People getting into multifamily and commercial real estate investing must understand the process of loan qualifications in buying a property. Vinney Chopra, a multifamily syndication expert, is back to share his insights on loan qualifications. Vinney talks about why you must create a great portfolio for the evaluation process of your loan and the significant role of your net worth in determining the loan amount. Learn more about the loan process as Vinney presents a series of scenarios to help us understand the world of loan qualifications better.
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Loan Qualifications: How The Whole Process Works with Vinney Chopra
Our guest is Vinney Chopra. Thanks for being on the show again, Vinney.
Thank you, Whitney. I’m charged up. I’m excited that you invited me on your show. Thank you so much.
I appreciate your time, your expertise and knowledge in the business. Vinney has an amazing story of how he came to America with $7 in his pocket to controlling over $200 million in real estate and having a very successful syndication business and management business as well. Vinney, thanks again for your time. We’ve done a series of shows and I encourage the reader to go back and read to many of your previous shows, learn about your story. We dived in to many specific topics. What do we want to talk about, Vinney?
We’re going to talk about loan qualifications. That is a major part of the whole equation. There are a lot of new investors and a lot of people getting into the multifamily and commercial real estate investing and it’s a big puzzle. I would like to take our audience to a series of questions and series of scenarios as to why it’s so important to find out how big an apartment complex they can afford.
Why is this important? I find that this topic specifically, it’s hard to educate yourself in-depth on until you get into the weeds or you’re in the middle of trying to make a property happen or get a loan. Get us started.
I would say to all the audience, first of all, as you find out the emerging market that’s a huge part. As a syndicator because loan sponsorship or loan qualification is important and not we are buying as much as we can but the big world of syndication, that’s where we scale up. That’s where we’re getting to a bigger number of units. We get into some good stuff and we can add value to those communities for the great residents we’re going to be attracting and so forth. It all boils down to what can I afford? The number one thing I’d like to tell the audience is that your loan amount has to be lower than the total net worth. That is a huge part. The net worth, that’s your total assets including all the cash you have, all the savings, all the retirement and every possession we have, like our primary residence and then taking out the debt. The assets on one side, liabilities on the other and the difference between the two is net worth.It's hard to educate yourself in depth until you really get into the weeds. Click To Tweet
Our net worth determines how much loan we can get in the commercial. It’s a little bit different in residential. You’re looking at your W-2, how much you’re making. In the multifamily, they’re going to look at the FICO scores. They’re going to look at other stuff but the majority of the things they look at NOI, the Net Operating Income of the commercial complex. We need to see the total incomes at the complex minus expenses, the NOI. Any lender, if it’s Fannie Mae, Freddie Mac, small business loan, institution loan or the local banks, they would like to look at our whole picture. I call it a story. I believe in putting together a great portfolio of all the things, all the experiences and everything because the lender, the loan giver is looking into, first to fall, do you qualify for the loan? That’s number one.
Number two, can you manage the asset? Do you have to skills once we give the keys to you and millions of dollars of the loan in your name as a guarantor or recourse loans that we can get, how are you going to manage it? Would you take the asset going up or are you going to take the asset going down? That’s why it’s so important that we do understand what’s involved in the loan qualifying process and buying the property at the right closing table and then to take over the asset. To make the long story in a simpler way, our net worth has to be higher. When I say our, I didn’t say mine because that’s the other part of this whole process.
That’s what I wanted to get to because I know people, if they’re getting into commercial property and they’re learning about how to qualify a loan, they’re thinking, “I don’t have that kind of net worth. It’s going to take me 30 years to have that kind of net worth so I can go buy an apartment complex.” What do we do?
In those cases, for the new investors, they don’t have the high net worth, they need to look for the key principal. A loan sponsor is another word. Dean Trowbridge shared with me a term called loan enhancer. That’s a word that’s coming to me years back when he shared with me. He says, “Vinney, you can have so much net worth but we could combine the net worth of other people who will be guaranteeing or writing their name signature on the loan.” The lender could say, “You are the sponsor, you will be on the loan, but other people can also be on the loan.” That’s what we call it as the loan sponsor or seeking out somebody.
