Episode Transcript

I'm back with my special guest, Gary Mascitis from GSM commercial capital, and this is part two of our creative financing segment. So stay tuned.

00:12

Welcome to Growing Empires, hosted by real estate entrepreneur and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.

00:31

So let's talk now about government agency financing. So tell me what it is, so my listener can understand and give me some pros and cons for government agency financing. Government agency financing is one of the least understood financing products out there for the multifamily and mixed use space. I would say that 95% of my investors that I, my clientele or people that I meet, even if they're in the business for a long time, and to own a lot of units, you know, hundreds, or sometimes even thousands of units are not familiar with government agency financing. And I just literally had a situation yesterday where an investor was introduced to me, they own hundreds of units in the Easton area, and they've been in business for over 30 years in real estate and have never used a government agency and really didn't know anything about it, it's very common to not know something about this product and it's a fantastic product. A government agency loans are basically designed for properties with at least it has to be a minimum of five units, and the minimum loan size is $750,000. So there's a couple different programs, but basically, all of these loans just like residential loans, there's their government agency backed Fannie Mae and Freddie Mac, are the ones that have the underwriting guidelines on these loans. And, and these loans are being packaged up and sold off to investors, just like 90 plus percent of residential mortgages are, they're very different products than residential mortgages. So government agency financing for commercial properties is broken down into two overall types, they have what they call the small balance program, which is somewhat of an oxymoron to a lot of investors because it starts at a minimum of $700,000. Right. And goes up to $6 million. Okay, so, you know, their definition of small balance versus investor is often two different things. And then $6 million, all the way up to multiple hundreds of millions of dollars is just what's known as their regular or large program. Basically, the advantages, some, some of the advantages and disadvantages, and it's mostly advantages, are so government agency financing, you can do 30 year amortization on the loans, most bank financing for commercial is either 20 or 25 year amortization, with a few exceptions at 30 years, so 30 years kind of non standard in typical commercial bank lending, it's the norm in government agency financing. So, for those investors that are looking to maximize cash flow 30 year amortization can really help you know, boost your boost your cash flows. One of the other major differences is and benefits is that you can lock your interest rate for a much longer timeframe than your typical bank loan. So, whereas, you know, typical one to four family financing, most people think you know about, well, I'm going to do a 30 year amortization, 30 year rate lock, guess what, in commercial financing that is not the standard structure. So I think we should start with that. And then we'll go on to what the standard structure or structures or in government agency. The most typical financing structure from a commercial bank on an investment property is 20 to 25 year amortization and interest rate lock for five years, in some cases, seven years and if you get very large, potentially 10 years, but standard is five year interest rate lock. The term of the loan, which is the amount of time before you have to make a decision to either refinance or pay off the loan is typically between 10 and 15 years. So after the five year interest rate lock on the loan, you will have a rate reset for another five years, and then possibly another five years after that, based on a pre determined formula. banks aren't doing like teaser rates, like the old adjustable rate, you know, mortgages and residential, it's very, it's just a very defined situation that's going to be the formula is going to be based on either constant maturity treasuries, or the Federal Home Loan Bank Rate, you know, very well recognized things. And the rate that’s said at the time of financing is not a teaser or discount, it's, it's basically if the rate was resetting five years from now, and the financial markets are where they are right now, it would reset basically at that rate, typically. Okay, so let's, so that's typical bank financing. Government agency, you could do its 30 year amortization, your standard that most people do for a rate lock is 10 years, you can lock the rate, you can have anything between a floating rate loan and a 30 year lock on government agency financing. Which is you know, a huge benefit, it enables investors to customize things much more to what their their game plan is for the property, you know, whether it's going to be a long term hold or whether, you know, maybe it's a value add property where they know that they want to refinance within, you know, once they once they build some additional equity in the property. So they don't want to be locked in for a long timeframe. Because the prepayment penalty, which is another thing on commercial loans, whether they be bank loans or government loans, you know, is typically going to have some bearing on how long your interest rate is locked as well. So, the ability to customize anything from floating to 30 year fixed rate, typically, the longer you go out beyond 10 years, the higher the interest rate, but at least you know exactly what you're going to have for the life of the loan, which is important. The other difference would be the prepayment penalty structure is more customizable with government agency financing. When you're dealing with bank financing, a very common prepayment penalty structure, if you have a five year rate lock is going to be something like a prepayment penalty structure over the first five years that declines from 5% to 1%, on an annual basis, so 5, 4, 3, 2, 1 each year. With government agency financing, you have the ability to have that type of prepayment penalty structure, or you could have something called yield maintenance. And it's something that's I think, beyond the general scope of the conversation to get too far into the nitty gritty on that. But what I will say with yield maintenance is effectively if you have a scenario like we're in right now, where interest rates are pretty much at all time lows, with the yield maintenance structure, if the rates interest rates go up over the next few years, and an investor decides to sell a property or refinance it as opposed to having potentially a hefty prepayment penalty, they might actually have something that's monetarily in their favor, because rates have gone up, if rates go up. So they might not have any penalty, or they might be owed money. Whereas if rates went lower than your prepayment penalty is kind of tied to how the difference between the interest rates at the time they got the loan versus at the time that they pay it off. And, you know, the concept is basically because there's an investor on the other side of the real estate investors transaction that is buying mortgage backed securities, they expect to get a return, a specific return, for a certain amount of time. So if a real estate investor decides to pay off the loan, if it's for to the detriment of the mortgage backed security investor, the real estate investor will owe some prepayment penalty. And and if it's not in their favor, then they don't or they could they could actually be owed money. So so that's I guess from a structural standpoint, those are the main differences between government agency and bank financing.

