deal even if you fail.. give them lots of money up front and rub their bellies", "replies": [], "depth": 1}, {"id": "h0kfzzs", "text": "Check out USDA B&amp;I program.", "replies": [], "depth": 1}, {"id": "h0kg4vx", "text": "Talk with a mortgage broker. A lot of lenders where I am want personal guarantees. As you scale up the personal guarantees can be removed. Its a challenge.\n\n\"Equity solves all problems\" quote from a mortgage broker friend. On the first deal I'd go heavy on the down payment amount. You can always refi it out later. Or as other have commented do seller financing.", "replies": [{"id": "h0lh9w2", "text": "Any idea where to reach out to get equity?", "replies": [{"id": "h0lla4d", "text": "Starting out its usually dollars from friends and family.\n\nRaising equity is the life blood of any real estate investment management company.", "replies": [{"id": "h0llheb", "text": "It definitely is... I was hoping there was a resource online that I could post to. Might honestly just have to try this subreddit unless it\u2019s against the rules", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h0kgwxv", "text": "My first commercial was seller financed.", "replies": [{"id": "h0ky7hb", "text": "What LTV?", "replies": [{"id": "h0l1u2l", "text": "It was about 10% down so, 90% LTV if I recall.", "replies": [{"id": "h0lj3ry", "text": "How did you structure the deal, rate, and who backed the loan? Was it the commercial property backing the loan or did you have a personal guarantee through a sponsor? I\u2019m struggling with this topic as you can tell. Elsie the property make enough to service the loan and make a profit?", "replies": [{"id": "h0m3q51", "text": "This was in the late 80's, the seller was someone who didn't have great credit and had borrowed against it in the early 80's at 13% at one of those high rate finance companies (not a bank) I seem to recall. He wasn't the brightest bulb.  I'm pretty sure I wrote the deal as a 10 year amortization, 10 year payoff.\n\nI was 32'ish at the time, the seller was in his mid 50's, I prepared the amortization schedule, they paid a bank something like 50 bucks a month to manage it for him.  I told him a dozen times \"*there's nothing to manage....I give the money to you, there is the amortization schedule.  It shows the amount paid in interest and in principle both monthly and annually...you're giving your bank $600.00 a year for absolutely nothing*\".  He said it made him feel more comfortable.  Worked for me.\n\nIf memory serves, he owed 100 grand on the property, I offered him 300 grand for the place, he was thrilled, we never told the lender (not something I'd do today) and I simply paid his loan off over the next 3 years (6 or so years ahead of their schedule so, they never cared), I provided him monthly proof that I'd paid the bill....the remaining amounts (200 grand) I paid to him (through his bank) as his equity and I think I blended the rate so that it was an overall 9% to me which was a decent rate at the time.\n\nSecurity:  He owned the property until I paid the last payment.  He backed the loan with his equity.\n\nThere was no profit to speak of.  It was for my construction company.  I didn't lease it to others until years later.\n\nI got tired of outgrowing every property I'd been in for the 12 or so short years I'd been in business, we were growing fast and the first few years it was a hell of a squeeze on my cash flow but within 7 or 8 years it was far less than I'd be paying to lease a similar property.\n\nI sold it in 2010 or something and today it leases for about 12 grand a month I think.", "replies": [{"id": "h0mtg3u", "text": "What a great story and example. That was fantastic that you took over the loan. Essentially he took all the risk and you took over the property at a lower rate than what the market offered at the time.", "replies": [{"id": "h0obw2g", "text": "Well, considering he had a healthy down payment from me and a monthly payment that exceeded his own payments by at least 2X, complete coverage of his existing obligations, and the right to repossess the property if I failed at any of the above, I'm not clear how he took any risk at all but, yes, it was a great deal for him and it suited my needs flawlessly.", "replies": [{"id": "h0tsa9d", "text": "Assuming all obligations were made, it was a fantastic deal for you.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h0kl9fg", "text": "Syndicate, take a 5% promote for putting the deal together, don't put in any of your own money, don't fuck it up. Rinse and repeat until you have enough to buy your own deal. Alternatively, sugar mama/daddy\n\nEdit: I posted without actually reading OP's question. Fuck up on my end. Made a separate reply answering the actual question.", "replies": [{"id": "h0kygm5", "text": "What do you mean? Take 5% equity, and promote to find an investor? Keep earning that 5% until you gain enough equity to do your own deals?", "replies": [{"id": "h0l4yez", "text": "Definitely just realized I posted without fully reading OP's question. Wow that's embarrassing. Edited appropriately.