Ep #181 – Michael Becker has Provided Financing for 5,000+ Units Worth Over $100 Million
Here’s Some of What You Will Learn:
- Michael is a senior director at Old Capital Lending and has been a commercial banker for 15 years.
- Different strategies to find a team and take down a deal.
- The importance of finding a team to help overcome any shortcomings to take down deals.
- The benefits of taking down a deal and returning capital to initial investors.
- The importance of educating yourself in the business to be taken seriously.
- The benefits of building relationships and networking to find deals.
- Different strategies to get on broker’s lists and be sent more deals.
- Different ways to raise capital for deals.
- The importance of building your resume in the business.
- The different types of loans available, including HUD/FHA.
- Ways to help others who have done deals prior to enable you to do your own.
- The importance of having a management company to help with loan approval.
- The key players suggested to be successful in the business.
- The steps to identifying and analyzing a good deal.
- Tips and advice to make it through a downturn successfully.
- The importance of having renovation funds up and working capital up front.
- The importance of professional management and avoid code violations.
- The pros and cons of single family vs multi-family investments.
- The importance of getting started in the business as early as possible.
- The benefits of Supplemental Loan Programs.
- The Importance of Bank and Fannie Mae loans with renovation dollars to rehab property.
- Connect with me on Facebook at Rod Khleif.
- Text Rod to 41411 or visit RodKhleif.com for a FREE copy of my book, “How to Create Lifetime Cash Flow Through Multifamily Properties.”
You can learn more about Michael Becker at:
Watch on YouTube!
Full Transcript Below:
Ep #181- Michael Becker has provided Financing for 5,000+ Units worth over $100 Million
Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif and I am thrilled you’re here. I know you’re gonna enjoy the gentleman we’re interviewing today.
His name is Michael Becker, and Michael has done over 5,000 units, raised over a $100 million. He is a Senior Director over at Old Capital Lending, which is a company that we’re actively working with as well. Michael has been a commercial banker for 15 years.
I’m gonna stop there because I could go on and on. Michael, welcome to the show, buddy.
Michael Becker: Hey, thanks for having me on.
Rod Khleif: Absolutely. I always like to ask how people got started. I think that’s the first question most podcasters ask. I know you started in banking but if you were doing any real estate before then, during then, and then how you got involved in the larger deals.
Michael Becker: Yeah, my background, like you said, I was a banker by profession. That’s how I got into it, I was loaning money. Through that process, I realized I was on the wrong side of virtually every transaction. I was more of a borrower than a lender. I went down and I started doing something about it.
About seven, eight years ago, I think it was 2010, I started doing some single-family homes, like a lot of people thus far has started —- buying some foreclosures out of recession, rehab and then flip them, turn them into long-term rental. I did 16 of those, and then that wasn’t very scalable, and it was very time-intensive.
Every time I did one, I was buying myself a load of job. I don’t want that. At my day job, all I did all day was make loans to people who buy apartment complexes. I realized I have a lot of resources, a lot of information right at my fingertips that I’m supposed to take advantage of. I started going out and do something about it.
About five years ago, I met my now business partner, a guy named Sean Mabarak. He’s working for a broker that’s out of Los Angeles, and I was a banker here in Dallas. Made a loan to one of our clients, that’s how we met. From there, we just started doing some deals. We formed our company that we do syndications out of called SPI Advisory.
We’re here in Dallas. There’s seven of us in our company. Over the last four, five years, we raised a little bit over a hundred million bucks. We’re in a little bit over 5,000 units now. All here in DFW, starting out on the C class phase. Now, we’re doing B to A minus, that’s what I call. So, they kinda like mid-80s, mid-2000 vintage. All looks like light value I could call it.
That’s basically, what we do, I’m still affiliated with Old Capital, work with Paul Peebles and James Eng, who’ve you’ve had on your podcast.
Rod Khleif: Mm-hmm.
Michael Becker: I co-host Old Capital Real Estate Investing Podcast with Paul. I don’t do that much lending anymore. I leave that to James and Paul. I have more than my plate full with our 5,000 units.
Rod Khleif: Yeah, I would say so. By the way, guys, their podcast is awesome. It’s Old Capital Podcast, right?
Michael Becker: Yeah, the Old Capital Real Estate Investing Podcast. On iTunes, and Stitcher, anywhere that they listen to you, they probably can find us as well.