09:30

Now, as far as other types of benefits in mortgage in sorry, and government agency financing, the most important thing is that or one of the most important things is you know, real estate investors have can have very different tax returns, okay? Bank lenders are going to typically look at three years tax returns both personal and business. If applicable, and you know, some real estate investors, you know, one of the nice things I should say about real estate investing is it's not all of your revenue is not necessarily taxable, right, because you have this great thing called depreciation, which is a non cash expense that you're able to deduct on your tax return from from your income to determine, you know, what, what, what your taxable income is. And so a lot of times real estate investors have very strong cash flow, but their tax returns might look a little weaker from a bank perspective. So with government agency financing, you don't need tax returns, there's no tax returns involved with the underwriting, the underwriting is based on what's known as stated financials of the property so basically, there will be something that I will help put together with the seller, and the real estate investor is a schedule of historical schedule of rent roll and expenses, and what the projected is over the next year, and that is how the property is is underwritten. So it that's, that can be a huge advantage to some people, you know, a lot of real estate investors also own other businesses. So, you know, business owner tax returns aren't always the, I would say the most sexy on paper, and you know, that can, that can that can impair somebody's ability to get a bank loan, government agency financing, you don't have to worry about that. The other thing is most bank loans, the real estate investor, the guarantor on the loan is going to have recourse with the bank, if if God forbid something were to happen, and that that investor and/or property encountered problems, then the bank can have recourse with that investor beyond the property itself. Whereas government agency financing is what's known as non recourse financing in less than they have something called Bad Boy Carve-Outs, which is, you know, if someone committed fraud, then it does become a recourse loan, but generally, it's basically considered a non recourse loan. So those those are, I guess, the main differences, I would say that, once you get into the particularly into the large space, 6 million and more, as the government agency programs define it, the pricing on government agency loans gets a little more aggressive, much more aggressive than bank financing. So that's something else to be aware of, in the small balance program, it can also be more aggressive than bank financing. But it's going to depend a little bit on the financing scenario, the loan to value someone's looking to take, the cash flows of the property, the loan amount, you know, etc. so that that's, I would say, the main differences, you know, in terms of qualifying for a government agency program, you can have relative, you can have an inexperienced investor use that program, as long as they're having as long as they have an outside property manager. You know, there are some other criteria where the, you know, there's some credit type criteria, you know, they're obviously going to run credit score's, there's a net worth criteria, your net worth has to be at least equal to the loan amount that you're taking out. There's some liquidity requirements, but I would say in general is a very flexible and beneficial program that most investors just, they're not aware of it, therefore, they're not taking advantage of it.

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The episode will continue in just a moment.

14:01

This season is all about winning the money game with your real estate investing. However, simply investing in real estate with all of its advantages that it promises, you can still get taken to the bank if you don't know how to make smart money decisions or have access to the right resources to save you time and headaches. Building your investments so that they grow in value over time requires a lot of factors to go right and the money part is a big one. It's not always about the property. It's how you make the critical decisions about leveraging money so that you have the most control and freedom while growing your portfolio. Whether you're concerned about the validity of that too good to be true offer on a property or you can't settle on the right mortgage structure, I can help. I will answer your money questions on a quick call and if I don't know the answer, I can certainly connect you with somebody who does. Visit GrowingEmpires.com and schedule that call with me today. That's GrowingEmpires.com and I will help you make smarter money decisions and put you in full control of your investing success.

14:56

Tell me about the outside property manager. Why is that a requirement of the, of the loan structure? Sure. So, you know, if particularly if you if you have a newer or less seasoned investor, you know, running, managing real estate is is something, you know, that requires effort and experience. And, you know, if you're, if you're looking into larger loans, you know, they're they want to make sure that you have a professional, that's going to help with that process, which will greatly enhance the likelihood of success of that investor on on that on a project. So I think, you know, it makes sense, their, their requirement for government agency financing is, you know, someone has to, in order to even consider self managing has to have at least one 5+ unit property for a minimum of two years in the marketplace that they're purchasing. And, and speaking of the, the marketplace, or the geographic marketplace, you know, government agency financing is nationwide, the guidelines vary a little bit based on based on the the area of the county that someone is looking to finance in, but it's it's a nationwide program. So most commercial banks are going to want to finance locally, people that live or work locally, whether it's in the same state in many cases or in surrounding states, whereas government agency, you know, you could be a New York investor buying a property in PA or California or Florida or wherever. So it does open up avenues that would be much more difficult to pursue via commercial financing. Okay, Gary, so what product do you offer that you feel beat your competition? Would you say it's the government agency financing? I would say that that is definitely one of the products that that helps separate me from a lot of my competition, since since I understand that product and have that additional tool in my arsenal. But I will go back to the fact that the differentiation between one commercial mortgage broker and another is not as much based on the product, but it's based on their experience and the types of things that they can offer. But this is a service based business at the end of the day. And, you know, having 30 years of financial background, and capital raising with hundreds of different corporations, hundreds of investors, you know, if you have every tool in your arsenal, or every arrow in your quiver, it becomes less about, you know what one product you can offer that as the best or not, it's being able to apply that product to someone's situation if it's the most effective and efficient way to help them finance. So, you know, the way that I look at things is, since I have the full suite of real estate, commercial real estate finance products available, available to me, it's it's a situation where I would say this, if you were a hammer, everything looks like a nail. But when you have every arrow in your quiver that you can pull out for particular situations and every product available to you, it becomes less about the product and more about your ability to utilize the products that you have to get somebody the best financing for their situation. That's a great point. I really like that analogy.

