Podcast Interview—How Did They Do It? Real Estate
Episode 763: Close More Deals When You Utilize Commercial Loans with Alejandro Szita
Episode Summary:
Embark on a journey towards real estate success with Alejandro Szita as he guides you through the strategic utilization of the debt service coverage ratio. Unveil the true potential of this financial tool, empowering you to make well-informed decisions, optimize returns, and achieve triumph in all your property endeavors. Let's dive right in!
Visit the How Did They Do It? Real Estate Podcast’s official webpage
Podcast Transcription:
Seyla:
Thank you everyone for joining today's episode of "How Did They Do It?" Real Estate Podcast. Today, I am honored to be joined by our special guest, Alejandro Szita. Alejandro has been doing loans and real estate transactions in southern California since 2006. He is a California and Florida mortgage broker and a licensed California real estate broker. He is a member of the Association of Independent Mortgage Experts and a graduate of the Infinite Banking Concept practitioner course. Alejandro started in mortgage in 2006 and he subsequently worked for over 10 years under the prominent Los Angeles real estate broker where he became familiar with many different real estate and financial scenarios. He started prosperity in 2018 and now specializes in out of the box real estate loans for business owners and creative entrepreneurs. So Alejandro, thank you so much for spending time with me today. How are you doing?
Alejandro Szita:
Seyla, thank you so much for having me on your show and it's a pleasure to meet you
Seyla:
Nice meeting you too. So Alejandro, if you don't mind, can you share a little bit more about your background and how you get started, involved in real estate to begin with?
Alejandro Szita:
Yes. I come from Chile and when I came to the United States I did many things like, usually that's how you actually begin. And I used to be in the world of marketing. I used to make those infomercials, I don't know if you remember those 30-minute long commercials. So I was involved in marketing for many years. And it was one of my infomercial clients that came to me one day and he said, Alejandro, would you mind going to a financial seminar? I'm hosting a financial seminar. And I said, yes, I would love to because I have been interested in finances all my life. This is my number one topic. And to make a long story short, that financial seminar introduced me to the world of real estate, which I thought was very boring by the way. I mean if you would've asked me back then in the year 2000, Alejandro, you're going to work in real estate? I would've said, Seyla, are you crazy? This is so boring. And actually real estate is one of the most creative businesses that you can be involved in and it has so many facets. But that was my beginning and I did a lot of things. I worked as a commercial agent, as a realtor, as a luxury agent. I worked for a hedge fund in Century City. They had like $1.2 billion under management. They had these big hotel properties, these big office buildings. So I have been exposed to pretty much every single aspect of real estate. But what I happened to like best were loans because of my own experience. I remember when I came here into the US, I wanted to get a loan to just buy a car and then I saw how difficult it was. Unless you work for a company and you have a paycheck like a W2 employee, unless you are like that, it's going to be a little hard and a little challenging to get any kind of loan. But I focused on the real estate loans because this is where my background is.
Seyla:
That's awesome. Alejandro, thank you so much for sharing your background. So today I want to talk to you about a couple things, right? Well you are the real estate broker here in California and want to ask about your insights of how California market is doing and in terms of commercial real estate here in California, what's your thought about how is this coming along and how people can find good deals here in California, especially for a state, a tenant friendly state, and why would anybody still want to invest in California? And also a second thing, like you mentioned earlier in your background, self-employed professionals like artists or business owners or entrepreneurs, when they try to get into real estate, it's a little bit difficult because they don't have that like W2 income to show or something like that. Right. So you design a product out of the box, like a loan to help the self-employed professional. How are we going to get those loans? So let's start with the first one. From your experience as a broker here in California for many, many years, what's your thought about California's real estate markets going on right now?
