Herndon Davis, founder of Mortgage Real Estate Services
Nationwide — Do you ever dream of buying and renting out houses and apartment buildings or maybe fixing up and flipping houses like on HGTV or perhaps building a strip mall with commercial tenants paying you rent? Then mortgage broker, Herndon Davis of Houston, TX, definitely wants you to use his firm, Mortgage Real Estate Services, to find the perfect financing vehicle to fuel your commercial real estate dreams.
We recently interviewed him, and here’s what he had to say!
So what exactly does your company, Mortgage Real Estate Services, do?
Herndon Davis: We consult and connect both individual and business borrowers with many types of commercial financing opportunities available to them through private money, real estate investment firms or capital investors all looking for a high return on their investment. We focus on helping to fund commercial real estate and residential investment management projects. Simply put, we want more people who look like me to own, to invest and to control real estate and not just live in it.
But isn’t buying and managing Commercial real estate a lot riskier?
Herndon Davis: Yes, buying commercial estate can be riskier but the financial rewards and gains can be far greater and much longer-lasting than any other asset you may invest in. It’s definitely a trade-off but with careful planning, I can help you mitigate those risks thereby increasing your net worth and creating generational wealth for your children and grandchildren to come.
But with Commercial Real Estate don’t you need perfect credit to even get approved for a loan?
Herndon Davis: No, you don’t, far from it actually. Ideally your FICO score should be at least 660 which is an entire 40 points below the national average of 700. Some lender investors I work with will accept scores below 600 but higher interest rates will apply.
But with Commercial real estate don’t you need a lot of money saved to get approved for a loan?
Herndon Davis: No, you don’t. In fact, in some cases you can even get 100% financing. However, if you’re just starting out with your first few projects typically, most of my lender investors will fund your project at a 75% Loan-To-Value (LTV) which means you must bring a 25% down payment to the table plus additional closing costs. But remember you can also partner with someone or a small group of individuals and split the 25% down payment equally thus reducing the savings you need.
For more experienced real estate investors, I have a few lender investors who will finance at 85-90% LTV and even 100% of construction costs of a new rental or fix and flip property but only if you own the land free and clear. So, the amount of money you need to bring to the table really varies depends on the type real estate project you have, your experience level flipping, constructing or managing rental property, and in some cases the state you live in. Through my numerous lender affiliations, I can match borrowers in 46 states and the District of Columbia.
But with Commercial Real Estate don’t you need a really high income to show you can repay the loan?
Herndon Davis: No, you don’t. That’s the beauty of commercial real estate! For example, if you want to buy a rental property say a 4-plex, your personal income is NEVER considered or documented neither are your tax returns! What matters most is how much net income is generated from the property divided by your mortgage payments on the building, called your debt servicing.
Let’s assume that your 4-plex grosses an annual rental income of $48,000. However, you estimate after building maintenance costs, insurance and property taxes your net annual income is actually $36,000. Let’s also assume your annual mortgage payments are $28,000 a year. This results in a Debt Service Coverage Ratio (DSCR) of 1.28 ($36,000/$28,000). This means that your rental property brings in 28% more net income than needed to cover the debt on the property. Most lenders look for a DSCR ratio of 1.2 or above to approve a loan to purchase rental property. Again, through my lender investors your personal income is never considered.
Now if you’re looking to buy then fix and flip a property the process works differently. In this case we operate on an Asset Based Lending model which includes short term loans called Hard Money loans. Let’s say you buy an extremely distressed home in a really nice neighborhood at a discounted price of $100,000 and you estimate you need $50,000 to bring it up to market value condition. So, in total you need $150,000 and you also estimate it will take 2 months to finish the project. The good news is that once the repairs are made on the home it will appraise at $300,000 After-Repair-Value (ARV) just like the houses that surround it.
Many lenders will start funding your project at 75% ARV or 75% of $300,000, what the asset is expected to appraise for after repairs are done. In this case its $225,000 ($300,000 X 75%). This is basically 100% financing but in many instances, you are expected to contribute either 10-20% or show reserves of, approximately, 9 months to pay for the interim interest payments even though you’ve estimated it will only take 2 months to finish the job.
In summary, you were loaned $150,000 and you sold the property for $300,00 or above depending on market conditions. You now have a gross profit of $150,000. Once you deduct your interim interest rate payments and other closing costs fees, etc you conservatively may net closer to $120,000 still a tidy sum even after a huge chunk of interest and fees have been taken out. Hence it really pays to buy property as deeply discounted as possible in order to maximum your flipping upside potential.
For hard money loans you may be required to show tax returns or other documentation depending on the specific lender investor I match you with. Remember these loans are meant to be short term in nature, just long enough to quickly make repairs and re-sell the property for profit. They aren’t meant to be a long-term financing option.
Okay, but in Commercial Real Estate, aren’t interest rates a lot higher?
Herndon Davis: Yes, interest rates are indeed higher in commercial real estate transactions versus residential owner-occupied home loans. But you must remember that you’re actually earning money in commercial real estate and ideally earning an amount far and above what it takes to pay on your higher interest rate loans. You see that’s the overall goal, to have a sizeable amount of excess cash that’s free and clear above your expenses and taxes: you that you can either move it to your personal assets, invest it in other business ventures, or save and invest for yourself, your family and create generational wealth that’s passed down to your heirs, decades after you’ve passed on.
For rental property loans you may pay anywhere from 6.45% to 9% on a 30-year fixed mortgage. And for short term hard money loans where you buy, flip and fix houses and then move on, your interest rates may be as high as 10-12%, but again it’s typically for few months and then you flip or sale the property ideally at an ARV that’s a lot higher than what you purchased and rehabbed the property for.
Do you mind sharing information about your background and how borrowers can contact you?
Herndon Davis: Sure, I have 15+ years Corporate Finance and Budget Management experience working for mostly Fortune 500 companies. I also have a BS in Finance, an Executive MBA and I’m also dual-licensed as Loan Officer and as a Real Estate agent in the state of Texas.
We look to fund quickly – sometimes we make same-day decisions and closings occurring within 10-14 days. So please come prepared to do business! Once you submit your application through me, things go quickly – so buckle your seat belts!
For more information and/or to get started, visit Herndon’s website at www.MortgageRealEstateServices.com, email him at herndon@MortgageRealEstateServices.com or call or text him at 832-457-8951.
