Welcome to Everything About Wealth episode 5, Bridge Capital and Portfolio Loans for Multifamily Properties Part Two.
If you were with us on our last podcast episode, Paul Winterowd reviewed the benefits of using HUD, FHA, Fannie and Freddie Mac loan programs. On this podcast, we continue the conversation with Paul to discuss how investors can use bridge capital to acquire multifamily properties.
Before we get started, let me reintroduce Paul Winterowd for those of you that may have missed episode 4. Paul is a commercial mortgage broker with Bonneville Multifamily Capital. He focuses on providing financing to multifamily properties and specializes in three areas HUD FHA Fannie Mae and Freddie Mac. He also has some Bridge capital and portfolio loan options.
Bridge capital is usually a temporary funding that helps an investor to acquire multifamily until it can get permanent financing. It’s very common for bridge capital to fund some sort of value-add opportunity when a property many not be eligible to get permanent financing due to the condition, needed repairs, or short timeline to acquire the property.
Syndicators will use bridge capital for value-add investments that have large profits in the back end due to the after-repair value of a property. When the investment strategy is relying on profits at the sale, commonly the existing income (cash-flow) will not support the leverage a bank or lender likes to go in upfront into the acquisition. In most cases, it’s due to risk from a non-operating property. Some factors can be a uninhabitable property, high vacancy, low rents, high dollar unit renovations, exterior replacements such as roofs, etc.
The reason why higher leverage is beneficial is to increase returns to the syndicator and investors due to lower amount of capital infusion. For example, if you were funding an acquisition with 80% loan to value ratio versus 60%. In the 80% loan to value option, investors would only have to bring 20% of the capital to acquire a property versus 40% capital in a 60% loan to value loan. Most conventional or a bank loans will probably provide 75%-80% leverage, depending on the property, not including any rehab cost. If a property is in need of rehab costs, it makes a lot of sense to look at a bridge or even a construction loan that will include leverage for both the acquisition of the property and the rehab costs.
A lot of banking institutions will use a construction loan but in the bridge capital space there are a wide array of options. A good way to decide which is the best option for you is to figure out which type of interest rates and leverage is best for the deal in advance. If you want lower rates but are willing to accept less flexibility of the closing schedule, you should look for loans through a conventional bank, Fannie or Freddie Mac. If you're willing to accept the higher rate and want a higher leverage amount that may include rehab costs with less underwriting and flexibility to close, a bridge capital loan may be for you.
Rates for bridge capital loans for good properties in good locations, the loan to value range can be from 60-65% on the low end and max out at about 75% loan to cost. On the high end, bridge capital loan interest rates can range all the way up to 12% or more. I know it seems high but again, someone would be willing to pay those higher rates if you need to close in a week or two or have really rough credit.
Of course, there are certain caveats with bridge capital loans such as paying a lot more fees up front such as points and a deadline to complete the renovation within a certain amount of time. The loans typically run about 12 to 18 months. At the end of the loan, the investor is forced to either sell the property or find another source of permanent financing for the property. You may find some bridge loans that will stretch two or three years but many times those type of loans are not marketed directly to the open market. This is where someone a mortgage broker will have a network of bridge capital lenders, as they market to through mortgage broker channels.
A couple of general rules of thumb, most bridge lenders don’t like to fund properties that are valued for less than a five-million-dollar loan amount. It is possible to find bridge lenders that will do smaller deals, but more common bridge lenders are looking for larger deals to fund. For smaller properties, it may be a better route to look at construction loans through smaller community or local banks that can act like bridge, but with better rates and financing for smaller properties. Again, it just depends on the deal and what terms would be best with the investment.
Let’s move over to portfolio loans with a bunch of single-family properties. For investors who hold a portfolio of ten or more houses and would like to roll all their loans into one loan, what do you recommend for them?
Freddie Mac has experimented with this type of program in the past, but the program seemed to go away just as quickly as it appeared. I'm not exactly sure why it went away, but Paul guesses they just couldn't make it work. For portfolio loans, it's really going to be a better go with private lenders or regional banks to place a portfolio loan. There are many banks and mortgage brokers in the residential space that are originating loans and securitizing them. There are able to work with portfolio better than other lenders because the maintenance of the loans is done in house.
One thing to keep in mind when rolling a portfolio of loans into one loan is the change in terms of the loan. The investor may pay a higher interest rate, have a smaller amortization rate and must put more equity down. Portfolio loans are like commercial loans in the sense paying higher rates due to the loan being considered more of a commercial loan. For example, terms for a portfolio loan may require a 25% equity down payment, 75% loan to value, interest rates around 5%-6% (as of January 2019), and 5-year term which may balloon or reset. Terms will be specific to lenders, but basically the loan is now commercialized. So, you lose some characteristics of the residential loan.
When it comes to deciding which options are best for you in any loans, Paul encouraged investors to take more control of the investments by understanding where you want to be. It will be beneficial for investors to understand their personal financial goals when it comes to the type of return, they desire. Sometimes Paul may receive calls from investors asking what type of rates they can get for them, but there is more than just the rates in a deal. Investors should analyze the deals by looking at profit and loss statements and forming proforma of the deal to understand what type of rates would work with the deal. That way when you call a lender, you can have a better conversation on the deal structure.
Most lenders would prefer investors call with their assumptions on how the deal will operate. Some factors to know before calling a lender is the how long you plan on holding the property, the desire internal rates of return, amount of renovations (if needed), how many partners, how much equity each partner has, etc. There is a tool goal seek in excel that may help with this. Once an investor knows that, an investor will already have an idea of the type of loan terms they need to make the deal work. That way when you call the lender, the lender can tell you quickly, if they are able to get the rates you need. Also, it will help the investor decide on whether they should move forward with the deal. Obviously if the market interest rates are around 5.2%, but you deal requires a 4% than you already know the deal will not work. However, maybe you can get around 4.9%-5.1%. Investors still need to be realistic about their analysis. As Paul says, “It’s a more sophisticated and intelligent approach rather than trying to make terms work for the deal.”
To get a better idea on monthly rates, Paul sends out a monthly rate sheet to investors to get a ball park idea of where interest rates currently are. To get on the email, feel free to send Paul an email at paul@bmfcap.com for more information.
Additionally, Paul recommended reading the Compound Effect by Darren Hardy. The book is more of a personal growth book but it's about establishing the right habits and doing the right things consistently. The book describes how we can have a very significant and exponential effect on our own lives. The book is a short read, around 3 or 4 hours, but a great book nevertheless.
Thanks for joining us on this podcast — we appreciate Paul’s insights. If you’re in need of a mortgage broker, I highly recommend reaching out to Paul Winderowd. The best way to reach Paul is by email at paul@bmfcapital.com. In case you want to give him a shout, his phone number is 801–323–1050 or 813–231–0504. Remember to stay tuned on our next episode with Paul that covers how to use bridge capital financing to buy multifamily properties.
To receive a monthly rate sheet of interest rates currently send Paul an email at paul@bmfcap.com for more information.
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