I always tell my students and my investors and partners, you could seek out people who have a great net worth in their retirement and their cash. They made it, they are in their 40s or 50s or 60s even, they don’t have the knowledge that you have but they can share with you their net worth and that’s the key. If you have a net worth of let’s say $500,000 or $1 million and then you get another sponsor who has got $2 million net worth, the combined is going to get you a bigger loan, a bigger number of units of apartments and so on. It’s the combined net worth which will determine the loan amount.
Go back to those terms briefly in case somebody has never heard of the key principal and loan sponsor. I’d never heard of loan enhancer. That’s interesting. All three of them, are they the same? Are those terms used interchangeably throughout the industry?
They are because you’re looking for somebody who’s going to go on the loan documents and qualify the loan for you or with you. Loan enhancers, it’s the same thing and as I said, there are a couple of other words like the key principal because you are the principal but if you have little bit lower net worth, the other person will also be a key principal because they are writing their name on the dotted line and guaranteeing it. One will be key, one will be a subordinate right there. Then another subordinate but you could write out in the PPM. That’s the Private Placement Memorandum, the terms and then as these people are coming into buying the apartment complex, they could be partners. How do we bring them in? That’s a good part. We do that through the LLC that purchases the multifamily, then we make them manage your LLC on top of it.
That’s how Dean Trowbridge shared it with me. He said, “Vinney, for $500 or $600 or whatever, we could make them manage LLC on the top.” The manager of the LLC owns the 30% or 25% of the property LLC because the investor’s money, class A members come into the property LLC. That’s the one where the title will be held. That’s what is buying the property. The property LLC is the purchaser of the LLC but then 65%, 70% or 75% of that cashflow and equity returns are going to class A members but then the rest of it, the 35% or 25% will be owned by the manager LLC. It’s called manager LLC and in that manager LLC, the loan sponsor will come in. Any partners who are helping to underwrite and raise money will come in and then yourself as the principal will come in too.
To break that down a little bit, if we were going to buy a $30 million property, I could find three people with a net worth of at least $10 million or we would need more than that. They all had, let’s say fifteen to make it safe and we can bring them in to qualify for the loan amount or the net worth, correct?
That’s true. $30 million, if he gets a 70/30 loan, let’s assume that. Then 70% of $30 million is $21 million. We will need a net worth more than $21 million total, you’re right, yes.
You mentioned that they want to know that we can manage the property and the other things as well. If these three members have never managed any type of real estate even though they have the net worth, are we still going to qualify?
No, you will not. A lot of people miss that part. That’s why it’s so important for us to look at a property management company if we don’t have our own yet and especially people starting out. We have had two acquisition companies, two management companies in the last years and rightly so because the lender wants to know who’s going to manage it. If you don’t have the experience, are you working with another company that has the clout and the experience and the know-how to manage that solid asset which is going to bring cashflows and pay the mortgage and take care of people like that? That’s why it’s so important for us to be talking to the property management company and interviewing them and finding the right partner.Trust is important in building relationships. Click To Tweet
They will then write a contract between their property management company to the LLC that owns the property and they will sign the contract to manage it on a daily basis. The personnel are at the property level, the community manager, the leasing agent, the lead tech, the border and all those people. Their salaries are paid by the LLC, the property LLC from the rents collected and everything like the insurance and the tax and maintenance. There is a fee that the property management will charge 3.5%, 3% or 4% monthly on the total rent collected so that they could manage the managers of the property. Our job as syndicators is to manage the property management company.
Will that covers the experience requirement by hiring a professional management company? We don’t have to have another individual sign that says he has bought two or three apartment complexes by having that management company that has the experience they fulfill that requirement.
That will fill the requirement. If you think that you want to partner for growing your business more and more, it’s a great idea to find out a management company who also wants to raise money a little bit into the deal and they become a partner then. It’s a vested interest from four partners we could say or three partners. That’s a great thing. Only do it for that particular property. Do not get into a big contract that we are living together for the next 30 years. That does not work. It’s a very fine art to understand the semantics and everything and making sure that the legal paperwork is done correctly but not to get into a marriage because you are buying their first property. You got to feel other people out. It’s a honeymoon period right there to see.
