Board Topic: financing my 1st property
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financing my 1st property

Posted by: sandeja16 Nov 2 2004, 11:04 AM
I am in the process of purchasing my first apartment complex. I am young but I have a backer that is willing to lend me money that I wish to leverage as downpayments for several apartment complexes. However due to my lack of credit history I don't know if I will be able to obtain financing at a desirable rate for the remanding balances. For instance, I am looking at a 40 unit complex for 3mill. I would like to use his money for 25% down paying him back at 6% but how can I finance the remaining balance. Do I need to set up a bank account with both of our names on it to show the down payment amount in my name?? Should I consider setting up my first property as a partnership?? What are my options. I know I have a great opportuinty here but I don't know what angle to take.

Posted by: Rick Nov 2 2004, 11:30 AM
Hi there. In my line of work I do not look at construction / real estate development loans because they do not fit my book. However, I do see many proposals that are structured silimar to this. Not wanting to be the voice of doom here, but if I was looking at a proposal that had borrowed 'equity' I would evaluate the entire transaction as debt (i.e. 100% financing) and would likely not have a favourable response. Essentially you are taking no risk in this transaction.

Now I am certain that there is an accountant out there who would propose that you should form a partnership, and return the equity stake to your partner over time by way of a dividend with a defined payout rate, but I and I'm sure most other credit folks would restrict the repayment of shareholder loans and or dividends until I received my $$ first.

Nothing beats unencumbered equity to getting a deal through.

Just my thoughts.

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Posted by: loanuniverse Nov 2 2004, 02:06 PM
As a lenderís analyst, I would much rather see equity rather than additional debt.

Believe it or not there is a possibility that a new analyst might be so concentrated on the specifics of financing the apartment building that the debt service for the private investorís debt might be overlooked. However, it is more likely that the debt will be counted against the rental income of the property and make the deal undoable due to inadequate debt service coverage.

Rick is right about his comments on subordination, that is very common in the corporate side as a way to alleviate lack of adequate net worth or high leverage. In the case of commercial real estate, you are safe from a capitalization problem with the mortgage lien and a loan-to-value ratio.

I would try to bring in the backer as an equity partner, and forming an entity to hold the real estate sounds like a sensible thing to do.

Take a look at my sensitivity analysis article in this site, it has a link to a spreadsheet where you can input the debt service of both loans and see if the property can repay.

Good luck
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