Alejandro Szita:
That's a very good question and I would say that it's a complicated answer because California, it's a great economy. If we were a country, we'd be like I believe number five of the number six countries with a population of likeability, 40 million people. The economy in California, the weather, the actual resources, the agricultural land, everything will point to make us one of the most successful countries and one of the most successful states. And this was so before in the eighties, in the seventies we were very successful. Unfortunately today we are on our way down. Having said that, it's difficult for new real estate investors to actually navigate the loss. You mentioned tenant friendly, that's one way to put it. But another way that I would prefer to put is landlord unfriendly. And those regulations really don't help anyone, don't help the tenants either because there is a shortage of homes, in California, there is a shortage I believe of 300,000 homes. But even if you were to build as if by magic 300,000 homes right now, that will be just to clear the backlog further, you know, increases in the population and economic activity. So we have all of the ingredients to make California the most successful state. However, the thinking is not there. So there is a big challenge for real estate investors. Another challenge that you may face but not so because I noticed that you invest in other states, most of the properties don't pencil out. When you put a property on a spreadsheet and you look at the fundamentals, they don't pencil out. So in order to find good deals in California, I find out that the best deals come from networking. They don't come from looking at listing services or even hiring agents. The best deals comes when you do your own networking, when you talk to insurance agents, when you talk to CPAs, when you talk to lawyers and you find out specific situations and that's how you can get in. And that's one way to get in. Another way to get in for the smaller investor or the independent professional is just to buy a property and maybe live in the property or maybe buy a small property that you can manage. Unfortunately in California there are not a lot of opportunities because it's either the small business owner or the institutional investor that can buy an $18 - 20 million project. In the middle is where you face, in my opinion, the biggest challenge. In the middle, let's say you have a few million dollars to invest and you could buy an excellent property anywhere else in California, here you can go to other cities, you can go to Yorba Linda,Yorba Linda is not that bad. You can go to Riverside, you can go to the east side of California and you might find things there, but that's where you're going to be the most challenged.
Seyla:
Got it. Got it. And Alejandro, pretty sure that there's a lot of investors, as they invest in California, right? And even though the deals are not penciled out, what are the opportunities that they see here that they wanted to take that risk and invest in California and still be successful from your experience?
Alejandro Szita:
From my experience, this is the appreciation of the property. Whereas in another state you may invest for cash flow, for income, the cash flow or income, it's very difficult to make it pencil out. But because of the politics that don't allow for the expansion of the inventory, that makes the inventory to be very, very tight and because it's very, very tight appreciation, what I've noticed in California, it's very, very high. So a lot of people invest for appreciation and as long as the property breaks even or doesn't lose too much money, they are okay with that because they know that in a few years appreciation will take care of them.
Seyla:
Got it. Got it. And Alejandro, and you helping like independent professionals investing in real estate like W2 employees, they have their stable income coming in so then they can buy investments easily. Right. As long as debt ratios meet the guideline. What about self-employed professionals like artists, business owners or entrepreneurs? They have like random income and how do they get involved in real estate investment?
Alejandro Szita:
Well you can get involved using a type of loan, which they call the DSCR or debt service coverage ratio, those loans have advanced a lot compared to a few years ago. Today if you have a property that just breaks even, meaning that the rents that you get from the property or the rents that you could get from the property because if the property is vacant, the lender will send an appraiser. The appraiser basically will see what rents that neighborhood is pulling and they will try to guess what are the typical rates that that property could get. So if those typical rents or the ones that are already there, the renters that are already there, at least breakeven, meaning you can pay for the new loan, you can pay for taxes, you can pay for insurance and that will be a DSCR or debt service ratio equal to one.
Alejandro Szita:
You can get financing, believe it or not. And you can get financing in very attractive terms. One of the flip sides of being in Southern California or in California is that even though you have all these challenges, because you have all these challenges, the actual competition from lenders is strong. So you can get good loans at DSCR or 1 or 1.1, that means just a little bit more than what the property costs. So that's one way that you can get in. Another way that you can get in at the very, very beginning, if this is your first time, if you're going to, want to be on a multifamily property, the first time is be the owner of a fourplex and live in one unit, then you can buy it with 10% or even less down. And then as long as everything pencils out and the criteria is very flexible, that could be an in onto your first property.
Seyla:
Got it. And Alejandro, you mentioned DSCR loan, that's the covered ratio, right? And you're talking about like as long as the property can pay for the principal interest tax and insurance equal to one, then chances are you are able to purchase the property? Right. What about other expenses on the property itself? Right? The property usually comes with other expenses like utilities or like turnovers and all that. Are those being taken into the accounts of the calculation?
Alejandro Szita:
This is a very interesting question and there are two worlds. There is the world one to four that is considered residential, and the world of the building having five units or more, that is considered like a commercial world. If you are in the commercial world, yes you really need to take into account the net operating income. Which would include all of the expenses that you set plus a reserve for maintenance. Usually the people that are in the universe of the one to four sometimes are not aware of those expenses, but the lenders don't ask you to cover those expenses. They don't ask you to cover electricity, water, or a reserve. In the residential world, which is one to four, all they ask you is that rents will cover the new loan, principal, interest, taxes, and insurance. That's all. I mean, you and I know that it's going to be more expensive. You and I know that there is going to be repairs, things are going to go wrong, water and so on. But they expect you to cover that, not so in the commercial world. In the commercial world, then, like you mentioned, all of this has to be covered.
