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SHOW NOTES FOR EPISODE 267: BEST OF OLD DAWG’S REI NETWORK PODCAST – HOW TO GET BANKERS TO LOVE YOU
Have you ever wondered if there was a secret formula to qualify for the best commercial loans? In this episode, Bill Manassero interviews Old Capital Lending directors and co-hosts of the Old Capital Podcast Michael Becker and Paul Peebles. In this episode, you will learn the inside scoop on how to get the best multifamily loans, as well as special tips on impressing and winning over prospective multifamily lenders.
What You Will Learn
- How commercial lending differs from single family lending
- What are the 5 things bankers look for before you even apply for the loan?
- How properties are like human bodies
- The importance of net worth and liquidity for your key principal
- What is the “income approach” to valuation?
- How increasing interest rates may impact commercial REI
About Our Guests
Michael Becker
Michael (who was featured on Old Dawg’s episode #002 – “How to Acquire 3,000 units in 36 months“) has two roles in commercial real estate. He is affiliated with Old Capital Lending as a Senior Director of Mortgage Origination and a Principal at SPI Advisory LLC. SPI Advisory LLC owns and manages over 3000 apartment units in Texas. Michael heads SPI’s Frisco, Texas office where he oversees all aspects of property operations, including asset management, property management oversight, accounting and taxation, capital improvement and renovation projects and investor relations. Michael is a 15 year veteran commercial real estate banker and has originated and managed numerous portfolios of permanent and bridge loans in all major asset classes. Over the last 5 years of his banking tenure, Michael focused exclusively on multi-family properties, where he was the number one loan producer for his division at a Top 3 National lender for his last 3 consecutive years. Michael is a lifelong resident of North Texas and a graduate of The University of North Texas with a BA in Finance. He is married and has two young children.
Paul Peebles
Paul has been arranging real estate financing for borrowers and institutional clients since 1987. As the National Underwriter at Old Capital, Paul underwrites and structures all transactions handled by Old Capital through an array of sources including conduits, banks, life companies, Fannie Mae, Freddie Mac, HUD and private money lenders. His knowledge of the capital markets and his long term and deep relationships with the decision makers at the various capital sources is a competitive advantage for the client. He has closed over a $1 billion in real estate transactions. Paul is a “deal maker.” Prior to Old Capital, he was affiliated with Merrill Lynch Capital Markets, World Savings Bank and ITT Commercial Real Estate. He is a graduate of University of Iowa. He is originally from Western Springs, Illinois, is married and has one daughter.
How Commercial Lending is Different From Single Family Home Lending
- With personal mortgage loans, the bank looks at the person/borrower and their ability to pay back the loan
- Commercial lenders look first at the property’s ability to generate profit and then at the individual borrower/sponsor’s ability to pay back the loan
- Banker is concerned about getting their money back
- Commercial lenders look at income, expenses, net operating income, the business plan, the quality of the asset, deferred maintenance
- Interested in what the deal or value play is (i.e. upgrade, raise rental rates, new management)
- Finally, they look at the sponsorship/sponsorship team’s:
- Net worth
- Liquidity
- Track record/experience
- Paul said the main things he looks at are:
- Liquidity, first, (cash in your borrowers name solely)
- Net worth, second
- And then the Business Plan, pro forma and your ability to execute the plan
Properties are not just ATM machines
- A commercisal property is not just an ATM you buy and sit back to wait for the cash flow
- They are big believers in investing cash in the property from the beginning
- You need to invest money in the asset when you buy it in order to build value and perpetuate the asset
- Investment properties are like human beings in that they require regular, proper upkeep and maintenance (good food, nutrition, medical care) to make for a healthy asset (body)
Fannie Mae/Freddie Mac Loans
- Biggest government based lenders in the multifamily space
- They look for stabilized properties and experienced borrowers (previous multifamily experience)
- Would not invest in properties needing a lot of construction/renovation, that has a higher vacancy rate, or needs new management. A local bank would likely be more interested in those types of assets
How Their “Typical” Deal Develops
- Usually it’s a syndication deal
- Syndicate your equity
- The lead person identifies the property, secures it, gets it under contract, raises money with friends and family (10 at $100K each)
- The KP (key principal) or loan guarantor must have net worth equal to or greater than the loan amount. If the KP doesn’t have that, he can get others, who, together, meet the net worth requirement
Income Approach to Determine Value
- The way most multifamily bankers look at the deal
- Based on the net operating income (NOI) of the property
- NOI equals gross income minus expenses
- NOI is the key indicator of the value of the property
- Then the CAP rate, which is determined by the market, sales of similar properties in the area (In Texas, CAP rate may range between 5-7)
- NOI divided by the CAP rate equals the value of the property
- If you can increase the NOI – you increase the value of the property
- Market comps are not important for the deal
Common Trouble Issues
- Buying in high crime or lower socio-economic areas
- Not putting capital in the deal up front, in escrow account
- Poor management
- People who had old floating rate loans in down economy that had short maturity date
Advice for People with Small Multis Seeking to Upgrade to 100 plus Units
- Build your team out first – make a case for your credibility
- Get educated on large apartment complexes
- Pay for a “hands on” mentor
- Education firms they recommend
- Houston-based “Lifestyles Unlimited”
- Brad Sumrock
- REI meet-ups
- Talk to mortgage broker to assess your “financeability”
- Listing agent is going to ask how you are going to finance the purchase and you must be prepared with the “right” answer. The main questions they will have are:
- Where’s your money coming from
- Where’s your equity
- Where’s your debt
- Interview good third party management team. A good management team adds credibility to your team
- You need an experienced person on your team who has multifamily experience, who does a thorough due diligence on the property
What Key Things the Banker Needs to See in First 5 Minutes
- Strong personal financial statement
- Their knowledge and experience
- Network of liquidity
- Good Plan
- Strong team
Old Capital’s Approach
- Sees 99% of their clients
- Wants to get to know the client
- Does walk through of property with clients
- Meet with property management company
- Put transaction together with pro formas
- Does more apartment lending than any lender in the Southwest
Thoughts on Increasing Interest Rates
- Usually takes a while to hit the market
- There’s a certain degree of uncertainty
- Transaction volume may slow because it affects buyer returns
- Volatility will affect sales volume
Texas Real Estate Markets
- Four major metros in Texas
- Dallas/Fort Worth – Largest metro, great growth and diversity
- Austin – High flyer, a lot of growth, population exploded
- San Antonio – slow and steady with gradual growth
- Houston – Oil prices hurting so it’s in flux right now, office markets not good
- Midland/Odessa and west Texas not doing so well
- Secondary and Tertiary Markets
- Paul likes these markets
- Not as much supply
- Older properties from 60s-70s
How You Can Reach Michael and Paul
- Website: oldcapitallending.com and oldcapitalpodcast.com
- Phone: 817-488-0440
- Listen to the Old Capital Podcast, hosted by Michael and Paul
Get a Free Information-Packed “Fundamentals of Multifamily Financing” Tips
- Free giveaway: “Fundamentals of Multifamily Financing” 15-page document, pack-filled with everything you need to know about getting a multifamily loan
- To get this valuable free document, write to info@oldcapitallending.com.
- Besides the special report you’ll also receive their newsletter free of cost
Until our next podcast, keep moving forward and God bless!
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