In the clause, in the contract I have, it says that either party can let each other go within two months, 60 days. You got to have that clause in there because if they are not doing a good job, you don’t want to suffer. Let the property suffer. That’s the huge part and that’s what took us years back to starting our own management company because we had some challenges and things like that and now we are able to self-manage. We can make decisions faster or quicker. We can save millions of dollars in construction costs and we can look at the training of our employees at the right time, their benefits package, growth policies and everything that we have done. I give two growth policies to every team member every year. One is in June, about half yearly and one in November before Christmas holiday season. We give outgrowth policies.
Let’s say we’re getting into the business. We’re fixing a purchase, our first multifamily property, we’re doing our first syndication and we don’t have the net worth to be that KP and so we’re going to bring somebody in. What should we expect to pay somebody like that? How much of the deal is average? What should we consider for that?
I would say that depending on the size of the deal or the size of the loan, the more risk is involved on the part of the sponsor. The numbers can look bigger for them and for us also because if it’s a larger deal, the cashflow will be much larger and multiply whether it’s 70 unit to maybe 250 units. I would say 10% to 20% is usually the norm. It all depends who you are talking to and if there is a family member who is within the circle of influence and very close-knit and everything they trust and believe in you. They have this money and net worth and not making any money. This way, they are using their net worth. They’re not getting involved in the property that much, the day-to-day operation and other things. They might be happy with 10% or even 8% because they are getting something out of it. With more savvy loan sponsors, we go for almost 12% to 15%. I know in one time, I’m thinking about one deal where our key sponsor, when we didn’t have much net worth backed out.
He backed out at the last moment and it happens. I know Kim Taylor was in an interview I think with you or somebody and she was saying, “The number one reason that deals don’t close is that the new investors who are starting out, they feel that 1% is going to raise all the money, 1% is going to get on the loan with me and then at the end they don’t come through.” That’s a very big thing we should always be looking at, diversifying and networking, two, three, four people who can be on the loan with us. We need to be always talking in marketing every day, every moment. We should have an elevator pitch with investors. I never say investors, I always say equity partners. They are equity investor partners who are going to get the whole flow. The same thing is with the equity sponsors. You could say that I’m always looking for high net worth people who can share in the cashflow and the equity, which is true.
You could do two ways. You could pay them a lump sum fee upfront if you have some or pay them a percentage after the first year. I believe that loans sponsors are on the loan for as long as we are going to keep the property. They probably would like to know how well we are doing and making sure the mortgage is getting paid and the cashflows and everything and not run the property into the ground. That way, it’s good to pay them along with other partners. We pay the quarterly, the acquisition fee and the equity gains those are the three ways we get paid most of the time. We get paid four times in my company because we manage the asset also. We collect $500,000 each year with that 4% or 3% fee to manage the assets. The other thing is we do collect the cashflow. There are different ways people do it. They can do it where you give the majority of the cashflow to the investors and then you put a threshold and then you get 50%. In my case, I’ve been able to do different ways. You could 60/40 all the way through or 70/30 in the first year especially with the market where it is right now with the cap rate being low. We’re looking through all creative ways to do it.
Kim says the number one reason is that people put too many eggs in one basket. They’re counting on that one person to bring all the capital or this one person to be the KP for the entire loan. She’s very experienced as well. As far as qualifying for this loan and having a KP that’s going to stick with us, what are some ways that we can make certain that this KP is prepared to be in the long haul with us? With getting started, how can we convince them to be in this deal? Should we always have a backup that’s prepared to still sign with us?
You hit the nail on the head. I believe that first of all, we need to have a good stack up story because the key principal or loan sponsor, they’re going to look at us. What kind of knowledge am I getting? What kind of things am I underwriting? How is my underwriting? Am I conservative? Am I not? We got to portray our best foot forward so that they believe in us. That’s the number one thing. The second thing is to have a backup also is very good. Because it’s not a good idea to keep one and by the closing table, if they back out as they did within our case, we have to get a sponsor five days before the closing. I had $250,000 non-fundable. I take risks but the thing is it happened and we found the sponsor. One of my investors, he gave his financial statements. He was very savvy. Within fifteen minutes, he sent his financial statement he had already done to our loan broker and then loan broker said, “Vinney, you’re in. It’s perfect. This is a great guy,” and so forth. It’s good to always be selling.
