SS193: Top Tips for Thriving in Real Estate with Small Banks

SS193: Top Tips for Thriving in Real Estate with Small Banks

Working with small banks can offer significant advantages for real estate investors. In this episode, Charles discusses these advantages and how investors can utilize small banks to build a solid foundation for long-term wealth growth.

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Talking Points:

  • Small community banks and credit unions are the lifeblood of the real estate investment business, especially for smaller commercial properties and apartment complexes.
  • Their local presence, size, and flexibility make them the ideal lending source for investors.
  • Let’s break down real estate lending with local banks:
    • First off, small community banks usually keep the loans on their books – not selling on the secondary market – they determine what types of property loans they want to hold and how much underwriting is necessary.
    • They are most likely to make portfolio loans – great if you plan on purchasing smaller properties and refinancing them under one loan.
    • Typically, the fees are minimal, (if you are not using a mortgage broker)
    • The process is typically simpler and more straightforward
    • Certain banks will allow all kinds of creative financing options – cash-out refinancing, low down payment, portfolio loans, etc., but you need a relationship
  • Now let’s explore credit unions:
    • You are working with someone you can actually speak to – not set lending in a box
    • With federal credit unions, there are no prepayment penalties by law, and some states prohibit credit unions from charging prepayment penalties on certain loans – banks will usually have prepayment penalties on commercial loans that can range from 5%-1%
    • You are actually borrowing money from depositors in your community.
    • They typically have more reasonable fees – especially when rates drop
    • They offer small business lending, multifamily lending for small and large properties along with commercial real estate
    • Cooperative credit unions, so small credit unions can work together with larger credit unions to fund large loans.
    • They are more in touch with their community
    • There is less bureaucracy
    • Credit unions do not tend to merge – unlike small banks
    • One of the best examples I have heard about working with credit unions versus large national banks is if you have ever heard the Dave Ramsey Show if someone is behind on a personal loan or car payment, Dave asks who the lender is, and he is very relieved when he hears it is a credit union or small bank since, you can actually go into a branch, speak to someone. It is very typical to be able to adjust the loan if you are having an issue paying. A personal relationship is still cherished at these institutions.
  • How do you find small banks and credit unions?
    • Small bank and credit union lending is all relationship-driven, and investors need to start building those relationships now, even if you do not think you will require their lending for years into the future.
    • I have successfully found good local banks to lend on my real estate investments by simply making a list of small banks and credit unions within, say, a 45-minute to 1-hour drive of the property or market and reaching out to them all. First online or by email and then getting on calls with the ones who respond by email and seem like a good fit.
    • Many of them will not be interested in lending on apartment complexes or certain commercial real estate assets, but you will find some that are interested. These are the ones where you want to start building a relationship, first by opening a bank account.
  • If you are working directly with a bank or credit union, there shouldn’t be that much of a risk of being scammed, but if you have any hesitations when dealing with a lender:
    • Ask for references
    • Ask for addresses of properties they have recently loaned on
    • Avoid paying upfront fees. Some lenders, like agency lenders, might have loan fees that need to be paid upfront, but for most lenders, these fees will be paid at closing.
  • Always verify the representative you are working with has actually done a loan for a similar property to yours
  • Always get the closing statement before (days before) closing to review – always confirm fees throughout the process – leverage is gone if you get the statement at closing for the first time
  • Term sheets from credit unions and banks should be marked and sent back for renegotiation
  • Some pushback I hear from certain investors (usually new investors) is that bank and credit union loans are recourse. In other words, you are pledging your personal assets when you take out a loan, which is not the case with agency/government loans like Fannie Mae or Freddie Mac, which are non-recourse. However, most agency loan programs require the property to be stabilized with an occupancy rate of 90% or higher. It is not really possible to achieve this with many value-add properties. Also, non-recourse loans have many carveouts that really whittle away the coveted non-recourse label. This may include maintaining the property to a certain condition or occupancy rate. You cannot deviate easily from your initial business plan. If you said you would do certain renovations, like renovating 50% of the units, and only did 40% of them and then sold, paying back the lender in full, you still risk being put on a list that won’t allow you to take out another agency loan in the future.
  • For more information on nonrecourse and recourse loans, check out my other episode, SS124, which we will link to in the description.

