Chronicle #2 of a LIVE Multi-family Deal

Last week I was telling you about the deal I’m working on , a 15-unit apartment building, and I promised to tell you more about my conversation with my banker and the financing strategy I’m using.

As you may recall, my banker was completely ‘wowed’ when he looked at my financing application package and said: “you’re really making my job easy”! That’s exactly the kind of reaction you want to get from people you’re dealing in the multi-family business because your reputation and credibility are EVERYTHING! Ask anyone who’s been buying apartment buildings in Canada and they’ll tell you there are few players such mortgage brokers, lenders and realtors that deal with apartment buildings and most people know each other. And whenever you make their job easier, they remember you. Same thing when I was a multi-family underwriter at CMHC. I can still remember the best financing applications that came across my desk…

Preparing my financing application package was not rocket science. I used the same framework I’ve been teaching to investors for years and the same one that financial institutions use, including CMHC. All my documents were neatly organized in a binder with tabs and a table of content under 4 main categories, that is the ‘property’, the ‘market’, the ‘valuation’ (or value) and the ‘borrower’, which are essentially the four key risk factors of any real estate deal, even smaller rental properties.

Now keep in mind my application is still incomplete because I’m still waiting for a bunch of reports including the environmental site assessment phase 1 (ESA), the property condition assessment report (PCAR) and the appraisal, among other things. However, as these come in, all my banker will have to do is put those in my binder under the right category. Accordingly, the PCAR and ESA will go in the property section, whereas the appraisal will obviously be in the valuation section, and so on.

In this particular deal, it was even more important to be well organized because time is of the essence because the contract’s deadlines are tight, the market is hot and I’m already getting ready for my next deal. Most importantly though, is I’m going for conventional financing on this deal, that is at this point I’m seeking a non-CMHC insured loan and here are the reasons why.

If you recall in last week’s first chronicle for this deal, I mentioned the rents for the property are roughly 17% below market average rents, plus there are operating inefficiencies, namely utility costs can be significantly reduced. So by raising rents to market and reducing utility costs, plus converting 3 large bachelors into one-bedroom suites, which will enable me to charge higher rents, I’ll be able to increase the annual net operating income (NOI) by an estimated $20,000!!! That means a huge capital appreciation !!! For every dollar in increased NOI, there an equivalent increase in value of approximately $15 to $16 because the ‘income capitalization approach’ is used to derive value.

My strategy is to obtain ‘bridge financing’, also known as ‘interim financing’ through a conventional loan at an interest rate of roughly 4.75% until the property is fully ‘stabilized’, that is the income is maximized, the operating expenses reduced and the bachelor suites have been converted into one-bedroom suites and accordingly the NOI is maximized. Then, I’ll refinance with CMHC within the year (likely within 5 months) with an interest rate that’ll probably be around 2.80%. That’s cheap $$$$! And it’s mighty good on the cash flow… The conventional loan will be interest only and, as in this case, the exit strategy must be clear to the bank.

What else did I do on my deal since last week?

Oh yah! I sent the appraiser my documents including my spreadsheet with my own valuation of the property. Because of the financing strategy I’m using I’ve ordered an appraisal which will include the ‘as is’ value and the ‘as improved’ value. Then I got a piece of good news from the appraiser. He looked at my numbers and thought my ‘as is’ value was on the low side but he agreed with my ‘as improved’ value. Well that’s just my style! I’d rather be conservative upfront and get a positive surprise later.

The point about this is that ideally you want to know values in your market very well. Hence the need to research your market well in advance. Accordingly, the numbers I submitted to both my banker and appraiser were realistic and well in the ball park. Again, it speaks to one’s credibility.

The lessons here are you need to be well organized and by doing so the process runs smoothly. There can still be some negative surprises but at this point in the deal it’s unlikely. I’ve received confirmation from the City of Edmonton that there are no work orders or any by-law violations for health and safety or others for the property, including confirmation in writing that the property is fully compliant with current fire code regulations. My professional building inspector was at the property last Friday and confirmed the property is in good condition. I’m getting the ESA Phase I report today.

Speaking of the environmental site assessment (ESA), you may remember from last week’s post I saved $1500 on this cost (full price would have been $3000) because I was able to buy it from the previous buyer whose deal fell through just before Christmas. The engineer who prepared the ESA will write a ‘letter of transmittal’ addressed to my banker enabling the latter to legally rely on it for financing purposes. That’s a very important detail. If it were a brand new ESA I had ordered, the report could be addressed either to me as the borrower or to the lender. In this case, because it’s a ‘second hand’ ESA it has to be addressed to the lender.

That’s it for this week.

Again, I encourage you to look at my up-coming multi-family training programs coming up, including my on-line course for which right now I’m giving you EARLY BIRD DISCOUNTS on both training programs. You get 25% discount on the online training if you sign up before the launch date of January 31, and 35% on the live event. Both program come with 100% money back guarantees. I can assure there are no other training programs like this for multi-family investors in Canada.

Check out these training programs by clicking on the links below:

On-line Course

Live Experiential Event

Have a great weekend.


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