#187: 9 Questions I Get From My Banker and Lender When Funding Apartment

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So hey there, guys, welcome back to Accelerated Investor. I am so excited that you could join me today, as always, on this podcast, training and video training series. I really, really enjoy doing these live calls and these recording these podcasts immediately after something big happens in my business. And what I love about it is I love that I had some meetings this morning. I was at one of my apartment buildings, had a meeting with one of my lenders and bankers this morning and super interested to tell you about what actually happened. And so this morning, I was called by my commercial broker. He said, hey, one of your lenders, that’s going to fund your next deal, wants to meet you face to face, said, OK, no problem. I haven’t really met any of my other lenders in the past. 

And Fannie Mae and Freddie Mac, when they fund a deal, they don’t ever ask to meet us face to face. But the lender was in town. It’s from a local regional bank and one of the vice presidents was in town in Cleveland and said, hey, you know, I’d like to meet these guys if we’re going to fund their next deal. It’s a 12-million-dollar apartment building that we’re buying. It’s going to be worth 19 million when we’re done with it. And he said, I just want one of our requirements is we want to meet all of our borrowers face to face. I said, OK, great, let’s do it. So we met this morning, me and my partner Glen, our broker and the lender, and we thought it was going to be more of a meet and greet, which was fantastic. But the gentleman from the bank started firing away with some great questions. 

And I thought it was it was really good dialog back and forth. And I thought you’d like to hear some of the questions that we got asked. And also my responses to those questions I thought would be really good for you to hear exactly what we get asked, especially on a 12 million dollar purchase. So there were nine questions that I could remember that my lender asked me before approving the funding for this apartment deal. The good news is at the end of the conversation, he turned to me and Glenn and our broker and said, well, when do you guys want to close? 

Basically saying, hey, look, I think this is going to get funded. What day do you want to close? So that was good. Gave us the warm and fuzzy when we were done. So here’s the nine questions I got asked. Question number one, tell me about your background. Number two, how did you decide to buy apartments in those markets? Number three, why did you buy those properties in the past? Number four, what do you need to do to raise the rents? Fifty to one hundred dollars. Number five, what do you need to do to raise the rents one hundred and fifty to two hundred and fifty dollars. Number six, what’s the average cost when you turn a unit? 

Number seven, how often do you take draws? Number eight, tell me about your management team. And number nine, do you self-manage or use a third party? OK, those are some of the questions, the nine questions that I remember getting asked just this morning. And here’s how I answered them. OK, so our broker sort of teed up the call or teed up. It was a face-to-face meeting in the boardroom at the broker’s office. And he basically kind of did the warm and fuzzy introductions and said it kind of threw it over to me. The first question was, Josh, well, why don’t you tell? 

I’m not going to give the guy’s name, the lender who was sitting across from us. But why don’t you tell him about your background? And so I kind of went all the way back. I said we started in residential. We pivoted over to raising capital and doing private lending. We then doing private lending and a lot of rehabs and rentals. Then we started doing private lending for other people. Then we started brokering loans, then we started investing in apartments. And that brings us full circle to today. Then we had a conversation about the residential market. I told them how we were selling all of our residential properties, anything really under twenty units. But we’re selling all of our duplexes, all of our quads, all of our single-family rentals. 

And we started talking a little bit about covid and how covid. You know, there’s just not much inventory that’s on the market, people don’t want to move in the middle of a pandemic. And so but there are a lot of buyers looking to buy, even if it’s in the middle of a pandemic. And so we had a conversation around residential and we kind of went back and forth about why we’re selling all of our residential. 

And I told them, look, I’m predicting that in 2022, there is going to be a pretty significant increase in foreclosures because an increase in delinquency, there’s going to be an increase in the number of properties going through the foreclosure pipeline. Right now, there’s a foreclosure moratorium. And so the number of foreclosures that are being processed is down. Eighty five percent. Well, in my area, if there’s normally, let’s say, four to five hundred foreclosures that are processed every month, which is what happens in the Cleveland, Akron, Canton markets, imagine in December of last year, instead of processing five hundred, you only processed seventy-five. 

So you have four hundred and twenty five that get backlogged. Then in January same thing at four hundred twenty-five more that get backlogged. February you have four hundred twenty-five more they get backlogged. March four hundred twenty-five more that get backlogged. So then when the foreclosure moratorium ends, let’s say it’s in July. You’re going to process all your normal foreclosures, plus you’re going to have a bunch of these hundreds, thousands of foreclosures that are backlogged for the last year they had the foreclosure moratorium. 

