Case Studies

H. Mixed-Use Financing Proposal Example -


This is a short case study on how I am obtaining financing for a mixed-use rehab project.

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Video Transcript Below

Hey Daniil Kleyman here and I'm wanting to record this short case study for you on a pretty cool project that I'm getting ready to start. It's going to be a mixed use apartment conversion and this case study is going to deal specifically with obtaining construction financing. I'm going to give you some details about the project, but I'm also going to show you how I'm able to present and obtain construction financing for this project. So, this is actually a building that I bought last spring. I paid cash for it. I paid about $65,000. It was on the market for actually a pretty long time and nobody … I think it was listed for $100,000 or $110,000 and nobody … I think a couple of people made bids on it, but nobody ended up, you know, very few people wanted it because it needs so much work. Every imaginable problem with this building that you can imagine, it has. It needs a brand new roof. It's got exterior brickwork that that needs fixing. It's got these old windows, it's got a concrete slab foundation that we'll have to to jackhammer through to put new plumbing in. It's got water issues. It basically needs everything.

So very few people in my market were willing to touch this project. I ended up bidding on it and I got a great deal because first of all I'm gonna end up making a lot of money with this building. Second of all, it's eligible for historic tax credits, federal and state, which is great. And third, it also came with a buildable lot over here to the left of it that's over 30 feet wide. It's got the best zoning in terms of density that you can have in this area. So the lot itself is probably worth $30,000 to $40,000 and I'm going to end up building a duplex on it.

The other cool thing about this building is it's got … well, it's got a huge lot of in general that goes all the way back. So I have room in the back of this building to put an outdoor dining area for the restaurant and plenty of off street parking. So overall, it's a great property in an area that's quickly gentrifying and once this project is completed, that's actually going to sort of extend the line of gentrification out in this neighborhood. So I'm really excited about it, but it's going to be a lot of work.

So here are the basics on this building. Paid cash, 65 grand. It's about 4,400 square feet. It's going to be … it used to be … upstairs used to be the classrooms for the seminary, which is back here. You can kind of see this building. So downstairs was a restaurant, upstairs were classrooms for the seminary next door.

We're going to keep the restaurant, but we're going to decrease the restaurant from the entire downstairs to just this half right here on the corner. This is going to be a two bedroom apartment. And then upstairs I'm going to put three more apartments. So the building will be converted to a restaurant plus four apartments. It's going to require a rehab budget of about $300,000. that's kind of my worst case scenario. I'm hoping to come in under it, but it's going to need everything. New roof, exterior brickwork, site work, sprinkler system all new framing, electrical, plumbing, HVAC, insulation, sheetrock, flooring. Literally everything in this building will be redone.

So, my financing is going to come from a local community bank. I typically take out construction loans with them and these particular construction loans are … normally they will finance up to 80% of my costs, which is 80% of my acquisition, 80% of my renovation. But because I've already paid cash for this building, I'm going to propose to my lender that they just finance 100% of my renovation. And the way they structured their loans is you take out a construction loan that's interest only for the duration of construction, which, for me is going to be six to nine months. But then they simply take this loan and they roll it over into what they call a mini perm, which is a 20 year amortizing loan. So it goes from being interest only to now being fully amortizing at 20 years. Usually … I like these interest rates a lot because my interest rate on this construction loan and on this mini perm is going to be somewhere in the fives. It's around five and a half percent.

So this loan will be a 20 year amortizing loan with a three year call, which is not great. But I also may end up refinancing out of this into another loan eventually. But this is very cool because you're getting construction financing and then there is really no need for a takeout loan because it just rolls over into a permanent loan. So I hope you can follow me, and this is great for me because I plan to hold onto this property.

Let me show you in the Rehab Valuator real estate flipping software how I’m looking at this deal and how I’m going to create a very brief proposal to send to my lender. Okay, so I typically have, within my documents folder I have a properties folder and then I have a sub folder for the deal, and within that deal sub folder, I have sub folders for documents, contracts, insurance, and that's where I store a copy of my Rehab Valuator Premium house flipping software. So I'm going to pop that open.

