Countless articles read, scores of conversations, dozens of books, and oneMBA compare nothing to what we have learned through experience. You guessed it. I’m talking about financing your real estate deals! It’s easy to assume there are limited options when it comes to financing real estate deals, yet experience has taught us that creativity is the only limit.
In our latest deal, a portfolio in Salt LakeCity, each building is separated into individual parcels, presenting us with the option to create individual loans. We saw this option as an opportunity that would allow us to refinance each building once the remodel was complete and rent was stable with a new tenant. It all seemed so straightforward…
DSCR IS THE NET OPERATING INCOME DIVIDED BY DEBT SERVICE
Appraisals were ordered and the lender’s underwriters had their target numbers set. Commercial lending is not restricted by conventional Fannie and Freddie guidelines and the underwriting process is much more in depth: appraisals, phase 1 environmental studies, market rent study and buyer experience level are all analyzed. A few weeks later, our lender revealed that although the buildings appraised for the agreed purchase price, the current rents in place did not cover their required DSCR of 1.25X. The debt service coverage ratio is the net operating income divided by debt service.
To make this deal happen, it was time to get creative. Since the current rents did not reach a DSCR of 1.25X, we searched for more options: (1) increase the downpayment to keep separate loans or (2)bundle all properties together to reach1.25X.
Assuming a strong cash flow, investors win by putting as little down into a deal as possible, so we opted to bundle the properties together. Fortunately, after further working with the lender, we are still able to refinance each property into individual loans upon completion of there model.