So what a little discussion around that. And I thought that was healthy for the banker to know my past in residential and my focus now that I was selling all my residential, that he knew that I was 100 percent in on commercial apartments. And then we talked a little bit about how we co-GPd, co you know, general partner co-syndicated, co-sponsored deals in the south down in Macon, Georgia. Albany, Georgia. Mobile, Alabama. Lawton, Oklahoma. And he said, question number two, how did you decide on those markets? And my answer to him was we didn’t really decide on those markets. We decided on the deal. And what I mean by that is, first of all, we were doing deals with people that we knew, people that we trusted, people that were friends of ours, and they were getting into those markets. 

But we didn’t pick those markets because they were in the path of progress. We didn’t pick those markets because they were, you know, in an area where there was going to be growth. We didn’t really care about that. What we cared about was the fact that we were buying them, much like buying a residential rehab property. We bought them because we knew that we were getting them at about 60 cents on the dollar. And when you can get a property at 60 cents on the dollar then and you know that you could put money into it, then you know that you’re in good shape. 

You know that you can buy it cheap enough and just do the capital improvements. You can force the appreciation. And when you force the appreciation, then you can refinance or recapitalize the deal. So we didn’t really decide on an area. We decided on deals, these deals that we could buy for twenty to twenty-two to twenty-five thousand a door. 

And since we’re able to buy them very cheaply, put about ten thousand dollars into them, we were able to now sell them at sixty thousand a door. So all in four thirty, thirty five adore selling them for sixty thousand a door. We thought was an incredible deal. So it was more about the deal and less on the market. Then we started having a conversation about the local Cleveland market and said, look, we’re focused on northeast Ohio, we’re focused on Cleveland, Akron, Canton, we’re focused on Columbus. We’re focused on these areas that are within two hours of where we live because we know the markets. We grew up in this area. We can self-manage these deals. We can also bring in third party management if we need to. We know the cost of construction. We know the cost of labor. And again, we’re not buying in northeast Ohio and in the Columbus market because we’re in the path of progress. 

Now, in Columbus, you could definitely say that’s a really, really strong growing market. It’s like number seventeen. No, eighteen in the country. It’s growing. It’s fantastic. A lot of Fortune 500 companies, Allstate, State Farm, bunch of insurance companies can’t remember which ones. The Limited, Victoria’s Secret in all that kind of stuff is is down in Columbus, so. The we decided on our market local market, because we know there’s older housing stock and because we know there’s older apartment stock that needs to be modernized. 

So that was answering question number two, why did you decide in those markets? Number three, why did you decide to buy those properties in the past? Sort of already answered this. But again, because there’s older housing stock and there’s older apartment stock, we can buy things where the owner hasn’t been super engaged in ownership either. The guy lives out of town and he owns a property here in Cleveland, but he lives somewhere else. Or the last several apartment deals that we bought were because the owner was 70, 80 years old and. The guy on the property for 20 or 25 years and his depreciation schedule was running out. And so he was gonna have to start paying taxes again when his depreciation schedule runs out. And so we bought those properties because they were there, were ripe for unit turns. They were ripe for modernization in increasing the rents.  

Then we moved on to question number four, he said, well, what do you need to do to raise the rents by 50 to one hundred dollars? So if the rents are below market, can you just get organic natural rent bumps? And my answer was yes. We try to look for things where maybe the owner hasn’t raised the rents for the last three to five years and we could just bump the rents by 50 bucks. Seventy-five bucks. And we’re in B class areas with B class tenants where they’re not going to really hurt by paying a little bit more. So we said, look, in order to raise the rents 50 to seventy five to one hundred bucks, the resident has to have a better experience. They have to have a better experience, meaning you go from manual management to using software, you go from writing checks and getting cash deposits and getting money orders to paying your rent online. You go from not having upgraded common spaces, not having nice landscaped common spaces outside, maybe not having a dog park or not having a jungle gym for the kids. Doing basic, small things to the experience allows us to raise the rents by 70, 50 to 75 to a hundred bucks, even if we don’t do a unit turn. 

So then we moved on. So the answer to the question before was. The experience, right, and a lot of times where we’re buying properties that haven’t had rent raises in three to five years, they’re ripe for a rent raise no matter what, and if we bundle that in with a better client experience, we can easily raise the rents. Number five, what do you need to do to raise the rent? One hundred fifty to fifty dollars. Now, we got into unit terms and we said, look, a lot of the properties that we’re buying haven’t been modernized for the last 10 or 20 years. 

Some of them have the old yellow subway tile in the bathrooms. A lot of them have maybe older cabinets haven’t been painted. They don’t have they still have old carpet, they don’t have LVP. They don’t have a new toilet or a new vanity or a new vanity mirror or new medicine cabinet or a new tub surround. You know, they have the old yellow or old white subway tile in the bathroom. 

