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HOW NOTES FOR EPISODE 327: CREATIVE FINANCING STRATEGIES FOR COMMERCIAL REAL ESTATE
Brian Murray, real estate mogul and author of the best selling book Crushing It in Apartments and Commercial Real Estate, returns to the Old Dawg’s REI Network Podcast to share his insider secrets for successful commercial real estate creative financing. In this episode, Brian also shares how he acquired 600 doors without syndicating, how to prosper even in markets that aren’t that great and why he buys properties for the long term.
What You Will Learn
- Why acquiring different asset classes makes you a better real estate investor
- The two main creative financing techniques he still uses today
- What his favorite asset class and why
- When is the best time during the negotiation process to introduce seller financing?
- How to give the seller what he or she wants so you can get what you want
- Strategies for negotiating your best terms with seller financing
- Why he always schedules closings early in the month
- How he financed a great deal without putting any cash into the deal and got cash back at closing
About Our Guest
Brian Murray
Brian Murray acquired his first investment property in 2007. Without raising any outside capital, Brian bootstrapped his way from newbie investor to founder and CEO of Washington Street Properties, a commercial real estate investment and property management company that has been ranked on the Inc. 500|5000 list of the nation’s fastest-growing private companies for five years in a row. In 2015, Brian Murray was recognized with a Gold Stevie Award for Executive of the Year in the Real Estate Industry.
Brian Murray is author of the bestselling and award-winning book Crushing It in Apartments and Commercial Real Estate, which sold more than 20,000 copies in its first year of publication and garnered positive reviews from Publishers Weekly, Foreword Reviews, and BlueInk Review. The book was chosen as the Gold Award Winner at the 2018 Robert Bruss Real Estate Book Awards. It was also named a Gold Award Winner by the Nonfiction Authors Association, a Finalist for the Best Book Awards in Business: Personal Finance/Investing, and Finalist for the Next Generation Indie Book Awards: Finance/Investment.
In addition to his endeavors in writing and real estate, Brian Murray has worked as a teacher, technology executive, management consultant, and engineer. His media appearances include interviews on CNN, PBS, and CBS MarketWatch. Brian has been quoted by the Wall Street Journal, the New York Times, and dozens of other major newspapers around the world. He holds degrees from Syracuse University, Johns Hopkins University, and the Darden School of Business at the University of Virginia.
More About Brian
- Since last appearing on the show:
- Continuing to grow company
- Has branched out to other commercial asset classes
- Mostly focused on multifamily commercial/apartment complexes
- He was 50% office/retail and 50% residential
- Today 75% multifamily
- Adding more apartment units
- The market is difficult to find the best deals
- His focus is finding distressed assets and turn them around
Why He Has Acquired Different Commercial Asset Classes
- Brian has acquired office buildings, retail and multifamily
- He has seen a true benefit in acquiring different asset classes
- Reasons he has diversified
- Loves to learn new things
- Loves to solve puzzles
- There’s a lot of similarities in the various asset classes than most people realize
- Basic principles are the same
- Especially the value-add approach
- Looking for properties that are not well-managed
- Likes to turn things around
- Each asset class has its pros and cons
- Multifamily
- Pros
- Loves the tenants
- Enjoys the opportunity to improve their homes and the community
- Easier to control your occupancy
- You can lose 2-3 tenants and still cash flow
- If you are having difficulty renting, you can adjust rental rates and see a quick response from the market
- Residential
- Pros
- Office and Retail
- Cons
- Occupancy
- You may have to sit with an empty space for a very long time
- One single tenant can occupy the majority of your available/rentable space
- He tries to find office/retail properties where one tenant is not monopolizing available space to spread the risk
- You can sometimes lose a tenant who has occupied 50% of your space and all of a sudden you are cash flow negative
- Space configuration is limiting
- Finding a tenant that wants your “available office/retain space” may not meet their specific needs
- The market does don’t react quickly to changes in rent
- Many people think that office tenants are better to manage because they are more “professional” than residential tenants
- They are actually more difficult than residential tenants
- Occupancy
- Cons
- Single Tenant – Double Net
- Purchased a Dollar General Store
- Pros
- Probably a good investment
- Regularly received checks in the mail
- Stable asset
- Cons
- Didn’t find it very rewarding
- There was no opportunity to value-add
- That has been his “secret recipe” for success and growth since the beginning
- Value-add has also been the reason he didn’t have to raise capital