Rod Khleif: Yeah, no question. You guys really dig deep. That’s what I like about your podcast. You get deeper than I’ve done on a lot of my shows.
I’d love to go a little deeper with you today actually. I know that you’ve raised a ton of money. Let’s go back though. Let’s go back to when you first partnered up with… I forgot, was it Sean?
Michael Becker: Sean. That’s right.
Rod Khleif: Yeah, partnered up with Sean. Tell us about the first deal you took down.
Michael Becker: Yeah, the first deal we bought was a 120-unit property, built in mid-70’s in a submarket called Garland. It’s a C class property in a C class neighborhood, essentially. We ended up… Sean at that time was working for a broker out in Beverly Hills. They had a connection to a bunch of equities, and high net worth individuals.
We ended up just having one partner and us, and we just did the deal together. That was how we were able to take it down. I was kind of the local boots on the ground, here on the market, and the money was out at California. What we ended up doing… everyone starts with what they have, Rod, and we really just…
I had the resources of connections, and underwriting, and understanding how to do the deals from being a banker. I just really needed the money. And we’re able to kinda marry that together. Just because I was able to do that, a lot of your listeners are new. They don’t have that in their background, but you start with what you have, and then start building off of it.
That’s really one of the things you need to focus on when you’re starting out is what resources you have, where am I deficient, how do I either partner or find someone to help me overcome my deficiencies. My deficiency was really just the equity and we had everything else.
Rod Khleif: Okay, your partner’s done most of the equity raising or have you transitioned into that as well? Are you more operations?
Michael Becker: Yeah. When we started out, he had the first primary relationship from there. Then we did several, the first 4 deals were just kinda ventures with the high net worth individual and then us. From there, we’ve done a bunch of syndication where we have a $100,000 minimum. We just go out and raise it.
I think, the first equity raise we did in syndication, was our fifth deal. We had to raise about a million and eight. That was a big struggle to get that million and eight. The deal we’re just doing now, we raised 12 million bucks in about a week and a half.
Rod Khleif: Wow, no kidding. Yeah. Once you return some equity, and return some capital, and some money to investors, then it spreads like wildfire. You just gotta get that first deal done and turned around properly, return some money.
Okay, let’s talk about… in this hot market, it’s obviously the biggest hurdle most people complain about is finding deals, sourcing deals. Can you speak to what you’re doing? Obviously, you guys, if you’re taking down deals, brokers take you very seriously. They’ll answer your phone call. That’s something not everyone listening has the ability to do but what advise would you give people that don’t have that track record in trying to break in?
Michael Becker: Yeah. What you said is very true. I’d like to say it’s a completely unfair business. Who you know? What you know? What chips you can trade? That’s just really how it is. This is a relationship business. It’s completely unfair. So how do you overcome that to get your first deal?
First and foremost, you gotta get your ducks in a row. You gotta understand what you’re talking about. If you don’t have a basic level of education, then these guys are gonna sniff you out on the first phone call. If you can’t speak jargon, you don’t understand some basic stuff about it, it’s too early to get on the fone with the brokers because once you expose yourself as a fraud, they’re not gonna take you serious going forward. So, first and foremost, get educated, that’s number one.
Rod Khleif: Yeah.
Michael Becker: Number two; you need to start getting networks. You need, of course find equity. If you have money, that’s great. If you don’t, you start finding some people that do have some money that you kinda potentially can partner with.
These deals, when you front them, are different than single-family houses. It’s not a poor man’s game. You gotta have some capital to your front. Earnest money and loan deposits, and ____ [00:07:18] and things like that. You’re not talking about $2,000 in earnest money so you can go buy a million dollar deal, you’re putting $25,000 down. You gonna buy a $20 million deal, you’re putting a quarter million dollars down.
You’ll need some capital to front that until you could go raise the capital and then you get reimbursed that money. So, there’s that. Then you start, you gotta get in front and get network with the brokers ‘cause the brokers control all these deals.
We’ve done 25 transactions now on the buy side. I think five of them have been marketed and 20 have been off market. With that said, probably only three or four of those have been direct. There’s always a broker involved. So get networked ‘cause they control the deals.
How do you do that? First, the easiest thing to do is get on their list. All have mailers, it’s not like MLS or centralized, you need to start finding the brokers out of the actual ones on the areas you wanna buy. Get on their basic list and then start going to networking events.
