René Nelson with Pacwest Commercial Real Estate asks the expert Isaac Grant, a commercial lending officer with Northwest Community Credit Union, what he is looking for when an investor is looking to receive pre-approval for a loan. Understand the issue of market rent versus proposed rent and the impact of professional property management.
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René Nelson: When a borrower calls you and they want to get pre-approved and actually go through the lending process, what information do you look at when you’re deciding how much they qualify for in relation to the property? What do you want to know about the property?
Starting the Pre-Approval Process for a Loan for Multifamily Property Investors
Isaac Grant: When we have that initial phone conversation or meet in person about a subject property that someone’s going to purchase, some of the best information to have for that conversation is going to be the offering memorandum from the selling broker. That’s going to give your lender a good snapshot as to what it is that they’re looking to purchase and ultimately what they’re asking you to finance. This helps your lender size up how much they think they’d be able or willing to lend against that subject property.
Isaac Grant: Another great thing to have for that initial conversation is some of the personal financial information for anyone that’s going to be part of the purchasing and borrowing entity for that subject property. We need to see a personal financial statement and some personal tax returns and really get a good picture as to that individual’s financial strength.
René Nelson: You do a lot of multifamily units in the Eugene Springfield area, and tenants in apartments is really my passion. That’s what I enjoy working on. A lot of times a listing broker will bring a property out and we’ll see a pro forma statement that includes typically last year’s expenses and next year’s rent for what I call kind of a market. There’s a difference between market rent and what you could get rents to on the upside for rent. I always try to point that out and really look at it and analyze it for my clients, but when we’re doing that initial inquiry and the borrower is trying to get pre-approved and you’re starting to dig into the financials, how do you deal with that? With market rent versus the proposed rent or where it could be?
Isaac Grant: This is a fantastic question, especially in the current marketplace. We’re seeing a lot of properties that are marketed price-wise at market rents, but maybe the in-place rents are lower than the current market. What we typically like to look at is the historical performance of the property. We want to see some trends. The trends in the rents going up, have they stayed stable to begin with, to get an idea as to whether this property can support an increase in rent. If we think that it can support an increase in rents, then we’re going to look at the management that’s going to be in place also. Is this borrower going to have property management in place? We might even have a discussion with the person that’s going to be managing the property if they won’t be managing it themselves, to see what they think they’ll be able to achieve based on the other properties that they manage in the same market area.
René Nelson: That makes sense. That really helps because I’ve seen a lot of situations where maybe an owner/manager has a property and they’re selling it, but my investors typically use professional management because they’re more passive investors. I just had a situation where market rent was $400, but when my client took it over, they were able to raise rents to $550 but they used a professional manager. In a situation like that, if they can be documented and demonstrated, will you take that into consideration?
Isaac Grant: We can take that into consideration on a case-by-case basis.