Double Your Money
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Learn how to double your income on financing your borrower’s purchases and have your borrower thanking you all the way to the bank. All it takes is understanding how to sell the power of bridge loans to increase your borrowers return.
Educating your borrowers on how to achieve real estate wealth is key to closing more loans, and this approach permits you to move beyond quoting rates and fees. The bridge loan value add method increases returns for your borrower and enables you to close two loans where you only closed one. As an extra benefit, the freed-up capital enables your borrower to return to the purchase table much quicker, with another loan for you to fund.
Financing for Value Add and Forced Appreciation
Forced appreciation is a key path for creating real estate wealth. This means buying a distressed property that is often outdated or in poor physical condition due to the owner’s precarious financial situation and inability to provide ongoing maintenance on the property.
The challenge for buyers of distressed property is finding financing. All the reasons that make a property distressed are very reasons that traditional financing generally will not work. This is especially true for commercial micro-balance loans, loans under $1.2 million for commercial real estate or 5+ unit multifamily. A bridge loan is useful for issues such as:
Low DSCR
High vacancy rate
Compressed closing period; or where traditional financing has fallen through and the seller will not extend
Maintenance or building code issues
Avoiding a prepayment penalty
Borrowers are new to purchasing commercial investment property
Use of seller credits
Reimbursement for the out-of-pocket cost of renovations or repairs in the subsequent refinance
Big Picture Thinking
While many investors understand the power of forced appreciation in theory, the challenge for many loan brokers is helping borrowers get past the higher rates and fees of bridge financing. Overcome this by shifting buyers focus to the overall return on investment. Educate them to see how bridge loan fees and rates are a small part of the overall cost and enable the high returns of forced appreciation.
Let’s see how this plays out for a borrower targeting a $1,000,000 multifamily property.
Standard Purchase
Laid out below are simplified numbers for a borrower who can only accept traditional financing and a property that is not distressed or in need of work.
| Purchase Price | $1,000,000 |
|---|---|
| 75% LTV Bridge Loan | $750,000 |
| Borrower Capital Required | $250,000 |
| Net Cash Flow (Yearly) | $41,687 |
| Cash on Cash Returns | 17% |
While the cash-on-cash returns are good, let’s look at what can be achieved with a bridge loan value-add approach.
Bridge Loan Value-Add Approach
This is an actual property Kirkland Capital Group funded. Jay and May of Jaymay Ventures purchased a 16-unit boarding house in an up-and-coming location at the heart of San Antonio Texas. Many of the rooms did not have their own bathroom, and the inspection found plumbing and foundation issues. Additionally, only ten of the units were currently rented. To attain the highest and best use, major renovation was required to convert the 16-units to 10-units, each with their own bathrooms, and fix the core issues of the property. Doing that in a short period of time also required emptying all tenants for the three to four months of renovation.
The borrower was able to negotiate a sale price at $550,000 with a $40,000 seller credit. Renovation costs came in at $260,000. An analysis of the post-renovation rents and pro forma at the same cap rate, normal for the area, valued the property at over $1,000,000. Let’s walk through the process, starting with the purchase and renovation cost. The numbers are simplified to focus on the concept.
| Purchase Price | $550,000 |
|---|---|
| Seller Credits | -$40,000 |
| Renovations | $260,000 |
| Total Property Cost | $770,000 |
| 75% LTV Bridge Loan | $412,500 |
| Bridge Loan Fees & Points | $13,570 |
| Bridge Loan 12 Months Interest | $49,500 |
| Borrower Capital Required | $420,570 |
Now let's look at the post renovation result with the new rents they can attain:
| New Value | $1,000,000 |
|---|---|
| Net Return on Appreciation | $166,930 |
| Return on Investment (ROI) | 40% |
At the new value obtained by forced appreciation the borrower was able to net, after costs, $166,930. This gave the borrower a 40% return on investment for just that forced appreciation. Considering this is one year or less it's a great return. However, the outsized returns don't stop there. Let's look at what happens with a refinance.
| Refinance @ 70% LTV | $700,000 |
|---|---|
| Bridge Loan Payoff | $412,500 |
| Reimbursement | $287,500 |
| Borrower Capital Adjusted | $133,070 |
| Net Cash Flow (Yearly) | $41,687 |
| Cash-on-Cash Post Refinance | 31% |
Even if the refinance is only at 70% LTV, the borrower was able to recapture almost $300,000 of their initial outlay of down payment and renovation costs. This adjusted their investment to just over $130,000. This adjustment in invested capital creates the outsized 31% cash-on-cash return post refinance.
The other advantage this approach brings is freeing up capital for the borrower to more quickly purchase their next property. In a borrower's real estate portfolio over several years this increased leverage and ability to purchase more properties further increases borrower investment returns over a more traditional approach. By integrating the bridge loan costs into the overall returns, the higher cost of a bridge loan becomes a non-issue because of the increased overall returns for the borrower.
Educate Your Borrowers to Close More Loans
Moving beyond quoting rates and fees to educating your borrowers on how to achieve real estate wealth is key to closing more loans. The bridge loan value add approach increases returns for your borrower and enables you to close two loans in one year for that property. Additionally, by freeing up capital you enable your borrower to return to the purchase table much quicker, which means more closed loans.