You got to be using those words, “Always be selling and marketing and also always be closing.” The ABC of closing is always true because you want to tell the equity partners, “If you find out somebody has got a high net worth, you want to get them involved right away.” He said, “I’m looking into these larger multifamily communities where we look for a value play, momentum play and the add value.” I’m always looking for equity partners who would like to be on the loan with me and that makes a big difference. You’ve got to keep them abreast. Sometimes we feel that, “I got him under my belt. He is looking forward to working with me,” but we don’t talk to that person for three months. Now we got the property, now we are going back but he already got going somewhere else. You’ve got to keep in touch. You’ve got to bring them into confidence and build that relationship and that trust is very important.
I’ve experienced that myself. Whether we’re raising capital or whether you’re needing that KP last minute, you’ve always got to have that relationship building and you’re always working on that. It’s a delicate process, isn’t it?We tend to believe that we could do everything ourselves, but that's not true. Click To Tweet
It is, to be truthful. It’s hard to even get the investors to give us $5,000 or $50,000 or $100,000 and $500,000. In my case, it’s $700,000. They had built that trust in my companies and the track record. The same thing is true with the loan sponsors too. They are looking at their reputation to be truthful. They are looking at, “I built this net worth by working hard. What if I sign on a dotted line and then the sponsor is not going to be that savvy?” They have their own inhibitions and risks are involved. As you said, you’ve got to always be preparing a list of maybe two, three, four high net worth people, especially who are believing in multifamily because that’s the business we are in.
Is there anything else to specifically qualifying for a loan that we need to know about or that we should be preparing for as soon as we’re looking at this property or doing underwriting? What else should we be thinking about when we’re thinking about specifically the loan qualification?
With the loan qualification, you’ve got to prepare a pro forma, a projection for five years. It’s very important. The CapEx budget is very important. Those two things go hand in hand even when we get the property if it’s in the best and final or like that. We could go to local banks, we don’t have to pay the loan fee and so forth, Fannie Mae also. Many times if you go with the loan brokers, you might pay 0.5% or 0.75% or 1% but you will be guaranteed a loan in a good way and he’s going to watch every step of the way to make sure that the closing is on time. In my fortunate career, I have closed all 26 of the deals from LOI to closing, a 100% record but it happened because I had great loan brokers to be very truthful because we don’t know the jargon.
Many times we believe that we could do everything ourselves and that’s not true. It’s good to have professionals who can take you side-by-side and do all these things for you and share your story with other lenders because they meet with breakfast and lunch with other Fannie Mae, people coming into town, Freddie Mac people. They have relationships built in with local banks, the Vice President, Commercial Divisions because they are doing many loans. It’s a good idea to get them involved. The biggest thing I would like to tell everybody is to don’t hesitate. Go ahead and talk to a broker even to take them in confidence and say, “What is needed off of me? What can I put together in my story, my bio? What kind of things can I put together, a stack of things which can qualify me for the loan? What are the limitations and how many more people can I bring in? I want to get a $5 million asset or $10 million assets,” and they will guide you.
What are some maybe questions for us to determine if this specific loan broker is somebody we want to work with? I have many contacts, many out of the blue or we have worked together, scheduled call or get together. What are some questions that I could ask them to say, is this somebody I want to try to partner with or work with long-term?
You want to go on their website. You want to go into what kind of investments they are doing. I believe finding somebody who’s local to the market because they can get a lot more clout going because they believe in their backyard. A lot of loan brokers say, “I can write all over the country.” I like to believe in going to somebody like in Texas and you want somebody near Georgia and go there and even ask the broker to be truthful too because the brokers have a lot of affiliations. Recommendations are the best place to go with and to find out from their reviews also and as you interview the loan broker to sell you on why they are the right people to work for you because you are paying them 0.75% or 1% fee. That’s a lot of money and you want to make sure they are closers, they have the clout and they have the experience.
Maybe even talk to some of their testimonials, their recommendations, referrals so that you could talk to some investors in the same space where you are in. The worst thing that can happen is if we are in this 50 unit range but we are dealing with brokers in the 150 or 200 and loan brokers in that big level too. That doesn’t help much. We need to be where we are to get started and then move up from there. It’s a great opportunity to ask some very pointed questions about their dealings. When was their last closing? Ask them, “Could you share with me what kind of loan terms were you able to get?” Those things are important. Again, meeting with the loan brokers and let them guide you. The guiding process that we share with you too, how much on top they are or they are not.
