Commercial real estate owners and investors. Let me ask you: What would you do if your capital weren’t tied up?
Increase your net operating income with strategic renovations? Unlock liquidity to acquire a new property? Scale your business by growing your team? Fund business-related expenses? Improve cash flow by refinancing high-cost debt? Grow your footprint through mergers and acquisitions?
Access to capital can be one of the biggest obstacles to growing a real estate portfolio. That’s especially true in the short-term rental space, where acquisition and operating costs go far beyond a down payment. You can always bring on equity investors (and give away upside) or debt (and limit your growth) or take advantage of a new creative type of financing option. The financing I am writing about is perfect for portfolios with high cash-flowing assets to cover down payments and/or working capital needs. Liquidity is made available to professional real estate investors with low-leverage, cash-flowing assets.
How is this money made available? The lender leverages the net monthly cash flow of the rental investors’ entities (which own the real estate), to provide up-front capital. Borrowers can then use the funds to acquire new properties or improve existing properties. In effect, it’s a cash advance against the net rental property income (after deducting any first or second mortgage payments). The structure of the cash advance does not affect any lien priority or impose on any existing mortgage agreements. This cash advance is not considered a mortgage loan, and so there is no lien filed on the property. There is no impact on personal credit or on the existing lenders’ debt-to-income ratio calculation. No trade lines are reported on personal credit.
How does the lender protect themselves? On a cash advance—a cash flow or revenue assignment agreement, a personal guarantee and a lien on the business entity. On pref equity—operating agreement, a temporary membership stake in the entity until all payments have been satisfied. They do not participate in any profit or upside. Personal guarantees are required.
The ideal borrower profile has four main qualifiers: (1) 3+ years experience owning or operating rental real estate, (2) has an established business entity and business bank account, (3) 12 months P&L with debt service showing stabilized positive cash-flow performance and (4). U.S. based. This product is not for new or inexperienced operators, operators with no business entity, noncash flowing assets or non-U.S. businesses.
Asset classes they lend on: multifamily, single-family rentals, mobile homes, RV parks, self-storage facilities, student housing, assisted living, retail, industrial, hospitality, short-, long- and mid-term rentals, hotels, motels (no office space).
How is the funding advance calculated? First, they take the entities’ net income (see above). The advance amount is a multiple of up to 22 times the net monthly income. Example: Net income after taxes, insurance and debt service is $90,000 per month = $2 million loan (rounded). Terms are one to five years, with a monthly amortized payment structure. The advance is secured by a UCC lien against the entity that holds the asset. Maximum $2 million advance per entity. Rates and fees are very reasonable—comparable to subordinate loans, currently 12 to 18%. No restrictions on use of the advance proceeds apply. No appraisals, environmental reports etc. required.
To give you an idea of how the funds are used: One multifamily portfolio owner applied for cash to use for a down payment. Another client, who owns an assisted-living portfolio, started an application to get working capital for improvements for one of his facilities, and another owner of a portfolio of vacation rentals applied for cash out to make an all-cash offer on a property. This financing product may have an easier process than obtaining a bridge loan.
Options are always good to have.
Carl Guzman, NMLS# 65291, CPA, is the founder and president of Greenback Capital Mortgage Corp. and www.Mortgagegenius.com, a residential consumer advisory. He is a real estate mortgage banker and business financing expert with over 34 years’ experience. He currently has 214 five-star reviews on Zillow. Carl and his team will help you get the best mortgage financing for your situation and his advice will save you thousands! Visit www.greenbackcapital.com or email [email protected].