Like in my town, or pretty much any major town for example, like two weeks from now, Marcus & Millichap are having a big multi-family event in town. So, you just buy the ticket for 300 bucks, and you go to their event and all the brokers are there. That’s a good way to go meet them, start shaking their hand, and meet you face to face.
Another thing I do is start scheduling tours. Go tour the deal, underwrite it and give the broker some feedback, that’s another good thing to do.
Rod Khleif: Mm-hmm.
Michael Becker: You can’t do this from behind your computer sitting at home. You gotta get out start meeting people. Touring deals, going to big events, going to these networking events where the brokers are gonna be at, that’s one of the best ways to start to get to know these guys and form a relationship.
Rod Khleif: That’s a great tip. Actually that’s never been brought up before. That is a great tip to go to the networking events for the brokers themselves. I mean everybody talks about going to REAs and meet ups but that’s great advice.
What advice would you give someone as, just some tips, as to raising capital for deals? Any strategies that have worked well for you or anything you might share?
Michael Becker: Yeah, well, starting out, it’s usually you start to come to friends and family, the principals those are the first people who’ll give you money. That’s where you need to start. So, get your list. Those are the first people you got to do.
A really good effective tip really is if you could go to a REA, or join like a mentoring program, whenever they have one, and you start getting network of other people. If you could find someone that has actually done a deal before…
A lot of these is about building your resume out. If you can then partner with them to do a deal or if they’re doing a deal you can join on their deal. Maybe invest alongside them passively…
Michael Becker: Then potentially they’ll sign the “bad boy” carve-out or sign as the key principal is what that’ll hold to. I’ll stop there and kinda explain what that means.
So, when you get these loans, there’s usually two types of loans you get. Either get bank financing or you get agency financing, which would be Fannie Mae or Freddie Mac. In financing, when you go get a loan out, you’ll need a bank. They typically make you sign a personal guarantee to that loan. Fannie Mae and Freddie Mac where they sign what’s called a “bad boy” carve-out. These loans are non-recourse unless you commit fraud or misrepresent something. These are rules is what’s called a carve out to the guarantee.
And there are a term that uses KP or key principal. That’s some jargon for you when you talk to a broker. They’re gonna say, “Who is your KP?” and you need to understand what that means. Cause [bad audio] jargon. So, if you have someone else’s experience sponsor that can do a deal that needs some additional net worth or liquidity to the KP stack, you can go solve that problem for you.
Also, you kinda get into the Fannie Mae Country Club, for a lack of a better term. Once you sign as a KP, then now you’re able to go in and do your own deal, lead ‘cause you have that experience. You’re in the Fannie Mae system essentially.
So, that’s a good way to shortcut it. Find someone that has done it and join on their team. They’re the pilot and you’re the co-pilot of the airplane, I guess, to use an airplane analogy for you.
Rod Khleif: Oh, that’s great, absolutely. Try to be a KP as soon as you can, so that you join the country club like you said. Once you’ve been a KP then after… What is it? 12 months, you’re able to do a…
Michael Becker: No, it’s not even really… It’s pretty quick. Three to six your ready to dig on deal.
Rod Khleif: No kidding.
Michael Becker: It’ll not take that long. It’s pretty… lending is still very common sense. They’ve loosen up quite a bit from what it was four, five years ago. They don’t need the full year to season and to be able to apply for your own deal.
Rod Khleif: Wow, okay. So, if somebody is putting a team together, they’re gonna look for the experience, a key principal sponsor and they’re gonna make sure that they meet the net worth requirements, which is a 10% of the loan amount, correct?
Michael Becker: Liquidity is typically 10%.
Rod Khleif: Oh, liquidity is 10%, that’s right. Net worth is equal to the loan amount. Right.
Michael Becker: That’s correct, yeah.
Rod Khleif: I got them reversed, okay. So, you look for a team that satisfies those requirements, right?
Michael Becker: That’s right, it’s a team sport. Yeah, you need to have the financial part of it; you need [bad audio] management company to manages it. Most people are gonna out, especially your lender would likely is not gonna let you, approve you for a loan if you’re self-managing. Unless you have some experience and you have a track record doing it. So, you need to find a good local third-party management company that manages these types of assets that you wanna buy in the area that you’re buying in.
You don’t wanna go, for example hire say like Greystar. Greystar manages 400,000 units in the country that specialize a lot in class A. You’re not gonna hire Greystar to manage a 50-unit deal on Cleveland, Ohio. You need to find that local management company in Cleveland, Ohio that specializes in the small class C deals. That’s what you wanna hire.