- Sold it after 2 years to buy a value-add deal
- Pros
- Purchased a Dollar General Store
- Multifamily
- Reasons he has diversified
Creative Financing to Increase Equity
- When he first started, he couldn’t get a bank to finance his properties, so he was forced to be creative
- His first property was a mortgage assumption
- His second property was owner financing
- Today, when he finds a good value-add deal, he always looks for ways to increase equity
- It gives more comfort going into a project, knowing they can leverage the property as much as they can
- If he knows, going into a property that, within 3 months to a year, he can increase equity 30-40%, then he looks at every possible opportunity to reduce the amount of cash needed to close on the property
- That will dramatically boost his cash-on-cash returns
- Even though he has no problem getting banks to lend to him today, he still sees great benefits in creative financing
- His two most common creative financing strategies
- Mortgage assumptions
- Seller financing
- Seller/Owner Financing
- Way underutilized
- In today’s hot market, it depends on what you’re buying and where you’re buying
- Many people just rule it out immediately, assuming the seller just won’t do it
- He usually likes to do a “very small piece of the deal” with seller financing
- The seller does have to own the property 100%
- As long as they have equity in the property, they can still do seller financing
- Typical Scenario for Brian
- They are interested in a property
- They try to learn as much about the seller as possible and their debt situation
- If it seems like it’s a good fit
- They come in with an aggressive offer where they will have a counter
- The seller counters
- When Brian comes back, bringing their counter closer to the owner’s counter, that’s the best point to introduce seller financing
- If you start out discussing seller financing right away it can work against you because the seller thinks:
- The buyer doesn’t have the cash
- He doesn’t qualify for bank financing
- In Brian’s first counter, he says “I’ll give you closer to your asking price but can you give me 5% in seller financing?” because…
- I can give you more cash out of my pocket
- I can get a better cash-on-cash return
- A lot of times, if they aren’t experienced, they may want to talk with their accountant or attorney
- They may also see that their is an opportunity to:
- Defer capital gains
- Earn passive income on the interest
- Profile of the best seller financing candidates:
- Older person
- Wants to get rid of the property and move on
- Not interested in exchanging the property to something bigger
- Has held the property for income for many years
- You can sell the idea of you can still receive income but without the management headaches
- The 5% financing can go up to 10%, 15%, etc. depending on the seller, their situation, how motivated they are
- Many sellers are driven by price
- They are willing to make concessions in other areas, as long as they get the price they want
- Help them to get their price but use that to get allowances in other places for you (i.e. less cash out-of-pocket, etc.)
- If you start out discussing seller financing right away it can work against you because the seller thinks:
- The seller will have to agree to take a second position to the original financing
- You will have to work with a local bank or regional portfolio lender to do the first because agency lenders (Fannie Mae/Freddie Mac) often don’t allow someone in the second position
- Sometimes, he’ll have the bank finance less to make them more comfortable in the first position
- The bank just wants to make sure you meet the debt service required ratio to cover both of the loans
- If you can have the bank cover 75%, the owner cover 10%, you can can try to find other ways
- How to negotiate your best terms with the seller:
- Start with a very long amortization period – at least 30 years – and a low interest rate
- If he has to negotiate, he would rather start with the interest rate because you get a much lower monthly payment with a long amortization period
- Most sellers will want a balloon payment somewhere – typically, he goes for a 5 year balloon payment due
- What that looks like
- Competitive interest rate
- 30 year amortization
- Balloon payment due in 5 years
Other Ways to Reduce Out-of-Pocket Cash at Closing
- Because he buys distressed properties, that usually means there is some “downside” to be improved
- For example, the roof needs work
- Negotiate for that (i.e. $10,000, $50,000, etc.)
- Ask for credit at closing. It can be specifically for that item or, even better yet, ask for a “deferred maintenance credit” in that amount to be written into the offer (that way, he has the option to use it for whatever he wants).
- Most lenders will let that go
- They typically will keep the purchase price (as long as the appraisal supports the price) and give it to you when they are calculating back the closing credits
- Sometimes, Brian has even renegotiated the price up. Let’s say it was $300,000. He will ask to increase the price to $310,000 so he can get $10,000 back in closing credits.