You should be familiar with this window. I'm going to click Update. So here are the basics, right? Purchase price is $65,000. I've entered some closing costs here, some holding costs, and I'm usually pretty conservative when I estimate my holding costs. Again, it's always better to err on the conservative side. I'm going to switch my financing on. So this is how I'm inputting it. I'm going to say lender caps ARV instead of cost, and here's why. If I was seeking financing for acquisition and renovation, I would've said lender will will give me 80% of my cost, which would give me 80% of my acquisition and 80% of my rehab. But because I already own the property free and clear, I'm going to do this. I'm going to say lender caps ARV because I want to get to the exact loan amount. So I'm going to say I want the loan amount of $300,000 because that's my rehab budget, and now I'm going to type in equals 300 divided by ARV rent. Or alternatively you can type in just 440.

So here's what happens. I go to my second exit strategy because again, remember, I'm not flipping this deal. I'm going to refinance it into the mini perm and I'm going to hold it. So I'm using the second exit strategy refi and hold. My after repair value is $440,000. I want the loan amount for $300,000. so I simply enter a formula here and that gets me … look right here. That gets me to my loan amount of $300,000 right? See total loan amount, $300,000? I'm going to enter one origination discount point, one point for other closing costs. We're going to pay this upfront at the closing. My interest rate will be five and a half percent and I will be making interest payments during my rehab.

So then I go here. My rehab budget … because I'm not going to submit the detailed budget yet because I'm finalizing all my contractor bids, so right now I'm just ballparking at $300,000, so I'm just going to enter a lump sum here and I'm going to switch this because we're gonna fund this rehab in draws, right? You can see this changed. If we were doing it at closing, I'd get my entire $300 grand at closing, but my lender will not do that, as most banks will not do that, so you have to do it in draws. So I click return to analysis. I'm projecting my rehab period is going to take eight months. And again, it's probably only gonna take six but I want to be conservative. I'm only putting in a month for the refi because after my construction period, that automatically rolls over into this mini perm, into this loan.

So let's just go through this. Why am I putting in 68% for … this field is when I'm ready to refinance my property, what will my bank lend me as a percentage of the new appraisal? I'm saying the new appraisal, once the property is ready, will be $100 a square foot, which is $440,000. Normally, I'd be looking to cash out refi. I'd be looking for 80%, but what my bank does is they simply take this $300,000 loan and they keep it. They keep it on the books, but they roll it into a fully amortizing loan. So again, I'm typing an equals $300,000 divided by this because my “refi” loan will continue being $300,000.

Rate will be five and a half percent. It's going to be amortized over 20 years and there's not going to be any additional points because again, that loan just gets rolled over. I hope this makes sense for you. You know, if not, send me an email. Here's the important part. I go here and enter … and let's magnify this. [Inaudible] I'm entering my projected rent roll. So as you can see here, I'm going to have a two bedroom, two bath apartment, and you can just type this in. Two bath. Two bedroom one bath apartment, one bedroom one bath studio, and the restaurant, and I'm typing in my projected rent roll. For this, I'm not assuming any vacancies and I'm going to manage it myself. So there's not going to be any management fee, but this is going to be important. I'll show you why this is important because this is going to determine a couple of things for you. I do the same thing with my operating expenses. There's going to be common water meters, so I'm projecting $250 a month in water bills. I'm going to get a huge tax abatement on this property. So my property taxes are going to be pretty low. And then this is my insurance policy.