Seyla:
Got it, got it. And so basically DSCR loan can be used for both the single family homes and also for the commercial loan.
Alejandro Szita:
Yes.
Seyla:
Got it. Got it. And then what about from the buyers itself, as self-employed professionals, what is required from the buyers in order to be qualified for the loan?
Alejandro Szita:
That's a very good question. It depends on the loan program. By the way, we have developed a new private loan program that we call soft money. We call it soft money. You know, I was on your website a few moments ago and I was listening to a gentleman that does hard money loans and he was saying he can close the loan in a week. He was talking about rates of 13% plus three points, that's like about 16%. And he was talking about the one year loan and so on. That is the universe of the hard money lender. And as he said, the hard money lender has a place. And then on the other side of the equation you have the institutional lenders that require you a mountain of paperwork that takes months to decide. And what happens is we've seen many deals that make total sense, but for some reason or other, the box that the lender wants is not there. But the deal is not really a hard money lender or a hard money loan either because the risk profile is not there. So you have a person that is in the middle, he almost qualifies for institutional, he doesn't really need hard money, but hard money's the only option. So he goes to hard money. So we created what we call the soft money approach, which is right in the middle. We still ask for tax returns, we still run the credit report. We still want to see that the borrower has the ability to repay. But we don't care about all those boxes that the lenders want to fill in because it's a privately done loan. So now we have the ability to do what we call a loan that makes sense. We don't only look at the property like the hard money lender, we look at the ability to repay, but we don't charge what the hard money lender charges. You know, our rates are between 8% and 9%. We still charge three points, sometimes less, but we try to be in the middle. So you use that by the way, as the last resort. What we try to do first, we try to place the borrower with an institutional lender. So a self-employed business owner or artist that doesn't fit all the boxes, we have like seven different loan programs before we offer our soft money option. Some of those options are like bank statements. We look at the cash flow because self-employed individuals may not have the tax return like the lender wants, but most of them have a healthy cash flow even if it's a variable cash flow. So bank statements were able to use the cash flow. Other self-employed individuals have a lot of assets. They don't necessarily have cash flow, they don't necessarily have the taxes. So we can use the assets or sometimes we do a combination between the assets and the cashflow. And for the self-employed borrowers that do have tax returns, but let's say they go to a major bank, and even though they have tax returns, the bank will decline them. We have lenders where we can take those tax returns, they will look at them and they would approve them. So to answer your question is we have about 13 to 14 institutional lenders that although they're institutional, their criteria is a little bit more flexible and we try to take the client there first. If that fails, then we offer our private solution.
Seyla:
Got it. Got it. That makes sense. So you have a network of institutional lenders that you work with and then you try to pair, you know, if the best products for your client don't work out and then you have a fail safe. Basically the chances of getting loans or financing for a property for self-employed professionals if they're going through your company, that's it. And then for the soft loans or the loans that you mentioned earlier, they're all DSCR loans, that's what you mentioned?
Alejandro Szita:
No, no, they're not DSCR loans. They are like your other guests mentioned, they are like common sense loans. They're loans where we adopt the loan to the customer. Now we are one of the very few owners that do offer private owner occupied loans, because I don't know if you're aware, but if you're a owner occupied federal law restricts you tremendously on what you can offer. And you have to have all the licenses, you have to do all the disclosures, right of rescission, blah blah blah. Most private lenders shy away from that. But we are fully licensed. We do the full protocol. So these private loans, they extend even to the case of the owner occupied. And then if it’s owner-occupied, we have to follow federal guidelines. So we need to make sure that the person has the ability to repay. But even then, even within the federal guidelines, there is a lot of flexibility. So we basically look at the whole picture. Yes, we ask for tax returns, yes we run the credit, we do all of that. But in private we do the underwriting. So it's a lot more flexible than the institutional one. I don't know if that answers your question.
Seyla:
Yes, definitely. It answered my question Alejandro. So thank you so much for clarifying that. And also it's like you mentioned about the ability to pay back. What are we looking for for the ability to pay back?