\n\nBut to go ahead and flesh out my thought on what I had originally posted, which was more of a \"how do I make enough money to buy my first deal\" - No on the first part, yes on the last. Traditionally (with the caveat of course that everything in real estate is fluid and negotiable) a syndication is a scenario whereby a Sponsor (in this case OP) puts together a deal and attracts investors to the deal. The investors will likely earn a preferred return on their money while the Sponsor will earn a \"Promote\" (carried interest) as a performance fee, basically a bonus for putting the deal together, managing it, etc., which bonus increases or decreases based on the performance of the deal. Usually this takes the form of a waterfall structure and frankly is complicated as hell. Sponsors often put in little or no money, instead being paid for their expertise and management of the project, as well as for putting the actual deal itself together. Promotes are where real money is made by equity groups in real estate. \n\nMy recommendation to OP, as they would be getting into their first deal, is to basically act as a syndicator, but take a flat equity piece in the deal at a low amount (5%, maybe 2.5%) as their payment for structuring the deal and brining it to other investors. The benefit is four-fold; 1) you are getting into the deal with little or no up front investment, 2) you are able to tap into the knowledge and experience of the other investors, 3) you are asking for a small enough piece of the pie as your payment for putting it all together than your inexperience may be overlooked by the other investors, and 4) you can build your deal resume with these kinds of actions, eventually allowing you to access stronger investors, capital, and deals. \n\nOnce you have accumulated enough through these smaller deals (obviously rolling what you make into the next deal is a good idea to take more equity), buy your own deal outright. Or, use it to fund an expansion of your Sponsor business, moving into more complicated structures and making more money that way.", "replies": [{"id": "h0liu1s", "text": "Great explanation. But if I\u2019m bringing the deal, I\u2019m structuring, I\u2019m finding investors wouldn\u2019t some people consider this amount too low-  and technically ask for more than 5%? I totally understand obtaining the \u201c1st\u201d deal and building the resume. It\u2019s a catch 22 the way I see it. The sponsor usually has all the leverage because it\u2019s their name on the loan if there is one. I haven\u2019t seen a deal where a loan wasn\u2019t involved. What type was your first deal? Who financed it, was a seller carry or bank financed? What did you exactly do or how did you structure your first deal?", "replies": [{"id": "h0ln7n6", "text": "It's a low amount but it is also enough to ward of the issue of a first timer having no experience. Plus, if it is your first deal, unless you have a career in the business and just never purchased anything, any experienced investors aren't going to be giving a hell of a lot of credence to your involvement and are going to assume they will be having to help manage the deal. \n\nMost likely, unless the syndicator has an unbelievably good balance sheet, the bank is going to require the other partners to go on the loan as guarantors; maybe you could negotiate their guarantee being limited with a burnoff but doubtful in this climate unless the deal is just a home run.\n\nMost stuff I have a direct stake in are convoluted family shit so it's not really comparable. I look at a lot of deals from syndicators for various clients (and personally but rarely get into them; don't like being along for the ride with no input, as with most things in life haha) and lenders and help structure deals for same, that's where most of my commentary comes from. I also help a lot of friends/business associates put together their own deals.", "replies": [{"id": "h0lo8v0", "text": "Lots of excellent insight. Thank you for sharing. What do you think of the current CRE market now? Is this a good time to be in multi family? Retail, where are you seeing opportunities?", "replies": [], "depth": 6}, {"id": "h0mu1i3", "text": "Can I PM you?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h0knuhj", "text": "Having an existing relationship with a bank is a huge plus. Reach out to a loan officer at your primary bank and see if they can help. \n\nFirst, you should underwrite the property to market metrics and make sure you have ample liquidity to fund the down payment. \n\nIf you come up short, reach out to a mortgage broker like myself for help", "replies": [{"id": "h0psom2", "text": "What\u2019s a typical down payment % on commercial land? (Dirt only, no buildings)\n\nWhat\u2019s a typical down payment % on a construction loan?", "replies": [{"id": "h0ptdzz", "text": "Land: 50%? Depends if there is a proposed construction within 12-24 months\n\nConstruction: 70 - 80%+ depending on final asset and if leases are signed (if retail/industrial)", "replies": [{"id": "h0pym3f", "text": "Good god\u2026.