So this will determine a couple of things. One, I can look here and I can see while my refi loan amount will be $300,000 which is my original loan, I'm going to tie up about $85,000 in cash in this deal, which I don't like to do, but again I can always refi out this later. This is how much equity I'll have on the books. This will be my cashflow and this is a very important number. Once the property is fully renovated and fully stabilized, based on my projections the debt coverage on this loan will be 1.91, which is great. This is an important number to show to your bank and so here's what I'm going to send to my lender. I'm going to go here to view reports and I'm going to send him the marketing sheet for the refi exit and I've already put this together. Let me show you what that looks like.

So I'm going to walk you through this. Project notes. Property is already purchased with cash. First box below shows, and I need to correct that word, shows the breakdown of projected cost basis versus ARV and loan versus interview. So let's look at this. Purchase and rehab assumptions. I'm showing my lender after repair value is $440,000. Purchase price is $65,000. My rehab costs will be $300,000. Total holding and closing costs, six grand. Total financing costs, this is what I'm projecting my interest payments to him and points will be, total projected cost basis is $385,000 which is 88% of the after repair value. Now normally, this would not look like a great project to me, but with this project I'm going to get historical tax credits and I'm not going to go into great detail about what historical tax credits are, but essentially because this is an eligible project, if I do everything according to the requirements, I'm going to get 45% of this $300,000 back as federal and state income tax credits. It's huge.

So even though my cash cost basis in this deal will be high, 88% of ARV is normally not a very good number. I'm going to get at least $150,000 back. It's going to be over $150,000 because I get to put in developer fee as well, back as tax credits. So this is actually going to end up being an awesome, awesome deal once I'm done. I'm showing my lender total amount financed will be $300,000. This is how much cash I'm going to commit to the deal. And then here it says, “Second box shows what the loan would look like when it rolls over into a mini perm.” And this is important, right? Because when this rehab is completed, he's going to take this loan, roll it over into a permanent loan, and look. This is the number that he wants to see. Oh, DCR of new loan, 1.91, assuming five and a half percent interest rate and 20 year amortization.

So here's what I'm going to do. I'm actually going to go here and … pay attention. I'm going to click this and I'm going to click this and I'm going to take my keyboard and hold down the control key and I'm going to select operating income. Let's start over. I'm going to select operating income, operating expenses, and marketing presentation. I'm going to select these three tabs, and then I'm going to go file, print. And so this is what I'm going to shoot over to my lender because I him to see this rent roll, this projected rent roll, and my projected operating expenses because then they verify this 1.91% DCR number. So I'm simply going to click print. Actually I'm gonna hit print and I'm going to select my PDF writer. Cue PDF, and I'm going to hit print, and this is going to create just a quick PDF three pager for me that I can attach to the email. And let's go here. Let's go to my docu- I'm going to go to my properties folder. So I hope this makes sense for you. Oh, let's go here. Write a rehab. Let's see, 801 North 23rd street. I'm going to call this loan financials. All right, and so that's it. And it's going to create this PDF document for me that I can attach.

Now here's the other thing, if I want it to be more formal, I would simply then include a cover page. I could include a detailed rehab budget if I want. I could include some additional pics, but this is a very preliminary conversation that I want to have with my banker and so I'm only gonna send him these three pages. If I was making a formal presentation, I would include comps. I would include additional pics. I would include the cover page. I will include all of this in my presentation, but this is kind of a quick and dirty that I want to send to my banker to get the ball rolling because we already have a good relationship. I don't really need to make a really good impression on him, but if I was approaching a bank for the first time, I would really utilize all of these reports to make a formal presentation.

I hope this is helpful to you. I know this is kind of specific, but hopefully a lot of you guys are doing construction and are in need of financing, or are currently getting financing. I hope this is helpful to you. All right. That's it. Thank you very much for watching. Leave me your questions. Leave me your comments below and we'll talk to you soon.


