Have you ever gotten a multifamily/commercial loan and had the lender come back at the last minute and wack your loan dollars?
Chances are if you own even a few properties this has already happened to you.
To help avoid this happening in the future, let’s look into how lenders analyze properties and get some tips on how to get your property in a position to obtain the maximum loan dollars.
The loan amount for any type of commercial or 5+ unit income producing property is qualified based on the properties cash FLOW. So even if you have tons of equity in your property, you may not have access to that equity unless the cashflow supports the loan amount you are requesting. That being said, lenders use certain guidelines when underwriting loans. For example, you may self-manage your building though a lender is going to include a management fee in their underwriting that would be typical for a building of that size. Additionally, your building may be 100% occupied but a lender is going to apply a vacancy factor based on the average vacancy in the area in which your building is located.
However, there are ways to increase your loan dollars so before going to a lender it is always smart to run some analysis on your financials prior to submitting. This is where a mortgage broker can really add value. Since this is what we do all day, every day, we know what lenders are looking for. We know how to package your deal and advise you on how to mitigate potential hurdles or issues. So, here are some tips on maximizing your loan dollars.
1. Analyze your expenses.
As a real estate owner, I like to do this every year to make sure we are not missing out on making the most out of our investment. Take a look at your recurring expenses to see where you can possibly save. Call a few trash companies to see if you can negotiate a better deal. Do the same with landscaping and pest control. Call your insurance broker or call a few brokers for quotes on insurance to see if you can save. Be sure to let your broker or lender know if you were able to reduce any of the expenses so we can use the correct figures in our analysis.
2. Analyze your income
Have you done any recent rent increases? If not, you may want to consider doing them. First talk to your broker (we can advise you on how best to do this, a lender won’t typically be a good source for this) to make sure that it won’t adversely affect you. For example, too large of an increase may cause significant turnover aka significant vacancy which could be problematic. But done right, we have guided many clients to maximize loan dollars. Another way to increase income is to bill back utilities (also referred to as RUBS). Be sure you are following the rules on this as some states have laws on what can be billed back. Many owners have begun billing back water, sewer and trash. Not only can this increase loan dollars but it helps you share the burden of rising utility costs and encourages residents to be more conscious of usage. You do not need to install individual meters! There are cost effective ways to do this but that is for another post.
3. Identify any one-time expenses.
When we analyze a property, we are looking at recurring expenses for the purpose of determining the loan amount. Replacements can be backed out – this includes obvious things like painting the building, replacing windows/doors, new roof to some of the not so obvious things like replacing a water heater, AC unit, flooring, appliances, etc. Be sure to notate any replacements included in your financials.
4. Property condition.
This one always gets me – I’ve done my fair share of loans on properties with deferred maintenance, that have trash everywhere or just overall look downright dirty. Remember, your property is COLLATERAL for the loan. No lender wants to see that an owner couldn’t care less about keeping up their property which ultimately jeopardizes their collateral. When you are having guests over, do you tidy up (I’m hoping the answer is yes!)? Well, when you are going to get a loan, we drive the property before giving a term sheet! Then we schedule an appraisal where we more thoroughly inspect the property. If a lender sees your property isn’t being maintained, they may decide they do not want to lend on it and if they do, they may require you to make improvements before closing. I always advise clients to make their property look clean and well-kept beforehand to avoid the lender nitpicking your property.
So there you have it. Even if you are getting the loan you need this is a good exercise to help you make the most of your investment.