I said, look, if we want to raise the rents by 150 to 200 dollars, we’ve got to modernize the unit and we’ve got to harden the unit. And so the rule of thumb here is that we spend about ten dollars for every dollar of square footage that we have. So if we have a seven hundred square foot apartment building, we’re going to spend about seven thousand bucks to harden the asset to a full turn of the unit, put in new flooring, new paint, new trim, new bathroom, new kitchen, probably paint the cabinets, keep the cabinets because cabinets seem to last forever. Keep the cabinets, paint the cabinets. 

And so that will allow us then to spend on a nine hundred square foot unit, spend nine thousand dollars on a five hundred square foot unit, spend about five thousand dollars hard on the asset, and then raise the rents one hundred fifty to two hundred fifty dollars. And so he liked that. He liked the linear connection between ten dollars a foot in improvements. That equated to one hundred and fifty to two hundred fifty dollars in rent bumps, and then number six, he had asked us, well, what is the average cost for a full unit turned? And I gave them that kind of rule of thumb. Ten bucks. So if you have a thousand square foot, should cost you ten grand. Do a full hard unit turn. OK, so replacing everything except basically the sub floors, the drywall and probably the cabinets. We’re kind of redoing everything. LVP, new trim paint, keeping the cabinets, paint those black matted hardware, butcher block or remnant granite countertops and then new tubs around new low flow toilet, those kinds of things. LVP throughout. 

Number 7 How often do you take draws? And this is something I think he really liked. See, I was a private lender for a long time. We made loans and then we did construction draws well. I hated it when somebody would take like a fifty-thousand-dollar construction draw in their loan and then they would do five thousand dollars’ worth of work and they would want me to come and inspect. And they would want me to give them five thousand dollars, then they would go to another five thousand dollars’ worth of work. I would send out a guy on my team. We’d release another five thousand dollars. I’m like, this is a joke. This is taking way too long. And I said, look, our budget on this property’s going be about a million, million three. 

He said, how often do you take draws? I said twice a year we’ll do a two hundred fifty-thousand-dollar draw. We’ll do another two hundred fifty thousand dollars draw. Every six months, $250,000 draw we take that, we get to two hundred fifty thousand dollars back. Then, six months later, another two hundred thousand dollars draw, we spent five hundred thousand of the six months, another two hundred eighty thousand outdraw. We said seven fifty, another six months, another two hundred thousand draw. We’ve spent a million. And finally the final two hundred fifty thousand draw, we spent a million to fifty and that’s taken us about twenty four to 30 months. He like that because he knew like we had the horsepower to be able to hire our team, have our own capital, spend our own money. 

And he wasn’t going to have to be kind of nickel and dimed with monthly drawers. He also suggested we could do all million at the end. And I said, that’s fine. But if we do it at the end, I don’t even really want it, because if I want to borrow money at 10 percent, let’s say I pay my investors 10 percent preferred return. I spend the million dollars at 10 percent preferred return. Now I’ve got interest on paying on 10 percent preferred return. Then I go to the lender and say, give me the drawer for a million. I pay back my investors at 10 percent, that’s great, but it cost me 10 percent while the money was in play. Now I get the million from the lender and now the cost of funds is only three-point two five percent. That’s great, but. In that scenario, I’ve paid 10 percent for the money, right? 

I’d only rather borrow two hundred fifty thousand and pay 10 percent and then get reimbursed the two fifty, then borrow the two fifty again, get reimbursed for two fifty, borrow the two fifty again, get reimbursed for two fifty. So over a two year period instead of borrowing the million. At 10 percent, it’s going to cost us one hundred thousand dollars, but it’s going to cost us a hundred thousand dollars for two years because going to take us two years to do all the returns, that’s two hundred grand instead I’m only paying 10 percent on two hundred fifty thousand. I’m spending twenty-five thousand and another twenty-five thousand for the second year, and so I’ve spent a total of fifty thousand instead of two hundred in interest. So that’s why we take draws like that. Makes sense. Hope that makes sense. All right. Question number eight was tell me about your management team. So just talked about the mixture between two employees and ten. Ninety-nine employees said, look, we’ve got a group of guys that are on to they get health insurance, they get payroll, they get retirement plan. They show up every day. They work 40 to 50 hours. 

That group is always going to be there. They’re always going to be looking for work. Then we’ve got a group of third-party contractors like Marcus and Sean, another guy named Mark, another guy named Tony and Tony. They come in and they do unit turns and they just jump into a unit. They pack out the entire unit. We pay them a flat rate, a flat rate fee for turning the unit. And then they go on. And if we don’t need them, we don’t pay them. So we’ve got a mixture of two and then also a mixture of ten, ninety nine guys that do capex. 