Transcript:

Charles:
Worried about being approved for a mortgage and unsure if you should apply for financing with a local bank? Learn how to navigate bank loans effectively in this episode.

Charles:
So after an extensive study of real estate financing options, and also through my personal experience, it’s clear that small banks and credit unions offer unique benefits that larger institutions often overlook.

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo, and today we’re diving into top tips for thriving in real estate with small banks. Now by the end of this episode, you’ll clearly understand why small banks and credit unions could be your ticket to smoother real estate investments. Now get ready to elevate your investment game. Let’s jump in and explore how small banks can transform your approach to the real estate game. A small community banks and credit unions are the lifeblood of the real estate investment business, especially for smaller commercial properties and apartment complexes.

Charles:
Their local presence, size and flexibility make them the ideal lending source for investors. So let’s break down real estate lending with local banks. So first off, small community banks usually keep the loans on their books, so they’re not selling them on the secondary market, and they determine what types of property loans they wanna hold and how much underwriting is necessary. Now you’ll know if you ever purchased a property like maybe like a regular residential property, and you gotta prove for one bank here with financing and then within a few months you’re paying another bank your mortgage. That means it was sold on the secondary market. That doesn’t happen typically with small community banks. Now they’re most likely to make portfolio loans as well. So this is great if you plan on purchasing smaller properties and refinancing them under one loan. For example, you are buying single family homes and you’re renting them out and maybe after you do five or 10 of ’em instead of having five or 10 different mortgages on them, what you’re gonna do is you’ll go to a local lending institution like a small bank or credit union, and they will give you one loan over all those different properties.

Charles:
Typically, the fees are minimal. If you’re not using a mortgage broker, of course, if you’re using a mortgage broker, then you have to pay them put down and below in the comments of what you have paid a mortgage broker before in the past. Now the process is typically simpler and more straightforward than working through other types of lenders and institutions. And certain banks will allow all kinds of creative financing options, cash out, refinancing, low down payments, portfolio loans. They’ll even do some sort of lending with a seller financing note. So if you’re getting seller financing from a property, maybe you can mix it with the bank lending so you can come in with even less of a down payment than you would’ve if you just went with the bank or with the seller financing. Now, let’s explore credit unions. You’re working with someone you can actually speak to, not set lending in a box.

Charles:
With federal credit unions, there are no prepay penalties by law, and some states prohibit credit unions from charging prepay penalties on certain loans, and banks will usually have prepay penalties on commercial loans that can range from 5% to 1%. They’re actually borrowing money from depositors in your community and they typically have more reasonable fees, especially when rates drop. They offer small business lending, multi-family lending for small and large properties along with commercial real estate. Now there’s something different than I found out when doing research on this is that there’s cooperative credit unions. So there’s networks of credit unions that can work together. So small credit unions along with larger credit unions to fund large loans. So don’t count out your local credit union if you have a large commercial property you are trying to fund. Now, credit unions do not tend to merge, unlike small banks who are always merging.

Charles:
And one of the best examples I’ve heard about working with credit unions versus large national banks is if you’ve ever heard of the Dave Ramey show, if someone is behind on a personal loan or car payment, when they called into Dave, Dave always asked who the lender was and he was very relieved when he hears it’s a credit union or a small bank. So you actually go into the branch and speak to someone, and it’s very typical to be able to adjust a loan if you’re having an issue paying. And a personal relationship with these small institutions is cherished. So how do I find small banks and credit unions? Well, small banks and credit unions, lending is all relationship driven and investors need to start building those relationships now, even if you don’t think you’re will require their lending for years into the future.

