Gents need a little advice.

I've bought a couple of lots through my company.
Ive got permits started and plans for about 3 duplexes (6 units) in the works in San Antonio.

Short version is we are a residential subcontracting company and this is sort of my plan of what to do with our capital during this slow down. I don't need a construction loan to build them based on the current situation, but at the end of the build what would be our best option to refinance?

Ideally id sell them as they are done but just in case the market doesnt allow that need a plan b. Id probably only borrow up to what id cash flow. I can save the margin on the projects til I sell in a few years if need be.

Do you need a builder?

Would love to get you a bid on these.

You might think about selling them as a portfolio once they're stabilized. Six units isn't huge and considering interest rates no one is getting the cap rates they were a few months ago, but you could still get good value.

As far as debt goes on the refi you will get good advice on here. Though if you're a member at a local credit union a small portfolio would probably be up their alley.

Don't need a builder Mr. Miller, we already do one or two customs a year. Thats just all was allowed with the previous amount of work on our schedule im forecasting that schedule to clear up in the near future.

Thanks for the advice in a credit union, ill see what they have to say.

so it sounds like you would not have any loan at the end of the process correct? if so, you would be doing a cash out loan to put financing on the property. You can do that a few ways:

First, you can do a conventional loan up to 70% loan to value per duplex. This would assume you can qualify with your personal tax returns, pay stubs etc along with the rent on the properties. This would be your best rate and terms with a 30 year fixed etc.

Second option is what is called a debt service coverage ratio loan (DSCR) which ONLY looks at the rent of the subject property. As long as the rent covers the principal/interest/taxes and insurance then you are good in terms of income. So, no tax returns, pay stubs etc. You can get a 30 year fixed on these loans, they will go up to 70%-75% loan to value but will have a higher interest rate then the conventional option.

Finally, you can potentially get a blanket loan as mentioned above for all three properties. The down side of these loans is they typically carry an adjustable rate (after being fixed for say 5 years) but also typically have a shorter amortization like 15 or 20 years which makes cash flow a bit tougher. the other con is that they can be hard to pull one property out of the collateral pool. For example, that makes it hard to sell one without the other two so you lose flexibility.

Thanks Jay,

These are on two seperate properties (4 units and 2 units)

There are multiple partners in the llc that has bought these so conventional sounds unappealing and not really repeatable for more than a few properties.

The dscr loans will work for an llc?
70 to 75 ltv doesnt seem terrible. What are the rates like on those? You seem to be the expert here.

Thank you for your help!

Yes, you can close the DSCR loans in a LLC. And the rates on these things change just like any other loan program and right now are pretty high. In the low 8's right now. But, they were in the low 5's just 6 months ago. so who knows where they will be when you are done.

Do you do that kind of work? Or have any reference in San Antonio for it?

Probably have at least 6 months til it matters.

Yes, we do a lot of DSCR loans as we work with a ton of investors. Feel free to shoot me an email.

Awesome Jay, Thanks!

Ill be reaching out soon.

If they are unable to sell you will have a tough time finding a refinance loan. Banks are overcommitted on their capital ratios because of this.

It all depends on the bank you are working with, and there are thousands of them out there. Thus, you can almost always find a lender, somewhere, who has capital to deploy.

Still, having your plan B being refinance versus sell is not a good option to be in. You should be considering the impact on appraised values due to lack of liquidity in the market, and whether your equity cash out is as significant as it would have been 6-months ago vs. what six months in the future looks like.

Finally, matter which route you pursue, the timing to get it done is going to take longer than it used to.

Based on the description, they are two separate parcels, therefore simply a duplex and a fourplex. The market for 2-4 unit is really no different then the market for single family homes. and that is market is vast. It will not have to be held on a balance sheet of a bank, instead it will be sold into the secondary market. Assuming they qualify of course, it will NOT be hard to find a home for the refi.

Austinag,

The refinance options are a plan B.

The market is so wonky that it might need to wait 6 months or a year, i realize ill be leaving some capital in each deal if that becomes the case.

I was mainly curious on what options are out there. It sounds like there is one that works for our situation. Of course there is a lot of variables I cannot control.

Trying a new business model for myself, you never know if it will work until you give it a go. The spreadsheet looks workable, we will find out about the reality.

On the whole this is a hedge that uses my existing team and keeps them together and working.

The headwinds that might make the sale hard in the short term should also put upward pressure on the rents. Thats my thought process, if its rented and cash flow neutral for a bit I can "punt" and hopefully wait on a better sales market.

Edit to add on the timing of construction; I honestly forsee lead times tanking soon. Our part to play is on the front end of the residential supply chain, and well it aint rosy. There is a glut of inventory not on the market yet but the starts are way down. Builders are having a third of their current pipeline canceling, they are pulling out of land deals. The pipeline is collapsing from what i see on the ground.

These will be built in 5 months i bet.

If you do go the refinance route find a bank with an appetite for this type asset on the balance sheet. You'll get better terms.