\n\nLand: There would be. Fyi: But the way I\u2019m structuring this deal is that the new Landlord rents out the land to a tenant with plans to build.\n\nConstruction\u2026 80% down?!?? (This would be for a mini storage facility)\n\nDownvoting for realism\u2026. /s", "replies": [{"id": "h0q7axr", "text": "Ah! Got confused. The % above were LTV. Say 20-30% down for construction. 100% if it\u2019s BTS with leases signed", "replies": [{"id": "h0r3f15", "text": "Thank you so much!\n\nI\u2019m figuring a 35% Down Payment since this is my first one. \n\nCan you tell me anything about interest rates on construction financing? I\u2019m sure I\u2019ll end up on the higher range and am currently figuring a high 5%, for the conservative breakdown. And on the flip side I\u2019m figuring an aggressive 3.5%. The middle case: 4.5%. \n\nAnything helps!", "replies": [{"id": "h0r7f8n", "text": "Really project dependent but anywhere from 3.5% (multi family construction $5MM+) or 10%+ (BTS, high leverage, non traditional). \n\nPM me if you want more info!", "replies": [{"id": "h0tms1s", "text": "What\u2019s BTS?", "replies": [{"id": "h0v85ck", "text": "Build to suit. Say you got a franchise that has a specific look or need. You build to their specs with predetermined long term lease. Higher risk development because it will be more difficult to rent out to another party because it's a tenant specific property. I think usually the developers flip it after its occupied but I could be mistaken.", "replies": [{"id": "h0wqc4q", "text": "Correct! Usually leases are signed and ready before construction takes place to mitigate.", "replies": [], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "h0l8qzw", "text": "OP, my first response should be ignored with regard to your actual question. \n\nAs others have said, local/regional lender where you can build a good relationship with your loan officer is key. The big banks (Wells, BofA, etc.) are good for SBA loans or for massive deals as no one can beat their rates. They also have almost no flexibility in their terms and 9/10 times could not give a flying fuck if you do the loan or not. I've seen WF take 6 months to close an SBA deal. \n\nBiggest challenges on your first deal will be lack of experience and your balance sheet. One part of the loan approval will be a section wherein the bank does a risk assessment on you as a borrower (I know this because I am the guy that writes up the actual loan docs on more complicated deals so I see these docs). You will be considered a moderate to high risk due to lack of experience. This will mean weaker rate, higher LTV, personal guarantee, and maybe even reserves depending on what your deal is. The easiest way to offset this is to buy a straightforward deal with no hair on it. You are way less risky if you are buying a corproate McDonalds on a hard corner with a 15 year term than if you are buying a multi-tenant retail strip with 12 tenants on an average 2 year lease, none of whom are credit, and a building that has a lot of deferred maintenance. Similarly, your risk profile goes up or down dependent on your personal global cash flow. If the deal goes south, are you gonna be fucked money-wise? If so, probably won't get the loan. On the other end, if the tenant is dissolved by some alien death ray and you could keep making the payments to the bank regardless of the cash flow from the property, much lower risk profile.", "replies": [{"id": "h0v9isx", "text": "Underwrite for Credit unions and we get alot of people like op. Residential is usually not too big of a deal as its fairly liquid and easier to lease. For retail you need a strong personal balance sheet (preferably liquid), independent/secondary cash flow, low LTV or a slam dunk project. Preferably all of these but atleast one or two.", "replies": [], "depth": 2}], "depth": 1}, {"id": "h0msjl2", "text": "You should be able to find a lender that will go higher leverage at a higher interest rate that will care less about your lack of experience. May be worthwhile to get a notch in your belt and maybe the returns look better with less equity.", "replies": [], "depth": 1}, {"id": "h0zdlio", "text": "It depends on how your personal financial statement looks, your personal cash flow, and the type of asset that you are buying.  \n\nCredit tenant triple net would be the easiest to find a lender, then multifamily, then industrial, and finally retail/office. But a lot depends on the tenants and the lease length.  \n\nIf you don't have much money then get investors that would feel comfortable with a limited guarantee. Difficult to do without a track record, so I am thinking friends and family here. You can take a little piece of equity, but can also make some money managing by controlling the general partner. There are more ways to make money in an investment than just having equity participation. I see that a lot with some of our borrowers that have actually build mini-empires of dozens of properties under different investor groups.", "replies": [], "depth": 1}]