You need a management company, you need your financial partners on the KP side. As long as you get limited partners it’ll come as investments alongside of you, strictly as a passive as a role.
You make sure you get a good real estate attorney that is definitely in because the real estate attorney sometimes can also be your securities attorney. So when you raise this money you need properly to comply with the SCC rules, deal a private place of memorandum. Sometimes it’s the same lawyer, sometimes it’s not, so you make sure you get that covered.
Good insurance broker and a good mortgage broker… To get a good debt, typically somewhere around 3/4 of the money, and equity’s about 1/4 of the money. Your lender’s your biggest partner in the deal so you make sure you get a good quality mortgage broker to help you give a good accurate quote which you can actually go out and get.
Rod Khleif: I’ll put on a plug for Old Capital. I will tell you, I’ve been very impressed. Even James who I’ve had on the show has done a billion dollars worth of deals. I know I think you guys have done 4,000 or Old Capital’s done 4,000 loans. So, I know that’s Paul’s big thing right now, Paul Peebles.
Okay, let’s talk about a team for just a minute. I know you’ve got offices in Austin and Dallas, I think you said?
Michael Becker: That’s right, yeah. So, I’m based in Dallas. My business partner Sean is based in Austin. The way we’re set up is, we have our analytic transaction coordination out in the Austin Office. And then in Dallas, we do kinda oversee the operations and asset management, once you do that. We oversee a lot of the ongoing investor relations, raising the capital, we handle most out of Dallas.
Sean and I split the duties on sourcing new inventory and working with the brokers in trying to find opportunities that we go out and take down.
Rod Khleif: Okay. Tell me what it’s like in your world from a competitive landscape. I’m sure that the there a lot of big players competing for the deals that you’re competing for. How do you stand out?
Michael Becker: Yeah, it’s a tough world, there’s is no question about that. Right now, every market is really competitive. Dallas is certainly no exemption. I’d like to think of us as like the center of the multifamily universe. There’s a lot of big, big management companies, big ownership groups are based out here in Dallas.
We’re a big market too. We have about 750,000 apartment units in DFW. So, that’s pretty large market right now. We try to allot capital everywhere so all these deals are tough.
We try to do our best to just source these deals off market. We’re not in the bidding competitive process. But even then, sometimes you have competition. On the on market, price obviously matters when you get these deals but the broker’s main job is to assess credibility more than anything. So that we need to be able to assess your credibility, “Can you close this deal?” And he needs to convey that to the seller that this is the right buyer. They don’t wanna just pick any buyer. They wanna pick the right buyer and close this deal on the first shot. You need to be able to get yourself set up in the broker’s mind.
Like I said, the first and foremost, you need to know the broker. You need to go tour the deal’s, a must. Meet these guys in person. Those are the things that are intangible that’ll help you.
Outside of that, you need to make sure you have your debt lined up. They’re gonna ask you what your debt is. Do you have a operating budget? What are you thinking on rents? So, you make sure that you do a market rent survey and be able to say intelligently, on what you think the rent’s gonna be. Do you have an operating budget for your management company? How thick is payroll? Where can you save? They’re gonna ask you some questions like that, on how deep have you gone on expenses. Then where’s your equity coming from?
So am I gonna go raise all that money from bunch of people that have never done it before? That’s probably not a good answer, right? So how do you… Me and my partner, we’re gonna do this together. My partner… Now you own zero units, your partner owns a thousand units. You play a we game, “We own a thousand units. We’ve done this. We’ve done that.” Finding a good partner or finding someone that has some experience to join on to your team, that’s critical.
The first deal, when I did it, I didn’t really care how much money I made. I mean, just wanted to make sure I did a good deal and I delivered profit back to everybody else. I worry about my cut of it down the road. We took it really small, promoting the deal. Now, that’s really set me up in my career to do more and more deals.
I wouldn’t worry too much about how much you make on your first deal. Just make sure you do a good deal and you return capital to your investors. Then everything else will come to take care of itself going forward.
Rod Khleif: Great, great, great advice. Have you had any early failures that you feel like may have contributed to your success? ‘Cause everybody thinks this is all easy. It’s just, “I’m gonna get in here. I’m gonna be rich.” But it’s a lot of hard work. Can you speak to any of your seminars?
