We’re doing a different kind of deal analysis today—a commercial deal analysis that William Foy and Marcus Davis of Spearhead Commercial Capital put together.
If you listened to our previous episode with them, you’ll recall they talked about an investor client who had 28 single family residences with 28 separate loans. They helped him restructure these loans, which enabled him to take out cash and invest in a multifamily property.
They walked us through how they did it and what it means for their client’s portfolio.
- Listen to the podcast “#358: Consolidating 28 Loans to Invest in a 56 Unit Multifamily Property” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
This client actually reached out to William and Marcus after hearing their episode on our Multifamily Mentors Show. He’s a home builder by trade who regularly works with local lending institutions to fund his custom home builds. Between his business and real estate investing loans, he’d reached his limit with these institutions. He wanted help unlocking equity from his portfolio.
His real estate investing portfolio consisted of 28 single family homes he’d built on an old mobile home park. Basically, he built a small community of homes and rented them out. Since they generated a lot of cashflow, he wanted to hold onto them. The problem was each property had its own loan and he’d reached his lending limit with the banks.
In order to continue his day job of custom home building, he needed to free up his lending limit with these institutions. While he had a good relationship with these local lenders, they were capped at how much they could lend him. They were constrained by evaluating the properties only on their loan to cost and not the properties’ current loan to value amount.
The total loan to cost value of the properties was $3.5M, but his actual cost to build was much lower. Marcus and William connected the client with a commercial lender who got market appraisals for the properties as completed and stabilized. These appraisals came in at $3.9M, about half a million higher than the loan to cost amount.
The client had two options for his refinance. The first was a 10-year fixed rate loan with 30-year amortization with P&I payments. This meant he would be paying both principal and interest. His second option was also a 10-year loan, but he would only be paying interest and not the principal. The difference between the two options was that with the first one, he’d be paying $163K annually, vs only $50K with the second option. Because his main priority was cashflow, he took the second option.
They paid off his original loan of $2.1MM and got a new loan for $2.7MM. He was able to pull out $670K that he used to purchase a multifamily property.
How Refinancing Helps Personally and Professionally
By taking the loans off of his local lending institutions’ balance sheets, he freed up his lending limit with them to continue his day job. The local banks were happy to see the note reduced because smaller banks like those only have so much money per person that they’re comfortable lending out. By reducing the loan, they were able to increase their business with him.
His new loan is a nonrecourse loan, meaning that it won’t show up on his personal credit report. In doing so, he reduces his liability and it’s easier to underwrite him as an individual with income. This helped him qualify for his new multifamily property.
Moving into a Multifamily Property
Thanks to his cash out refinance, he was able to purchase a 56-unit multifamily property. This purchase was structured with a seller carry note, meaning the seller is on the hook for a portion of the property until it’s stabilized. Once he stabilizes the new property, he can do another refinance with permanent financing. He has the potential to get another non-recourse loan with a 10-year note, but he’ll weigh his options at that time.
Connect with Spearhead Capital
If you have any questions about commercial lending or are in a similar situation as this client, reach out to William and Marcus. Click here for their preapproval process, or you can email them at firstname.lastname@example.org.
Be sure to check out their newly created YouTube page, too.