Is there many ways from your experience that specific loan brokers have stood out to you from other loan brokers you’ve worked with that you were like, “This is somebody that I want to work with a long time because of this.”
I believe in relationships and that’s how my investors also believe and trust in me and all of that from zero to 130 investors now. I can raise $6 million to $8 million in a day or two like that but the good part is my real estate attorney I met with only three times, Milton Colegrove in twelve years. Only three times I met belly to belly but he oversees all my businesses. He’s at the closing. He’s doing everything. The same thing with loan brokers. I have in my career only two loan brokers. Only two in twelve years. With my old company, I had one, Steve, who was a great guy. I didn’t want to take that from the old company to a new company that I started four years back. I kept the attorney the same and Kim, my syndication attorney, the same but the rest, everything is all brand new. I built 67 full-time people, all brand new. I had nothing. I had zero when I moved to Houston. I live near San Francisco but I do all these things remotely. I started a new company in Houston three and a half years back. I started a brand new company in Atlanta now.
I’ve got twelve team members over there. I’ve got my own attorney right there, my own brokers and everything. My answer to you would be to get just two loan brokers because one, they do a good job. They know your whole profile and bio and everything. They could get you in front of the right people. I love working with Brandon. I don’t mind sharing his name. He writes loans all over in Texas and all over the USA. He’s the same one who gave me loans in Georgia and he’s going to give me in Florida and in the Carolinas but he’s a great director. The best thing I liked about his whole team was that they share with you a lot more in detail and the metrics and everything. They are putting in nice metrics and recommendations. “This bank is giving you these terms. This bank is giving you this term and these terms. Fannie Mae is giving you this. Freddie Mac is giving you this.” This way you can make a good decision with a person who already knows what he’s talking about and then I’ve never had trouble in getting them to do all the paperwork correctly. With all the reports and everything. I’m just there to DocuSign and I sign everything that Milton tells me, my counsel and that makes my life easy.
That’s awesome. I can see why that person would be very valuable going through that process in what loan that we need to take. Tell the audience how they can learn more about you.
I’m passionate about raising a lot of money and students can partner with me, they can bring deals and they can learn from me. If they can text the word LEARN to 474747. They would come into my InnerCircle Mastermind. I do group coaching also still myself and I underwrite the deals. A lot of people are getting great knowledge from me and I share all my templates, everything I’ve done. I am no holds barred. I want my students to be better than me. They could go to VinneyChopra.com. We are putting three, four and more things. My book is coming out and there’s a lot of good stuff.
I hope you will text LEARN to 474747 and connect with Vinney. He’s probably the most generous man I’ve met, one of them for sure. I can’t thank him enough for being on the show and how generous he’s been with his time and knowledge. I hope that the readers will also go to Life Bridge Capital and connect with me and go to our Facebook group, The Real Estate Syndication Show where you can learn from experts like Vinney and many other guests on the show. Have a great day and we’ll talk to you all tomorrow.
About Vinney Chopra
Vinney (Smile) Chopra, a founder and Chief Executive Officer of 3 companies and President of 2, came to USA with $7 in his pockets. He has over 35+ years of Real Estate experience and 15+ years of Multifamily Syndication Investing & Managing experience including overseeing the management of $220 Million in real estate assets. MONEIL PREMIER COMMUNITIES are all Self-MANAGED by Vinney’s well trained 67 full-time professionals along with thousands of contractors and vendors!
His expertise includes picking right markets, underwriting well, raising $5 million to $8 million in a couple of days, negotiations for Win/Win/Win, driving corporate growth strategy, investor relations and asset management, and business & culture development.
Vinney is passionate to coach and mentor and teaches his skills to other investors so that they don’t make the mistakes he made. Vinney has an undergraduate degree in Mechanical Engineering and a Master of Business administration degree from The George WashingtonUniversity. He lives near San Francisco, married 39 happy years to Kanchan and have two great grown-up children.
If you want to learn or invest with Vinney, text “Syndication” to 47 47 47‼️