An apartment investor was referred to IPC by his accountant for a cash-out refinance on a 20-unit building. On the last 10 years he methodically followed the ‘PIT’ method of building real estate income and wealth: Purchase-Improve-Trade. This has resulted in a portfolio of over 60 apartments in a handful of buildings, all in working-class neighborhoods. Work force housing has been one of the best performers in the San Francisco Bay Area during the COVID-19 Pandemic.
The client’s goal was to get a few hundred thousand dollars in capital to recoup some of the money he has invested over the years. When we met, we showed him how we could exceed his expectations and get him much more cash-out with which he could acquire additional rental property and reach his retirement cash flow goal sooner.
Our process: We like to understand our client’s short, mid & long-term plans so we can suggest the right loan products. For example, for investors with multiple properties, it is safer to have staggered loan maturities, so we want to know when their loans are due. Knowing an investors’ retirement goals, we can suggest the best type and term of a loan, which is especially important if their income will decline in retirement. Knowing when an owner is planning for a sale, we can better suggest a more convenient prepayment structure.
After reviewing the current rent roll and the historic performance of the property (especially during COVID), we model the cash flow using the same assumptions as an underwriter, so we have a realistic idea of how much of a loan a property can support. Whenever possible, we walk the property with the owner so we can better tell the story to the lenders.
On our walk-throughs we will make suggestions regarding what we see as potential red flags to an appraiser and a lender (most lender reps are required to inspect the exterior of a property). We know that first impressions matter, and there are many easy, cost-effective cosmetic improvements that can be made to a property that can influence property value(and provide more enjoyment for the tenants), resulting in a better bottom line to the owner.
In our recent closing, we pointed out deteriorating paint, some obvious wood rot, the unkempt garbage area, some overgrown vegetation, and unflattering tenant belongings. We also let him know that the lender may require a holdback to repave the crumbling driveway. Together these items all could have had a negative impact on an appraisal and the lender’s confidence in the management of the property. The owner followed our suggestions for improving the curb appeal of the property and we then returned for updated photos to include in our submission package to the lender.
Conclusion: The property appraised much higher than the owner expected, and we were able to get him one million dollars cash in hand. He now has a solid rainy-day fund, and cash to re-invest. As to the driveway, the owner had been wanting to repave it, and the lender required it. We helped him obtain a competitive asphalt bid, submitted it to the lender, and we negotiated for no holdback as the owner agreed to complete the work within 60 days of closing. He is now repaving the driveway and shopping for his next deal, without the stress of meeting the timelines of a 1031 tax deferred exchange, and is one step closer to his ideal retirement income.