Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.
Hey, welcome back. What’s going on? Thanks for joining me on Accelerated Investor. And today I wanted to take a question from one of our members. His name is Paul Evans and he came to me inside of our Accelerated Investor Facebook group and said, Hey Josh, can you jump on a podcast and explain the different kinds of funding options that are out there for multi-family deals? And so what I thought I’d do is explain the difference between bridge financing or acquisition financing versus permanent financing and help everybody understand some of the ways that we can even help you at FreelandLending.com and through our coaching company, through JoshCantwellCoaching.com to help you better understand these options, structure deals, get funding, and get the mentorship and coaching that you need. So Paul, this one’s for you.
So let’s talk first about acquisition. Many of the best apartment deals that we find for ourselves that we buy, that we joint venture on or that we fund for other investors often are deals that need rehab, need repair, need to be stabilized. So we’ll often find deals that are great deals because they need work because they need to be stabilized much like a rehab. If you think about a single family property that you’re going to buy, fix and rent or buy, fix and flip apartments are no different. It could be a six unit, it could be a 600 unit, it could be a 60 unit, doesn’t matter. It’s the same idea. The term that you’re going to hear, probably the most overused term in all of commercial is the term value add. It’s probably the most overused term because everybody says value add to make you think like it’s a deal where you could add value and create equity, create profit. So a lot of people talk about value add investing.
So if you think about an apartment deal, let’s take a deal that we’re about to close on. We’re about to close on a 204 unit down in Macon, Georgia. And this opportunity is a value add deal for several reasons. So one, we have a longterm owner who wants to sell it, that does not want to make any more improvements. You have rents that are low, you have deferred maintenance that’s stacked up from roofs to windows to landscaping to parking, lots to landscaping on the outside. And then the interiors, the common spaces, and then the interiors of the units. They all could use updated to be, you know, modern 2019, 2020 type of, you know, look, feel and finishes. A lot of these units are older, they’re boring, they’re white, they’re institutional, they’re beat up and their owner just doesn’t have the money or doesn’t really care that much anymore to make the improvements. So when you hear the term value add, it typically means that either there’s bad management rents are low, or the units themselves or the buildings themselves need to be improved.
And if you replace those things, if you replace management, if you improve the units, improve the exterior’s and raise the rents, then you have an opportunity to increase the net operating income and thus increase the value of the building. So that’s what we’re looking for. If you’re looking for stabilized apartment deals that are already 95% 98% occupied and they’re over $2 million or more, you can typically get a, you know, a permanent financing loan right out of the gate, 30 year, 25 year, 30 year amortization, and you can have a stabilized financing right away. The problem with that is that you have to find 20% or 25% down of cash or your investors cash that’s going to go in that deal and stay in that deal for the long haul, probably going to be in that deal for the next 5, 7, 10 years until the building is sold.
So that’s what’s known as traditional syndication. Traditional syndication, you have the general partner who finds the deal, who’s operating the deal, who’s managing the asset. The general partner maybe owns 20% or 30% of the deal. And has to give up 70% or 80% of the deal to the limited partners who are putting up the money for the down payment. And when the deal is stable, you can get financing, traditionally from a commercial lender, commercial broker, that financing is going to be non-recourse. So which means you’re not personally guaranteeing it. They’re lending based on the asset their lending based on the net operating income and you personally don’t have to guarantee the loan, you know, putting your house and your family and your kids college education and your retirement at risk. And so if the deal is stabilized, those are some of the benefits of getting stabilized financing with no personal guarantee.
My friend Chris Litzler that works for Marcus and Millichap, does that type of financing for larger deals, $2 million and up permanent financing. If you have a deal that’s over 90% occupied for the last 90 days, that makes sense? If it’s over $2 million, 90% occupied for the last 90 days, you can get stabilized financing. You’re probably looking at paying one point, maybe another 25 bips for a processing fee. And right now the rate is around 4% it’s extremely low for commercial non-recourse stabilized apartment deals, 4% we just closed the deal. We closed a 492 unit deal a couple, maybe two months ago, and we got 3.85% financing when we bought it, right? It was already pretty stable, amazing. If you’re looking at longterm financing, you’re going to be somewhere around fours at the moment. It’s obviously subject to change. So that’s the type of financing your going to get what traditional syndication, you’re going to have to come up with the 20% to 25% down through private investors.
They’re limited partners and you know the building’s going to have to be 90% occupied for 90 days and you know, non-recourse, it’s pretty vanilla actually. That’s how a lot of apartment deals are done. Now the exciting part is to buy buildings that need traditional value add, not traditional syndication stabilize, but value add, meaning the properties again, have deferred maintenance. They need better management, they need the rents bumped, the units need improved. And by doing that you can increase the rents and then increase the net operating income. That typically lends itself to a loan that’s a bridge loan. You’re typically looking at a bridge loan between 18 months to maybe 36 months, could be as long as five years. That bridge financing is essentially just like it’s described. It’s a bridge between your purchase and acquisition to bridge that deal until it’s stable and then refinance into permanent financing.
And so we love value at apartments. We buy them. I own over 2,200 units of value at apartments. We’re closing on another 200 units in two weeks. And we also lend on these bridge loans. Our sweet spot is in that half a million to $5 million range for these bridge loans. So to give an example. I was just looking at a case study that we put together for two of our borrowers, Chris and Brian, they were able to acquire a six unit. So let’s just take a small six unit. They acquired a six unit for $195,000. They needed $145,000 in repairs and renovations. So there are going to be all in for around $330,000 $340,000. Then that little six unit, their three bed, one bath each. They’re going to fill those up, they’re going to be able to rent those out.
