- Chris & John
Ep 87: Financing a Multifamily Deal with Jonathan Twombly
There are more real estate investors in the game that ever, which means there are even more ways to finance deals, but educating yourself on what the process looks like and how to structure deals is really important. Today’s guest is Jonathan Twombly, who has some tips for financing a multifamily deal the right way. Jonathan is a full-time multifamily real estate investor, popular BiggerPockets commenter, host of the Real Estate Launchpad Podcast, and creator of Multifamily Launchpad, the only membership-based learning community just for multifamily real estate investors. In this episode, Jonathan explains how he went from a corporate W2 to full-time real estate investor, how he got financing for his first deal, the pros, and cons of agency debt versus MBS loans, and why he is more nervous now that easier lending is driving prices up. We also discuss cap rate and how it equates to risk, interest rates, and debt and leverage constraints, as well as the dangers of financial engineering on lower-class deals, a greater pool of undereducated, accredited investors thanks to the inflation of salaries, and the risks of pref equity. Tune in today!
Key Points From This Episode:
Jonathan introduces himself and his business, as well as how he got into real estate.
The availability of financing after the recession and making sure deals are buttoned uptight.
Agency debt versus MBS loans, and why Jonathan didn’t get agency debt for his first deal.
As lending became easier, asking prices accelerated and Jonathan got more nervous.
Jonathan sees the cap rate as a measure of risk – the lower the cap rate, the riskier the deal.
Speculations about future interest rates and lessons John has learned in the last 10 years.
Make sure the debt fits the business plan – you can’t predict what will happen long term.
There are now debt or leverage constraints on deals because they produce enough cash flow.
Jonathan is seeing more mezzanine debt or pref equity in an attempt to bridge the gap to refinance debt on over-leveraged deals.
Financial engineering is okay on stable deals in the sub-market, but not on more inherently risky deals with lower tenant profiles.
There are more uneducated investors in the game now, which means greater competition.
The expansion of the accredited investor definition and why that is problematic because of the inflation of salaries driving higher demand.
Jonathan recommends that investors start learning how to underwrite themselves so they can actually understand cashflow.
Jonathan says now is the time to be investing in debt and private lending, not pref equity.
“I look at the cap rate as a measure of risk, and the lower the cap rate – for the same asset, not comparing A’s to C’s – but the lower the cap rate within the same asset, the more risk is built into that purchase because you have less of a margin of safety.” — Jonathan Twombly [0:17:33]
“If you’re looking at deals that are very stable and very well positioned in the sub-market, the deal that people are going to want to live in no matter what goes on, I think that doing some of that financial engineering is okay. I think the problem comes when you’ve got deals that are lower down in the food chain that are more inherently risky because of the tenant profile, and then you’re looking at sticking on this pref equity in order to try to get the returns where you need them to be.” — Jonathan Twombly [0:31:00]
“If you’re not really underwriting the deals, you don’t really see how it works, how the cash flows work, and stress testing them, and seeing what happens if this doesn’t cashflow at this level. Where is the money going? If you’re not actually there with an Excel spreadsheet trying to figure it out, you won’t actually see how the cashflows work.” — Jonathan Twombly [0:40:42]
Links Mentioned in Today’s Episode:
Multifamily Investment Community Facebook Group
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