00:03.30

wongga

Welcome investment community this is Garrett wag your host of the investing to win podcast. So another solo episode today. Um, this one is maybe a bit of a repeat but not really because a few months ago we had a guest. From a financial serle institution speaking about commercial lending and cap rates. It was a great episode but we had only had it up for a few days and then our guest was told he wasn't technically allowed to speak on behalf of that financial institution which I shall not name. Um, so of course you wanted this to remove the episode and we complied but there were some really great insights during the conversation. So I thought I would record another solo episode with the highlights. Um, so this one um, started off with. Commercial lending and so commercial lending encap rates and what we're talking about here is really from the perspective of a commercial lender. What are they looking for and so what he specifically keyed in on was the 5 c's of credit and those are character conditions. Capital capacity and collateral. So let's go over each one as it pertains um to the lender's perspective. So let's start with character. Um, this one might seem pretty self-explanatory. Ah, but really it it could be as simple as showing up on time for your appointments.

01:28.49

wongga

And during the conversation I was a little bit taken aback because my biggest takeaway here. Well you know it's common sense to be professional of course wear proper attire be on time. You know the lenders are actually tracking this. They're tracking this in 1 of their categories and checking off a box and recording these points. Um, so what? my what it? Ah, while it might got to edit that out. Please so while it might seem common sense just make sure that you have everything there um in order.

02:06.79

wongga

Okay, our second one would be conditions and conditions specifically refers to.

02:19.40

wongga

Okay, the second one is conditions and they're not talking about the condition of a property or the conditions that you might put in your offer to purchase what they're referring to are the conditions of the economic climate are we in a rising interest rate environment. Are the rates dropping what's going on in the markets. Um, so I think what they really want to know in a nutshell they're evaluating how the current conditions. The economic conditions are going to affect your specific business or your specific deal. So. It's a little bit interesting so that is that is what they evaluate for conditions the next one. The third one is capital. This is a little bit easier to understand this one is the money that you or your group of investors actually has to contribute to whatever project that you're taking on. This could be in the form of money in the bank your down payment for the deal or maybe the down payment. Plus whatever you can contribute to the project in terms of emergency funds etc. The fourth c of the fourth c of credit. Um, is capacity now what they're talking about here is the capacity to make sure the investment can actually pay for itself. So cash flow. Um and cash flow from wherever that comes during even a renovation phase where income might be less than optimal. You know if you're.

03:49.15

wongga

Emptying out a building and you're going to be renovating for 6 to eight months the lending lenders want to know where that's what's your capacity for that investment to still cash flow or at least debt service. 1 point that he did make no lender is in the management business. So at the end of the day. They want to make sure that they're setting up that borrower for success as much as possible because they don't want to have to repossess the asset and then begin property managing it. Okay, ah the fifth c is collateral. We spoke at length about the asset itself. Ah, but the group of owners for a project and how strongly are as individuals and also if there's a corporate structure in place. So you're talking about maybe a syndication or some joint ventures some co-ownerships I'm not going to go over this in in much detail as we've touched on it. Many times in the past few episodes so you can go back and listen to those and finally um, the last point I wanted to get a little bit more into the weeds on cap rates anytime you're talking about commercial lending or evaluating multifamily. Everybody always mentions and speaks of all cap rates I didn't really have a great understanding of it before I did the interview I have a better understanding now. So hopefully I can define that better for you. The audience. But here's a synopsis and we'll start with a definition on the and on the internet. The capitalization rate.

05:20.86

wongga

Often Simply called the cap rate is a commonly used metric in real estate to estimate the potential return on an investment property. The cap rate is calculated by dividing the property's net operating income and oi by its current market Value. So In other words. Cap rate equals Net operating Net operating income over current Market value. Okay, so the net operating income is the total income generated by the property such as rental income minus. Operating expenses but excluding mortgage payments or other debt servicing or financing costs. So The cap rate provides a rough estimate of the property's potential return in the first year assuming the property is bought outright without any mortgage or loan. Okay. Now. That's from the internet we had a big discussion on it. Um, and you know he wanted to stress at the end of the day. A cap rate is a general indication of the strength of the asset. But it's just another tool to evaluate an investment. So For example, generally speaking a higher cap rate is good. A lower cap rate is bad but of course every situation is different. You could have a higher risk um very high income earning asset and you could have a low cap rate very Stable. Um.

06:50.49

wongga

You know, longtime asset in a good area with you know, long-term tenants so every every ah case is different. Okay, so we're at the end of the episode again I didn't want to go over it in its entirety I just wanted to give you the highlights. So I'm going to recap as I like to often do in my solo episodes. Okay, so here we go in commercial lending. We have this five c's of credit and those are character conditions capital capacity and collateral and then we have a a definition of cap rate which is simply a metric to estimate the potential return on an investment property. A higher cap rate is good. A lower cap rate is bad but the cap rate is just a guideline. Okay, it's a guideline and one of the tools in evaluating an investment so there's a whole host of other things. We've talked about some of those on our other episodes. You know when you're underwriting, an asset. So. There's a whole host of other things to analyze when you're deciding to purchase an investment property. So the the lesson here the take home message makes sure you do your homework so that's it I hope you enjoyed this episode and if you did and you enjoy what we're trying to do here. Please do me a favor. And leave a rating and review on Apple Podcasts that helps us reach more investors and it gives the podcast a boost in the rankings. So thanks for listening this is your host Garrett Wong signing off but until next time invest to win.