Charles:
Now, I’ve successfully found good local banks to lend on my real estate investments by simply making a list of small banks and credit unions within say, a 45 minute or one hour drive of the property or market and reaching out to all of them now first online or by email and then getting on calls with the one who responded by email and seemed like a good fit. Now, many of them will not be interested in lending on apartment complexes or certain commercial real estate assets, but you’ll find some that are interested. And these are the ones where you wanna start building a relationship first by opening a bank account. Now, if you’re working directly with a bank or credit union, there shouldn’t be much of a risk of being scammed. But if there’s any hesitations when dealing with a lender ask for references. Ask for addresses of properties that they’ve recently loaned on and avoid paying upfront fees.

Charles:
Now, some lenders, like agency lenders might have loan fees that need to be paid upfront, but for most lenders, these fees will be paid at closing. I’ve never prepaid for fees with a when, when I was working with any type of bank. So it’s one of those things that it’s a red flag if it comes up. Now, always verify the representative you are working with has actually done a loan for a similar property to yours and always get the closing statement before days before closing to review and always confirm fees throughout the process and your leverage is gone. If you get this statement in closing for the first time, term sheets from credit unions and banks should be marked up and sent back for renegotiation. And this is something that’s maybe not talked about that much. And this means that during your loan process, at some point you’re gonna get a term sheet from the lender and it’s can tell you exactly what’s proposed for your loan what the rate would be, what the terms would be it’ll go through exactly the fees and you can review this and then go back to them.

Charles:
So mark it up and send back for renegotiation. And one thing that I’ve found is every time that I’ve had an issue with a small bank and I’ve sent back the term sheet or I’ve sent back any of their fees for them to look at again and renegotiate they’ve always come back. It’s usually within only a couple business hours. It’s not, this is not like a week process that it might be with a larger institution. And yeah, and they’ve worked lowered their fees. So it’s something that it’s easy to work with these different institutions and they’re ready to lend, they’re there to lend and they want to close the loan. Now, some pushback I hear from certain investors, usually new investors is that bank and credit unions are a recourse. In other words, you’re pledging your personal assets when you take out a loan, which is not the case with agency government loans like Fannie Mae or Freddie Mac, which are non-recourse.

Charles:
However, most agency loan programs require the property to be stabilized with an occupancy of 90% or higher, and it’s not really possible to achieve this with many value added properties. You know, we’re buying properties that are not so great of shape condition and we’re going in there and we’re putting work into changing around management and also renovating the property. So to have a property with that high of occupancy when you buy it is usually not what you’re gonna be finding. Also, non-recourse loans have many carve outs. They call ’em bad boy carve outs that really whittle away the coveted non-recourse label. And this may include maintain the property to a certain condition or occupancy rate, which is obviously you, you can control the condition of your property and occupancy rate. However, who is the one that tells you what that condition has to be?

Charles:
And during an occupancy rate when we’re doing a value add, yes, that it’s not uncommon for your occupancy rate to go under 90% when you’re doing a value add job. So these loans are really for properties that are much more stabilized where you’re going in and you’re not really doing heavy value add heavy renovations, and you cannot deviate easily from your initial business plan. And this is one thing we found before with agency lenders. If you tell ’em you’re gonna do so many units, you’ve gotta do those units. And it doesn’t matter if you say you get an offer halfway through the business plan and you sell it, you’re still possibly gonna have an issue with the agency lender because you didn’t do exactly what you said you were gonna do. And so if you said you were gonna do like renovating 50% of the units and you only did 40 of them and you sold it and you pay back the lender in full, you pay back your your investors in full, you still risk being put on a list that won’t allow you to take out another agency loan in the future.

Charles:
This is not something that I’ve found with banks. They really, obviously if the property really goes into disarray, but it’s not something where they’re gonna be sending out people. And I’m gonna be hearing back about the condition of property. I’ve never heard that with any of my bank loans. If it gets paid, there’s no problem and it’s just a much easier situation to work through. For more information on nonrecourse and recourse loans, check out my other episode, SS124, which we will link to in the description. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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