And after they’re all full, it’s going to produce about $70,000 a year in net operating income and align after expenses. So you take that based on maybe an eight cap, you know, maybe a nine cap. Okay, so take your calculator and divide, let’s see, $70,000 divided by 0.08. It puts the value of the building and about $850,000 or $875,000 so let’s just call it somewhere in the eights. Okay, so they’re all in for $340,000 it’s going to be worth $850,000 now they take the bridge loan, which they’re basically paying interest only on the bridge loan. Now, the smaller the building, the more you’re going to pay. Meaning if it’s a small building, you might pay two points and 10% interest or two points and 8% 9% interest on a smaller building. That’s going to be a bridge loan for the next 18 to 36 months.
That’s going to allow you to pay interest only payments. The bridge loans typically also fund purchase and rehab and soft costs. It’s going to be about 80% about 80% typically of your loan to cost. So in this case, Brian and Chris are all in for $340,000 and let’s say they add another $50,000 in soft costs, meaning appraisals and surveys and closing costs. Let’s say they’re all in for $390,000 well, the funding that we provided was 80% of the $390,000 okay. So again, let me grab my calculator. $390,000 times point eight is $312,000 they got to put down $78,000 as a down payment or they can raise that capital from a private lender. Okay, so all in for $390,000 that got funded for $312,000 by me and my company and my team and they put down $78,000 but when the building is stabilized be worth $850,000 so the goal is buy the building interest only do the improvements do the rehab.
The typically rehab is done through a draw, so they have to do, let’s say $50,000 of improvements with their own money. Then they get reimbursed through a construction draw for that $50,000 they need to do another $50,000 of rehab, get reimbursed then another $50,000 of rehab with their own money. Then they get reimbursed and then now the building is, is occupancy ready? They move in the six tenants, they let that season for 90 days at more than 90% occupancy. Now they can go and refinance into permanent financing. Now in this case, because the building’s worth $850,000 let’s say they get a new loan at let’s say 80% per, let’s say 70% permanent financing, so let’s say $850,000 times 0.7 so they get a new loan for basically $600,000 that’s going to leave them $250,000 of equity. But remember they’re all in for about $400,000 they got a new loan for $600,000 so they’re getting $200,000 of tax free refinance proceeds that they’re pulling out of the deal and they still have $250,000 of equity or profit, right?
So now they are refinancing a permanent financing. Now because this deal is less than $2 million, Chris and Brian are going to have to permanently guarantee that loan because it’s only $600,000 loan, okay. Now if you want to take all these numbers I just gave you, right all in for purchase amount of a purchase and rehab of $340,000 plus soft costs. So they’re all in for three 90 building appraises at $850,000 and they get a new loan on it for $600,000 grand. Take all those numbers and just add a zero. Okay, just add a zero. So instead of being all in for $390,000 now they’re all in for 3.9 million. They get a new loan on it instead of $600,000 it’s $6 million instead of being worth $850,000 now it’s worth $8.5 million. Now with those numbers being that big, now they can refinance into permanent financing and they can get a non-recourse permanent financing loan for 30 year amortization with Fannie Mae or Freddie Mac or some other large institution, some other large agency.
So that’s the only difference. So what we love to see, what we love to personally do and what we love to personally lend on is value add apartments. Where there’s a bridge financing for can be 18 to 36 months, could be as long as five years. Actually this deal we’re closing in Macon, Georgia, it’s a three year bridge alone with two one year extensions, so one year extension then another one year extension, so five total years. We could be into it for, we’re planning on being in that thing for about 12 to 18 months, but we could go as long as five years. Buy it, bridge loan recruit capital from private investors for the 20% down. Give them a piece of the deal, stabilize the building, get it occupancy ready, move people in, stabilize it for 90% occupancy for 90 days, then refinance into permanent financing and you’re good to go just like that.
All right, so that’s the difference between bridge financing. Again, bridge, think of bridge as it’s bridging from the purchase to the point that it stabilize bridge financing. Typically, again, two points in 8% to 10% if you’re talking about a smaller deal could be one or two points and maybe 6% and a half to 7% on a really large deal, okay. That bridge financing, you’re going to have to sign a personal guarantee. The goal is now get at least up, get it occupied, refinance as soon as you can into an agency loan with nonrecourse financing, 30 year amortization based on the asset. All right, so that’s the difference between bridge financing and permanent financing for multi-family properties.
You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.
If you’re new to multi-family property investing, or if you’ve ever considered branching out and trying a multi-family deal, you probably have questions about how to finance these types of properties.
So, to help you out, Josh dives into the details on the different types of financing available for multi-family investing. He explains the difference between bridge financing (also know as acquisition financing) versus permanent financing.
Before you pursue any property deal, it’s imperative to do your research, learn the various ways to structure deals, understand your best sources for funds, and get the mentorship and coaching needed to make the best decisions for your investing business.
In this podcast, Josh explains how his financing company, Freeland Lending, and his coaching firm, Josh Cantwell Coaching, are two helpful resources for real estate investors who are looking for additional guidance and financing options. Because – regardless of where you receive your funding (private investors, institutionalized lenders, or boutique lenders) – you need to be informed of your options.
Josh also gives a few examples of multi-family property deals that he and some of his joint venture partners have recently worked on… to give you an idea of specific numbers and how he structures his deals.
- Why the term “value-add” is completely overused in multi-family real estate investing
- An explanation of traditional syndication – and the pros and cons related to this method
- How bridge financing can be a viable funding method
- The costs that bridge loans typically cover
- An example of refinancing into permanent financing with an institutionalized lender like Freddie Mac or Fannie Mae