Michael Becker: Oh, yeah… I was very fortunate that I was a banker. So, while you were probably working on your houses out I was on the other end of that, I was the Grimm Reaper, which was no fun at that time but it was an invaluable lesson. You get to watch what people did. How they just structurally set themselves up for failure when you hit some tough spots.
I have four key things I took away from the 2008 recession that are pretty common in some of these, a lot of people that I had to go be the Grimm Reaper to, know so-so. Things that got people in trouble was number one, they bought in the hood. So, if you don’t bite, don’t buy in the hood. The hood is tough. So, you buy high in crime areas, those low socio-economic areas with no jobs, those things are the first ones to go. These people just don’t have any money. The first they’ll hiccup and they scatter and they trash your units. So, don’t buy in the hood. That’d be the first point of advice.
Number two, a lot of people come in undercapitalized in these deals. They didn’t do good physical inspection. A good example, they’ll say, “Hey, I’m gonna go rehab this deal out of cash flow.” In my experience, that doesn’t really work.
Rod Khleif: Right. Let me stop you there for one second. I just wanna make sure everybody heard that. Do not go into deals thinking you’re going to reposition them through cash flow. That’s a mistake. Raise the money to reposition them properly.
Michael Becker: And your lender’s gonna give you 75% of the renovation dollars anyways under the loan. [overlap talk]
Rod Khleif: There you go.
Michael Becker: Good example what I would see, Rod, was like in Texas. In Dallas, it gets hot in the summer. If you don’t have any money in your deal and you have an occupied unit, and you’re AC condenser goes out on the outside. You don’t have the thousand bucks to go and replace it, so you go to a vacant unit, take the AC condenser put on the occupied unit. Now you’ve gotten all these free units that are down units and this snowballs and snowballs.
Michael Becker: I saw that happen quite a bit. So, make sure you walk in the unit, get a good capital budget on the front end and set that money aside, _______ [00:20:10] for maintenance, get your upgrade planned, set aside upfront. So, that’s number two.
The other thing that I saw was poor management. I saw literally an example of a UPS driver from California buy an apartment complex in Dallas and tried to self-manage it. That just doesn’t work. Really good professional management that just specializes in what you do. And there’s teeth, I mean you pay three to 5% of the collected revenue. They do all your accounting, your construction, your HR. All that stuff.
They keep you out of trouble. A big thing that people miss on these deals when you go off from a single-family house to apartment, the cities don’t really care that much on a single-family house. In the apartment, they come every year and do an annual inspection on you and frequently come visit your property. You start getting trouble on the code enforcement, that’s no good. So, make sure you have good professional management company in place. That’ll keep you out of trouble.
Finally, the thing I saw, you ___ [00:21:06] at a bad time. So, this happen around 2009, your capital works are frozen. You’re in trouble. So, what happens if you have cash flowing on your loan but the value is temporarily depressed? Let’s say you would end the thing with an 80% loan to value and now the value fell 10%, you’re at 90% loan to value. To refinance loan in the banker’s playbook, it’s re-margin my loan.
You gotta go bring 10% and pay your loan down and get them to redo your loan. If you’re in a syndicated deal, you’re gonna have to go back to your partners and say, “Hey partners, we just lost this equity in this deal. I need you to get me some more money so they’ll refinance the loan.” That doesn’t go very well with your capital partners.
If you get hold of a five-year hold period, maybe go out… We typically take out 10 and 12-year fix rate debt. That’s just doable that the next buyer can come and assume my mortgage. If we wanna axe the deal in four or five years but the economy’s in the tank, we just hunker down, ride it out, wait for a better moment to go sell it in the future.
Rod Khleif: Yeah.
Michael Becker: Those are the four main things I really observed, Rod. Those are not my seminars, they’re some else’s but…
Rod Khleif: Yeah, mine, hey, yeah. No pal. I’ll raise my hand, no question. I had a $50 million one then. But let me ask, you touched on something that I don’t think everybody gets, and that is we’re heading into a contraction. What scares you about this upcoming contraction? ‘Cause there’s no question it’s coming, it’s just a matter of when.
What are your thoughts? Like you just expressed, if you’ve got a property that cash flows, that’s a great cash flowing asset but the cap rates have compressed and you can… or not compress, the other way… Then you can’t refinance it and you’ve got five-year debt. You’re in trouble.