- Most lenders will let that go
- These strategies work best with local lenders
Other Valuable Tips
- He always tries to schedule his closings for early in the month (the 5th or 6th of the month)
- Put in the contract to prorate the rents
- The seller will have to collect the rents and prorate you most of the rents at closing
- You will get the bulk of the monthly rents at closing
- That had be a chunk of cash that can equal 1% of the purchase price
- Deposits for non-multifamily properties are treated differently than multifamily
- They can be co-mingled with your operating account
- With multifamily, you have to keep separate
- In every sales contract, everything you have to pay at closing is open to negotiation
- It doesn’t mean that there are local “conventions” of what you should do or how you should pay
- If purchaser typically pays mortgage tax, who pays for the survey, etc. for example
- Some are handled differently in different states
- Overcome, early on, any objections to the seller sharing information on their debt
- This helps the buyer tremendously
- You might find that the seller has good debt and it would be better to assume that debt
- In some cases, you might find that the seller debt might be higher than what you are paying or close to it
- He recently acquired a 126-unit apartment complex
- Seller debt was $4.7 million
- Brian put the property under contract for $5 million
- Brian agreed to assume the seller’s mortgage
- Brian only had to put down $300,000 (6% of the purchase price)
- He recently acquired a 126-unit apartment complex
His Company Today
- Up until recently, Brian was only purchased properties
- His market is not really that strong of a real estate market (upstate New York) but, of course, he still prefers to purchase where he can easily access his properties
- This is the first time he is considering properties further away
- However, his company has reached a size that, in order to continue growing at the rate they have been, they will have to bring in outside money
- To continue growing organically, he will either have to considerably slow down
- He is also considering syndicating for the first time
- He’s been fortunate with his success and where he’s at now, where he can bring in limited partners to help them achieve their financial goals through real estate
- He currently has 600 doors without ever syndicating
- Buying in an emerging market is only one way to boost equity. Brian has found many other ways to boost value — even within a market that is not considered a growth area
Advantages of Investing in Markets That Aren’t All That Great
- Higher cap rates
- Less competition
- You can find better deals
- They will cash flow better
- If you can maintain those higher returns and you have less competition, that sets you up to increase the value of your real estate
- Most people want to find those booming MSAs and “ride the wave” of appreciation and that can work too
- Both ways work, it just depends on your strategies
- Sometimes people feel they have to be in the best markets but that’s not necessarily true
- You can be in your own market, where there’s less competition and do very well, too
- Buying out of the hot areas can also mean you can hold on to your properties for longer terms because you don’t have to worry about getting out before the bubble bursts
Buying for the Longer Term
- Brian buys with the idea that he will hold on to the property indefinitely
- That’s one of the reasons he hasn’t done syndication
- Many investors have expectations – they want their quarterly checks and they want their original investment back on the exit
- He doesn’t like to sell
- He also likes to invest in his existing properties
- For the first time, he’s actually looking at selling his smaller properties because they are not as cost efficient as the larger properties and using the money to buy larger properties
Best Creative Finance Deals
- He had two deals where they didn’t have put any money into the deals
- One deal was a 115-unit apartment
- Affordable housing community that was scheduled (mistakenly by HUD) to come off of the affordable housing list
- Brian bought the property with the goal of bringing the property up to market rents
- Bought it at a great price – $2.4 million
- Property was in really bad shape
- Seller had let it run down
- It was not cash flowing
- Onsite staff was stealing
- Seller agreed to finance $500,000 in a second trust deed
- 30 year amortization
- 3% interest
- Borrowed 75% from a local bank ($1,800,000)
- With the second TD, they had raised
- Bank said it had to appraise at higher than $2.4 million and it did
- They made many small credits for closing
- They walked away from closing with a pretty good sized check
- This deal didn’t just happen overnight
- It was an owner he had been calling for years trying to get him to sell
- He found someone he knew who managed another affordable housing complex to take over the property management
- A year and a half later they sold it and he made about a million dollars
Finding Great Deals
- Over time, Brian knew every apartment community in his area that he was interested in buying and the owners of those apartments
- Every time he saw an apartment community that he really wanted to own, he would track down the apartment owner and lets the owner know that he wants to buy the property
- In his mind, every property out there is for sale
- The city he’s in is around $50,000
- He knows the owners of very apartment in his county that he would want to own
- He contacts the owners:
- Tells them something positive about the property
- He says to the owner that if they are ever thinking of selling that he would be interested and to contact him
- He also tells them that he would take very good care of the property if they ever do sell it to him
- Then he calls them about every 6 months, checks in to see where they are at and reminds them that he is interested
- His criteria for an apartment community
- 70 units and up
- He prefers local properties
- 80s, 90s construction
- Preference for pitched roofs
- Looking for a significant amount of value add, especially with asking prices so high
- Straight forward renovations
- Boost rents through
- higher end finishes
- Add washer/dryer hook-ups
- Below market rents
- Wants to create equity
- Increase cash flow
- Wants to lock in great rates for longer term
- Maybe get good agency debt for 10 years or more
- For the first time, he’s looking at out-of-state properties in the Southeast
How to Reach Brian
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