18:47

So who is your ideal client? Okay, so I have, I would say two types of ideal clients. And when I look at my client base, it pretty much gets broken down into two overall categories. The first is going to be the newer investor that really needs a lot of hand holding through the process. They don't really understand either the commercial real estate process or the or the commercial financing process. And they don't want to take their time to you know, go from bank to bank to bank to see who's going to be able to help them obtain financing. So that would be one type of ideal client where I can you know, help them learn and grow. My client base is pretty evenly split like over half of my clients are very experienced, real estate investors that are looking to outsource the CFO function, I would say of their of their business. They don't want to take the time maintaining relationships with banks, staying on top of every change that's going on in financing, because the top lender three months ago, could be at the bottom of the list no. Things change in this industry. And we've seen that multiple times over the years, including just recently with COVID, the most aggressive lenders that I was using, you know, six, eight months ago, some of them aren't even in the lending game right now, they just they've gone into their shell. So, so the experienced investor that wants to have a professional on their team, many of my investors basically call me their de facto CFO, when when I'm, you know, what we're dealing with. Because it really is, you know, being a consultant of, of that client and being an advocate for them, I work for my clients, I don't work for the banks, I don't work for the government agencies. My clients are who I worked for, and I really, you know, offer a full service, you know, approach or a white glove approach, so the, you know, very experienced real estate investors, you know, many of them that sometimes have done their financing on their own, and a lot of them just want to outsource, outsource it and not waste their time on that and they want to focus on their core business, as opposed to, you know, this aspect of the business.

21:22

So what would be your best advice as it relates to financing? If you had to pick one thing? What would be what would it be? Okay, so I would say that, you know, my best advice, if I was just going to be able to pick one aspect of, of financing, or advice on financing is to really have investors think about their situation, from a holistic approach, you know, we can all get sucked into thinking about just one deal or one, you know, scenario. And you really need to think about how, one this one property or two properties or portfolio properties, how that really fits into your overall you know, picture, you know, because you can, you, if you if you get myopic, and overly focus on, you know, one aspect of a situation, then you can kind of lose the full picture or harm yourself, and in some cases, so, I would just encourage people to think about things from from a holistic viewpoint. And, you know, to, to get, I guess, to give you like an example, just a brief example of that, one of many examples, I had someone come to me over the past two weeks via referral, and they're an experienced investor, they own 30 properties, and they send me through their personal financial statement, their schedule of the real estate they own, and I see that, you know, they are, they're not really maximizing the use of the asset that they have, which are, which are the this portfolio of, of properties, they have on almost all of their properties, they have relatively, you know, small loans against them. But it's encumbering all those properties from being able to use them to potentially for something else to leverage something else. So, so now we're looking at a portfolio loan against a subset of the properties so that we can do a higher loan to value on a smaller subset of the properties and have them release all the other properties and own them free and clear. So that we can either put a line of credit in place, so that they can utilize, or maybe they want to be able to use some of those properties to cross collateralize the purchase, so they don't have to come to the table with cash, they can put up another property. But you know, he had all these properties that had these small loans and it was really kind of tying his hands from being able to grow his business. And he's, he wants to go into growth mode. And we've talked about how to do that, for example. So that's holistic thinking as opposed to just, you know, looking at one individual aspect of financing. Sure, one deal, one rate, one set of terms. Yeah, I get that. I think that's actually fantastic advice. It really is. So yeah, I mean, I think that that's really, really all for today, I think that you've given an incredible amount of knowledge to my listeners, and I cannot thank you enough, Gary, we are going to make sure all of your information is in our show notes page. So all of my listeners can get in contact with you and reach out for financial advice and you know, potentially use your services in the future. So I really appreciate your time today. Thank you so much for your wealth of knowledge and you know, I hope you enjoyed participating as well. Thank Thank you very much, Jennifer. I appreciate the opportunity. And hopefully I know every investor could at least take one or two nuggets away from our conversation. All right, fantastic. Well, until next time, take care. Thank you.

25:16

For more information about how Jennifer can help you plan, develop, and manage a strong real estate investment portfolio, visit GrowingEmpires.com.

Contact for Gary Mascitis:

Phone: 732-598-7950

Email: gary@gsmcommercialcapital.com