Michael Becker: Yeah. I think… We’re still buying deals. I’m still reasonably bullish, especially with my [bad audio] on it. But the same time, it’s gonna happen at some point.
Rod Khleif: Right.
Michael Becker: What’s the degree of it? I don’t think it’s gonna be nearly as severe as the last time, personally, ‘cause the lending is really in check. Whatever is gonna happen is not gonna be a lender-driven events. It’s obviously gonna be a greater economy thing that might come and impact the housing market.
But what we do, like I said, the way we’re mitigating a lot of risk. We’re going out deals with four to five-year hold period but we’re taking that 10 and 12-year fixed rate debt. I have a lot of room left back in there. I’m making sure all the deferred payments are secure. We have enough capital in the deals.
Make sure you have working capital too ‘cause when you do the renovations… You got to pay your payroll until you start collecting rent. Make sure you got plenty of working capital upfront. Those are good things. Buying in better locations are a must too. Just don’t buy in the hood.
I think when you do those things and make sure you have proper management, I think you can pretty much ride out almost any scenario. So long as you’re not manically over leveraged which most of your lenders are not gonna let you get over leveraged even if you wanted too. Just dial back your leverage. If you try to get 80%, get 75 or you want 75, maybe go to 72. Little things like that will be wise whenever you do get the contractions.
Rod Khleif: Okay, fair enough. If you are gonna give advice to your 30-year-old self about this business, what might you do differently? What would you tell yourself?
Michael Becker: I didn’t make too many mistakes fortunately, ‘cause I was fortunate enough to be in the position, like I said, to be a banker, being in the industry. But I would have one, started quicker, I was 35 when I started the deals. I’m almost 40 now. So, 35 doing it which is, in the grand scheme of things is relatively young compared to a lot of people in this business.
Rod Khleif: I’ve got socks older than you. Yeah.
Michael Becker: I just started, I would honestly skip doing the houses. I didn’t need to do the single-family houses. I had a good job, I was able to save a little bit of money, I had a little bit of the capital. I could have gone right into the apartments.
If you need to form some capital and save that… I don’t think the houses are a necessarily a bad thing, if you use that as a tool to then form some capital, save it and then do something bigger. But find the biggest thing that you can afford. Bigger is better. It’s more efficient. If you have over 60 to 70 units, you typically can afford to pay a full-time onsite staff.
Rod Khleif: Infrastructure.
Michael Becker: You got a manager, and a maintenance person onsite, full-time, that really helps a lot. Trying to manage yourself offsite, just doesn’t work well. Just not very efficient.
Go as big as you can. I’d go a little quicker than I did. Just make sure to keep the four things in mind that I mentioned. Take a long term, non-recourse fixed rate debt if you can. That would be my advice.
Rod Khleif: What kind of debt are you getting 10, 15 years? What are you doing there?
Michael Becker: Well, most the loans that we do have been thru Fannie Mae. We got Freddie Mac right now, which is pretty similar to Fannie Mae. There are a little nuances but for the most parts they’re very similar.
Right now, we’re actually assuming out first HUD loan or FHA-HUD loan. It’s a 35-year fully amortizing fixed rate loan at three and a quarter. So, that’s very attractive. There’s some paying points that go on assuming the loan or originating, that may take quite a bit a long time, just restricted covenants once you have it.
But all things being equal, I know somebody’s gonna always pay me and I can pay that loan off for the next 35 years.
Rod Khleif: Oh, those are fantastic loans. There are pain because there’s so much work but it doesn’t get any better. I think they write them at 83% or something if you’re doing your…
Michael Becker: They do.
Rod Khleif: Yeah, they’re fantastic. They’re just like six months to get them done and a lot of upfront costs and reports.
Michael Becker: Right. [chuckles]
Rod Khleif: Yeah, okay but they’re fantastic. Thirty-five year, no balloon. There’s a lot of oversight though from what I understand as well. There’s a lot…
Michael Becker: Yeah. You don’t give them to everybody. You got to have experience. It’s a government loan…[bad audio] You can’t really do that when you’re doing that acquisition ‘cause there’s no seller that will sit around for six to nine months while you get a loan.
Usually if you like to have that product most…
Rod Khleif: Development?
Michael Becker: A bridge loan into that. Then refinance into it.
Rod Khleif: Oh, I see. Okay. I know somebody in Austin that did one on a build as well, yeah.
Michael Becker: Yeah. They do both construction and existing product. They have two different types.
