Thread by @realEstateTrent

Having my first real lender conversations in 20 years, and man do they have things backwards 🧵👇

20 years into this, and having now exited around 30 deals, I guess I was a bit naive to think lenders would jump at the chance to work with us.

I thought I would show them our 17%

unleveraged IRRs, and that every single deal has been a winner, and they would be all over it.

After all, we are only looking for 50% LTV.

Nope.

They are much more attracted to the single-tenant Best Buy at the 4% Cap with the $48 rents. Yes, where if that Best Buy closed

shop, the owner would immediately lose all of their equity and the salvage price would likely be well below the loan amount. Retailers go under all the time -- and when you look at the credit and not the rents, you are looking at things backwards.

With our deals, we buy properties at price per foot numbers below the area average, and with in-place rents we can easily replace in the event a tenant leaves.

Take our average deal:

$5M strip mall, 15,000 square feet, with an NOI of $300k, average rent of $20 in a market

where the average rent is $30. If the tenants leave the property is worth MORE. Why?

$30-20$ = $10.
$10 x 15,000 = $150,000
$150,000 / .06 (cap) = $2.5M in profit (minus call it $700k in improvements, etc).

So with the non-credit strip mall, we profit if a tenant

decides to leave.

Let's look at that Best Buy:

35,000 Square Feet x $48 = $1,680,000 NOI
Value at a 4cap = $42,000,000

Tenant Leaves:

35,000 Square Feet x $24 (market rent) = $840,000 NOI

Value at a 4 cap = $21,000,000

So which loan is more risky?

Lenders have this

wrong, and I've seen this movie before.

*Note -- a few people might have noted that I tweeted about getting a lone recently. Yes, that was on a deal I did personally, with a life co, and a loan broker did all the work. Heavy prepay, etc