Archive for Commercial Real Estate Questions and Answers
Question From the Audience: What are Lenders Looking For When It Comes to Apartments
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Fannie Mae Lending Criteria - this one is a slam dunk!
Greetings….
Two blog posts in one week…..just amazing!
Well…not really.
Anyway….
Got a great question from Steve in Colorado regarding lenders and lending criteria. My friend Terry Painter from the Business Loan Store provided us an answer……
Rob,
I know some investors try to stay away from flat-roof apartment buildings (vs pitched). In
general I’d prefer pitched but might consider flat especially if new roof or
other big benefit. However I also heard (not sure if correct) that Fannie
Mae does not fund flat-roofed apartments. If this is true this could make it a definite
typical “requirement”. Any comments?Also, any comments on what lenders look for regarding unit mix % ratio (this is the % of one bedrooms, two bedrooms, studios, etc) to look out for (with desire for higher mix of two bedrooms vs. one)?
Steve,
Fannie Mae does fund Apartment complexes with flat roofs. But, we (Business Loan Store) are funding
several with flat roofs now. If any roof has less than 5 years useful life left this will be a problem. Without question flat roofs do not last anywhere near as long as pitched roofs and are more expensive to maintain.As for unit mix, preferable unit mix is based on the sub market the property is located.
For example, if there are a lot of students, one bedrooms and studios are often preferred. Otherwise in most locations, more 2 bedrooms are
preferred. Usually one bedrooms and studios get the highest rent per SF.
So in locations that have very low vacancy, studios and one bedrooms could bring in the highest
income.Terry Painter, President
Business Loan Store
104 Monterey Drive
Medford, OR 97504
Mortgage BankerOffice 541-326-0570
Fax 888-404-7089
Cell 541-840-3078learn anything new?
Until next time…..rob
Wrap Mortgage ( A.k.a. Wrap-Around Mortgage): What is It?
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Jefferson Memorial was purchased on a Wrap.....okay okay...that is not true
Greetings from Washington D.C. (actually…not anymore…but when I wrote this…that’s where I was…as if you cared). Still my favorite metropolis (other than Cedar Crest, NM…of course).
Anyway….
With all that is happening with our economy, specifically, lenders not lending. Creative financing (owner financing) is showing up a lot more. Great for us…the investors.
In most cases, many of the “owner financing” deals have an existing mortgage in place. So…for a seller to sell his/her asset with seller financing, the seller may choose to sell via a Wrap Mortgage. What in the world is a Wrap Mortgage, a.k.a, a Wrap-Around Mortgage?
I have seen many definitions for a “Wrap Mortgage.” But for us, the investors, a “wrap” is basically taking the existing asset’s mortgage and wrapping it (hence the word “wrap”) with a brand new mortgage. In other words, a new legal document is created that refers to the existing mortgage (first position) but with the wrap mortgage now making the new owner liable. The beauty here is, the new owner is only liable to the seller. The “Seller” is still liable to the original lender.
****Note….A “true” Wrap is NOT an assumption….at least what I am defining here as a Wrap.
There is a lot more to this but the above is the general idea.
Many investors and sellers get a little jumpy when they find out there is a “Due on Sale” clause in the original mortgage when selling an asset creatively. A “Due On Sale Clause” is simply where the lender can call a loan due if certain points of the mortgage are compromised i.e., a “wrap mortgage.”
Have I ever experienced a lender initiate a “Due On Sale” clause? No. Have I heard of other investors have to deal with a lender exercising the “Due On Sale” clause? Yes…but only in a residential investment he or she bought on a wrap. But….that was the only one. Even in that instance, the lender worked with the investor on refinancing the asset. Go figure!
I have yet to experience or hear of it on a commercial deal specifically due to a “wrap mortgage” transaction. That is not to say that it does not happen. But my question is, will a lender excercise the Due on Sale clause on a performing note? I doubt it….but none-the-less it is a possible downside.
Just a few more thoughts regarding a Wrap:
1) the terms of first-position mortgage may or may not be reflected in the Wrap. Usually, the terms are negotiable with the first-position mortgage being the base line.
2) Legal instruments are used to put the Wrap in place, i.e., REC (Real Estate Contract). Usually, in a commercial transaction, the documents are a little more sophisticated (uhh…hmm…more complicated since attorneys are involved).
3) In some cases, an escrow company or attorney is used for the ongoing management of the transaction. In other words, a third party is usually used to make sure payments are collected from the new owner and payments are made to the first-position lender. This protects both parties.
Of course, there is a lot more detail involved but overall….I love buying assets with owner financing and a Wrap is a great tool.
Until next time…..rob
Residual Income: Do What You Want And Still Get Paid
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Residual Income....that sounds sooo good!
Greetings from The Pit @ the Univesity of New Mexico. Watching my boys play at Steve Alford’s basketball camp. Good times and good people. Today’s topic is one close to my heart because it has been my passion for most of my life. Not specifically residual income…but the lifestyle residual income provides. I hope you enjoy.
Residual Income
Most people who invest in commercial real estate are focused on generating profit (cash flow). One way investors generate profit is though residual earnings, which make up the net income an investment can earn over the minimum rate of return. Residuals are a source of passive income that generates income without requiring continuous active participation. Artists and intellectual property owners also generate residuals through royalty income.
Why Should I Focus on Residuals When It Just Seems Like a Small Amount Every Month?
If you spend all of your time working on the tasks that require the most effort for the littlest reward, at best you will only get the 
littlest reward. Instead, it would be better to spend a minimal amount of time on achieving the maximum reward (i.e. increasing residual earnings). If you are not creatively inclined or unable to invent something requiring a patent, real estate investment is a relatively easy way to begin earning residual income.
How Does This Work?
For example, let’s say you spend 40 hours a week at a job making $25 per hour or $52,000 per year. Theoretically, you are working every minute of every hour to earn $25 per hour. Now, let’s say you invest in an apartment building for $75,000. The building has four units that each rent for $400 per month, for a total of $1,600. If the mortgage on the building is $600 per month and the property management company is $100 per month and the remaining expenses are $100 per month, that means you earn $800 a month or $9,600 a year for spending at most 30 minutes a month writing a few checks. If you spent 15 minutes a month handling the apartment building, that equates to three hours or work a year, which would mean that you earn $3,200 per hour.
I can’t live on $9,600 a year. I Still Need My Job. Now What?
The explanation behind the above example applies to multiple buildings also. Let’s examine the same idea only with five properties. Following the same logic and using the same numbers, you would take home $48,000 a year, which means you earned $16,000 per hour.
Just because you earn residuals, doesn’t mean that you need to give up your job. Residuals allow you to have regular income of 
a potentially sizeable nature without a lot of work. They can provide you with financial security as well as legal rights to income that can be passed to your children or heirs. Take the time to think about residuals and other passive income streams. With a clear understanding of where your money comes from and how much work you must put in to earn that money, you too can begin to work smarter.
Until next time…..rob