Rod Khleif: Right.
Michael Becker: Can you take a second and talk about the supplemental loan program? I don’t think I’ve ever gotten into that on the show. I think that’d be really valuable for people to know about. Can you speak to that?
Michael Becker: Yeah. So, in Fannie Mae and Freddie Mac, it’s pretty unique to those two products, they allow what’s called a supplemental financing. What does that mean is essentially the second lein cash out note, essentially what it is.
The way it works is, you say you go get a 10-year loan with Fannie Mae, so long as you have more than five years of term left on your loan. So, the first five years of the loan, they’ll allow you to re-margin the loan. If you go in, do some physical improvements, and increase the net operating income by such a value, they’ll allow you to cash out, and pull out some of that equity.
So, re-leverage it, say the 70 or 75% lets you cash back out. Or if you go, these loans are also assumable, so if you go sell it, and I will sell my property to you, you could assume my first and get a supplemental loan to re-margin it back at 75%.
So really, a couple of nuances, not to get in too grainy there but a couple of nuances to it is it they typically, instead of having a 1.25 debt coverage ratio, like they require on a new acquisition, they want a 1:30 debt coverage ratio. So, a little bit more stringent.
Rod Khleif: For both loans?
Michael Becker: Correct, yes.
Rod Khleif: Right, for both loans. Right.
Michael Becker: Then on acquisition supplemental they’ll go to 75%. If you’re doing this to cash out for yourself, they’ll go up to 78% loan a value.
Rod Khleif: So, if you own it and you wanna throw second on a supplemental second. And the rates are great, right? They’re pretty good rates. They’re not like the typical high rate second loans.
Michael Becker: No, yeah. So, you gotta go back to the same Fannie Mae lender that you originally had the loan with to get it. It’s to say, the 10-year money today’s value four and a half percent right now, give or take.
A supplemental loan is usually about 35-40 based points higher than what the first would be. So, it’s still less than 5%, so that’s just phenomenal.
Rod Khleif: Guys, basis points, when you think one percent interest, that’s a hundred basis point. Basically, the 35 basis points is like a third of a percent. Okay, fantastic. Thank you.
Talk about which loans allow a rehab built in.
Michael Becker: You could do some renovation dollars in a Fannie Mae loan. Freddie Mac, they do have a value add Freddie Mac program. But you have to be in, I think almost $20,000 a unit or $15,000 a unit to qualify. Those are really big rehabs.
Michael Becker: Those are probably not what most of you guys are gonna get.
The standard Fannie Mae loans will allow for up to $5,000 a door in renovations. If you have a 100-unit deal, they’ll allow for up to half a million dollars in renovation cost be rolled into the loan. They’ll give you up to 80% of that 500,000 on top of the 80% of purchased price.
The Fannie Mae, if you’re doing a line of value add, that’s a pretty good product. That’s typically what I do. We usually do the Fannie Mae standard product. Roll in renovation dollars in that. It’s a very effective tool.
If you’re doing some… Those are really on the stabilized deals. If you have a deeper distressed deal or something that’s unstable, meaning that’s less than 90% occupancy, you typically need to go to a community bank or regional bank. They’ll give you typically 75%. That’s where most of the banks go to on the leverage. Then they’ll let you pretty much whatever makes sense on the renovation dollars. They’ll go well on in excess of $5,000 a door, as long as it makes economic sense to do so.
So you either get your bank loan or if there’s a lot of renovation, you can do it through Fannie Mae as well.
Rod Khleif: Okay, alright, super. Well listen, we’ve covered so much. I know everybody’s ears are spinning. I wanna thank you for being on the show, buddy. I’m very, very grateful. You added a ton of value in a very, very short amount of time.
Like I say, we may have created some questions, quite a few questions with this. I really appreciate you being on the show, Michael.
Michael Becker: Yeah, well I appreciate you having me. Definitely appreciate letting me plug our podcast, the Old Capital.
Rod Khleif: Oh, yeah, definitely, guys, need to check that out. Okay, Old Capital Podcast. It’s very, very good. If you’re serious about this business, you should be listening to that one as well for sure.
Michael Becker: Yeah, really appreciate your time and the invitation to join you on your podcast. Thanks so much.
Rod Khleif: Absolutely. Talk soon, buddy. Thank you.
Michael Becker: Alright, bye.
Rod Khleif: Alright, bye.
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