Comments (18 comments so far)

  1. Sondra Roach

    I can follow you since I do construction loans as a banker–problem is
    How are you getting bank to rehab an investment property? Bank only
    interesting in rehabbing primary residence and won’t look at you if
    you have more than 4 properties on your credit report– in New York

    I had a rehabber called yesterday asking for the same thing and couldn’t
    help him-problem is I’ve been dealing with him for years and am currently
    refinancing his primary residence but had to give him a big NO on his new
    purchase. He said he called a lot of banks and got the same big NO–He
    needs a lender since he does a lot of deals and can buy the property but
    no one will rehab it

    By the way it was tough to hear this video

    • Daniil

      Sondra – look at your local portfolio lenders or small local commercial banks. They do rehab loans all the time! No limit to 4 properties either!

  2. Thomas Rodgers

    I loved your presentation. What kind of credit score would you need to secure a deal like the one you presented? Since any deal would be my first, would I need to talk to a “Hard Money Lender” to do my first deal with no experience?

    • Daniil

      For the banks I deal with, they typically look for pretty strong credit. I’d think scores in high 600s at least but every bank is different

  3. I just playing around with the software and it just great I love it, great case study construction loan. excellent.

    • Daniil

      Thanks, Persio!

  4. mark

    The video was a bit specific especialy if you’ve never done this before. None the less it was informative. Where are you based out of?

    • Daniil

      Based out of Richmond, Va

  5. Thanks for the demonstration. We have a multi-unit project that is proposed for conversion from hotel type rental units to larger fractional ownership units. The plan is to sell the units (located within a resort) and owners will place their units in rental program. This may make a good case study video for both Rehabvaluator andRentalValuator that we can share with you and others in the future.

    • Daniil

      Sounds good, David. Would love to see it!

  6. Thanks Daniel for the walk through. Your info is always very educational.

  7. djony

    your a beast!!!
    i have to upgrade to the premium version but I can already see how I can use this software to catapult my real estate transactions. thank u! visionary!

  8. Joe Cray

    Daniil I am in the process to purchase the premium package (Tuesday), and i have purchased foreclosures back in the early eighties with Damian Johnson who played out offensive lineman for the new giants, and former Mayor Gibson of New Jersey before relocating to North Carolina in 1993. I owned and operated a child care development center until 2013 had to closed due to lack of state funding. I understand a little about real estate and how it can change your life if done right. I see change from a lot of leg work, to automation. My house will be in foreclosure by the first of the year i needed to make this work. I also would like to purchase the laze millionaire. software as soon as possible. In three to ten years i would like to leave something for my grand children. I realize the grands and great grands don’t remember there grand parents is because they didn’t leave them anything. Can i get some mentoring assistance from you are your staff? Thanks in advance. My email is

  9. C Johnon

    Hi Daniil, I purchase the premium softway 24 Dec., 2015. I am going to present my analysis to a couple of community banks at the same time and avoid the pull of credit by using one credit report from one of those banks. If they use Experian will have Experian, if another only use Equifax I will make sure to have one on hand. and Transunion, etc.
    My partner and I really appreciate this, Ive done many classes, seminars which are all helpful. but this tops the cake. I is really a helpful tool.
    I will let you know how the presentation goes and the approvals I will get.
    Thanks will keep you posted.

  10. WOW, It is amazing to watch this deal now after I saw the finished results in person! I would love to hear what this building is currently worth not to mention how much with the duplex you built on the lot next door!! What an experience to see the end result and watch the beginning now. You know the deals are real because he is using his own personal projects as case studies. This info is insightful and so much is given free just to help people, the full program is well worth the price……. Thanks for all you do!

    • StefanieK

      Thanks Josh!

  11. Charles Randles

    Daniel you are the truth!!!! Cant wait to get started with your system. Turns work into fun. I dont believe I have the lite version, but perhaps it is buried in my email feed when I was hospitalized. please send another link so I can get the premium version to try out for $1. I can see that the $1 investment has a potential of netting $5k …even $10k in potential profit!! I believe in you and know at this tool is a game changer!

    • Rafael Diaz

      Hi Charles,

      Thanks for the kind words!