I explain to our management team our management philosophy, look, when we have five hundred units in an area now, we need a full-time leasing agent that can market and lease out all the units. All right. Each property manager, an experienced property manager, can manage between one hundred and one hundred fifty units. An inexperienced property manager can only manage between 50 and seventy-five units. So we talked about that rule of thumb. He liked all these rules of thumb. And then question number nine, he said, well, do you self-manage or use third party? And I explained to him, we self-manage during the stabilization phase because there’s just too many moving parts. There’s units that need maintenance like leaks, electrical, plumbing, people lock themselves out of their units. So we’ve got to handle the maintenance. But then we’ve also got as we handle the maintenance and we have people that vacate units, we then got to step in and we’ve got to do CapEx, we’ve got to do a unit turn. 

And we’ve got to turn the unit. So during stabilization, we self-manage both maintenance and the capital improvements. Then once the building is stabilized and we we’ll call recapitalize it, that’s a fancy word for refinance it. Then we move possibly to third party management because the building is hardened, stabilized, much easier to negotiate the pricing with a third-party manage and negotiate them down. 

All right, so those are the nine questions there maybe is maybe a few more, but those were the nine sort of important questions that we got asked by our lender and bankers. So when you get ready to get financing for your next department deal or even your next single family rehab or you’re single family loan, be prepared to answer questions like this. Number one, tell me about your background. Number two, how did you decide on this market? Number three, how did you decide on this property? Number four, how do you raise the rents or raise the value in an organic way? 

Number five, how do you raise the rents or raise the value by forcing the appreciation? Number six, what does it cost you to turn this building or this property or this unit number seven? How often do you take draws number eight? Tell me about your management team. And number nine, do you self-manage or use third party and when do you pivot from one to the other? OK, so those are the nine questions I got asked by my lender, my banker, this morning before agreeing to fund one of my apartment buildings. 

It was a great discussion that I had with them, get a lot of respect for the guy. He’s running a very successful bank. And so obviously we wanted to look good, but also was really happy with the discussion. I thought he asked very fair questions. I thought we gave very good responses. I thought we were really prepared and. And I thought it went great, so here we go, will be closing the sucker now based on the last day of March and we’ll own this new two hundred and twenty unit on the 1st of April. I hope you enjoyed this interview and this training. 

Whether you catch it on Facebook live where you can catch it on our podcast, whether you catch it on YouTube, please leave us comments, questions, ratings, reviews. I just love and really need, require your feedback to know that I’m doing a good job. I don’t want to talk to Dead Air. Nobody wants that. So just tell me how I’m doing with a rating. Leave us a review. Leave us a thumbs up. Leave us a comment question. I hope this helps you along your journey to being successful with multifamily apartments. We’ll talk to you soon. Take care. 

You were just listening to the Accelerated Investor podcast with Josh Cantwell. If you enjoyed this episode and learned something new, help us build the A.I. community by leaving a review and five-star rating on our iTunes podcast channel. Also, don’t forget to subscribe so you never miss another episode. To see passive investing opportunities, visit FreelandVentures.com/passive. To start your journey toward the lifestyle you’ve always dreamed of with multifamily apartments, apply for one-on-one coaching with Josh at www.JoshCantwellCoaching.com.

I’m getting ready to close on my most recent acquisition, a $12 million deal, and the lender, a local regional bank, wanted to meet with me. One of their requirements is that they like to meet with all of their borrowers face-to-face. I’ve been on the private lending side of the loans, but I don’t usually meet with my own lenders, so I wanted to give you the rundown on the types of questions you’ll get asked by an institutional lender.

Your lender might ask you questions like:

      1. Tell me about your background.
      2. How did you decide to buy apartments in those markets?
      3. How did you decide on this property?
      4. What do you need to do to raise the rents?
      5. How do you force appreciation?
      6. What’s the average cost when you turn a unit?
      7. How often do you take draws?
      8. Tell me about your management team.
      9. Do you self-manage or use a third party?

We didn’t pick markets like Macon, Georgia or Lawton, Oklahoma because they were in the path of progress. We invested with good partners in those areas who brought us good deals. Listen to how I explained my point-of-view on how I decide on a property, set up a deal, harden the units, and manage my properties.

I was a private lender for a long time, so I understand why you’d want to get to know someone when you’re loaning them a big chunk of change. If you’re looking for a coach to get you to the point where you feel confident talking to a large commercial lender, check out Josh Cantwell Coaching, and let’s talk.

What’s Inside:

  • If you’re going to bump the rents, the tenant has to have a better experience.
  • My rule of thumb for upgrading a unit: we spend 10 dollars for every square foot to harden the unit.
  • My approach to drawing down is based on my own experience as a private lender, but it’s also designed to pay the least amount of interest.
  • How you can feel confident talking to a commercial lender about your latest property.

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