Personal debt vs. healthy balance sheet for lenders?

[Sid23]

I'm putting together a plan to acquire a 20+ unit apartment building in the next 365 days. Something came up last night that I'd love to hear opinions on.

How much does the borrower's personal financial statement affect the ability to obtain financing?

I ask because I'll be receiving a bonus (between $10-20k) in the next couple of months and need to figure out if its better to use it to pay down some of my $55k in debt, OR should I hang onto it and have it available for deal equity?

:thankyousign:


EDIT: I don't think I was as clear in my question as I intended to be. What I meant was what is more important for a borrower to have from a lenders eyes, a balance sheet with low consumer debt OR availability of funds for a downpayment? Obviously, BOTH are needed. I'm asking which would you pick if you could only have one? Thx.

 

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[Adam]

Liquidity shows stability and security. When lending on commercial income properties, lenders are more focused liquidity AND a good resume. Unreasonably high consumer debt can prevent you from getting financing, but low consumer debt won't overcome a lack of liquidity and a poor resume.

A 20-unit building is probably going to cost you somewhere between $1.1 - 1.2M. Your owner equity requirement is going to be $200K+. If I was in your situation, I would probably just pay down the debt with the $10-20K bonus, depending on how much you currently have in liquid assets.

 

[AroundTheWorld]

be liquid.

One one of our last projects, we were turned down be a bank for two reasons:

1) not liquid enough. We were told that our financials would have looked better had we tapped a LOC and had the debt / but also the cash in a liquid account.
2) we loved this one... the banker actually told us this.... "you are so young to have these kinds of assets"

We got financed at a different bank....

 

[Sid23]

If I was in your situation, I would probably just pay down the debt with the $10-20K bonus, depending on how much you currently have in liquid assets.

Care to elaborate on why? I'm forming a group of investors who will each contribute $20-30k, depending on the deal.

 

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[Adam]

Care to elaborate on why? I'm forming a group of investors who will each contribute $20-30k, depending on the deal.

That's why I said, "depending on how much you currently have in liquid assets." If you had $200-300K (I don't know if you do or don't), you wouldn't need the bonus, therefore its makes sense to pay off the debt. If your goal is to pool a group of people to invest, then by all means, hold the bonus money and utilize it for the building purchase.

 

[Diane Kennedy]

I will definitely bow out if there are any mortgage lenders, especially commercial lenders, in the bunch.

I have had the benefit of listening to Morgan Smith, President of Morgan Capital a number of times. They have 100+ offices and have purchased 5 banks this year. Anyway, Morgan always says that there are three issues in lending:

Credit
Collateral
Cash flow

If you are buying a commercial property, it weighs more heavily to the collateral and cash flow (ability to repay the debt). At the residential level, the cash flow is generally your own cash flow (income), collateral of the building and your personal credit score.

That's not to say if you have a history of foreclosures and bad credit that you can immediately buy a big commercial building, but it seems from what I've heard Morgan say that credit isn't as important.

 

[SteveO]

The advice you have been given matches my input as well.

I have done a lot of apartment loans. Nobody has ever asked me about debt to income ratios. But liquidity comes up in the conversations.

I agree with everyone else. Keep the funds available.

I have included lines of credit as cash available to lenders at times. They seem to have gone for that.

 

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[randallg99]

ditto Diane and Steve.

1. business credit is not nearly as important as liquidity and collateral when doing business and commercial RE deals.

2. personal credit is scrutinized for personal real estate transactions

a 10k bonus should be used for a good night on the town in NYC

 

[Sid23]

Thank you all for your replies. I'll definitely focus on liquidity...