10/13/2020
A brief overview of Fix and Flip (FNF) borrowing versus borrowing for multi-family.
I've been involved in investment real estate for a very long time, and never have I witnessed so many successful operators who have put money and sweat equity into purchasing, improving, and flipping houses. I could not be happier for them! Real Estate entrepreneurs for sure.
Over the past year, we have received dozens of calls from borrowers whose business is SFR fix and flip but now are seeking financing for a larger multi-family or commercial properties. Here are some observations that can be helpful when it comes to financing a multi-family or commercial property after a successful fix and flip career.
1. Many FNF entrepreneurs are accustomed to using hard money lenders whose underwriting is heavily dependent upon valuation models that are very straightforward. A standard ‘sold' or ‘for rent' comp matrix, along with rehab costs, are the main drivers for establishing ARV. If the purchase price plus rehab and carrying costs is less than the after rehab value, there is profit. How much spread is different for each FNF borrower.
2. Hard money lenders charge anywhere from a coupon of 7 to 14% with anywhere from 2 to 6 points. However, they are willing to close fast, be very flexible about the borrower's credit history and, more than willing to take possession of the property should the borrower default.
So, looking at #1 and #2, let's compare an SFR fix and flip lender with a more traditional lender on a larger commercial or multi-family property.
A banker wants to see a borrower has the experience and enough liquidity to pull off a multi-family or commercial renovation.
Second, if buying a stabilized property, an FNF needs enough cash for payment of 6 months of debt service and a net worth equal to the size of the loan.
Third, an FNF is accustomed to hard-money high leverage.
However, what an FNF soon learns is that if they have the liquidity and even the net worth, the best they may be able to do is 80% LTV on a new purchase for a stabilized property.
What the FNF is unprepared for is the extensive underwriting and diligence that goes into getting a loan from a bank or agency debt.
Fourth, a traditional lender does not want to own the property. A hard money lender is happy to lend money at high rates with the option of taking possession should the borrower default.
Banks want their money back and, in the meantime, earn a spread over what they pay for the funds. They do not want the hassle, headache, or headline risk of taking back properties. It's not their business. So naturally, they look at every potential downside before they put out any loans. They do their diligence and it can take 60 to 90 days to fund.
Fifth, often an FNF wants to refinance all their properties under one blanket loan, take the proceeds and buy a commercial property. Most banks avoid cross collateralizing several assets. The time and cost to accomplish this is unappetizing to most banks. So, FNF should plan their exit which may not include the availability of a blanket loan.