Alejandro Szita:
We are only looking to see that the borrower really can pay back the loan. Now when you go to an institutional lender, they have a lot of rules. You have to have the business for so many years, you have to be within a certain category. But like your other guest mentioned, I sometimes spend half an hour with or sometimes an hour with a prospect just listening to him without asking for any paperwork because I want to make sure that he makes sense. If he says I make $5,000 a month for example, just to put an example, I don't want to see something precise. I want to see from a common sense point of view that if he makes $5,000, so he says I make $5,000 a month and if he shows me a tax return that says that he makes $10,000 a year, I mean I understand that people don't want to pay taxes, but my first question is going to be how come you make $5,000 a month and your tax says that it's only $10,000 a year? A year? That is not necessarily a disqualifying factor for us, but we want to make sure that things make sense. If the person says, well I'm going to borrow the money, I really don't know how to pay it off, but I'm planning on selling the house, then that is not for us. That is only for a hard money lender. Because we want to make sure, okay, you plan on selling the house, that's good, but in the meantime we want to know that you can really afford to pay the loan. We know that the equity is in there, but we don't want you to be in foreclosure, we don't want you to have a problem. Also, all these private loans come from investors. So we don't want to go back to our investor and say, hey, you know, there is a problem on this loan, but don't worry we're going to sell the house. But that has expenses, it takes time. So we want to be fair to our investors too.
Seyla:
Got it. That makes sense. And Alejandro, you mentioned investors. So basically you got all this funds from your investors, right? And then you do a soft money loan for other real estate investors, or busy self-employed professionals, and you mentioned earlier it's about like 8 or 9% and how do you convince your investor to fund your soft money loan?
Alejandro Szita:
Because the risk is less. You see, our borrowers can really pay for the loan. The equity is on the property. We usually have a 30% cushion of equity. We usually show the investor that the person can really pay the loan. Also our DTI is 43% or less. So we show the investor that the person is not saddled. This is not his last resort. He can pay the loan, he has a viable exit strategy. What he says he's doing, he's done it before to some degree. Also, we specialize in very complicated legal cases that nobody wants to spend the time to understand. So we offer, in my opinion, more security to the investor because yes, a hard money lender may say, yeah, but I give you all of these equities. True. The equity's in there. But when it is foreclosed, it's not that simple. Sometimes it takes six months, you have to pay a lawyer. Yes, yes. The investor will get the money, but you have to go through a process. So we try to avoid going through the process. So to answer your question, we say look, if you go to a bank, if you go to Wall Street, if you play the market, you will be lucky to get what, even in today's with the rates as high as they are. For a really secure investment, if you get six to 7%, that will be great. That will be awesome. Or eight or nine. So you get a premium, you get pretty much what the prime rate is if you are going to get a loan, but now you are at the receiving end of the prime rate. That's how we convinced him. I say, yes, you can go to another hard money lender and he may pay you 12, he may pay you 13. There is another element of risk and we let the investor choose.
Seyla:
Got it. That makes sense. And Alejandro, for the tones, right, for one to four units, is it the same thing as like conventional bank for example, like 30 years amortizations and basically 30 years payment, and then what about the commercial side, DSCRs, what are the typical terms and balloon payments usually we see?
Alejandro Szita:
On the commercial side, we are only limited to small balance loans. We don't go, we don't entertain projects more than $5 million and usually we go a lot less than that. It was a marketing decision that we made. When you start to get into big projects, the competition is very fierce. Yes. You can get a lender that has only one eighth, like that's 0.1 to 5% better than you and usually you lose the deal and you have to spend a lot of time trying to quote those deals. So we decided we are not going to focus on the big deals, we're only going to focus on the small deals. So we only do commercial loans when we already have an established relationship with the residential client. We have many high net worth individuals that came to us. Like we have a case very simple very quickly. This is a business owner. His business sells like 20 to $30 million a year. He was with an institutional lender for 20 years. He went to his banker and he said, hey, I'm going to buy a house. What can you do for me? And they go, oh, you are the best client for you. We're going to do this, we're going to do that. He said, okay. He started to do it and he had a little, I would say, trivial issue on his credit report that we solved in a couple of months. And because of that, the lender for 20 years with his multimillion dollar company, just declined him. So that's how we became friends. Now he wants to buy a warehouse for his business and we're going to help him do that. But we usually don't go into the commercial unless we already have a pre-established working relationship because of the same thing that I did before. If we're going to invest all that time and money in getting him the commercial loan, we want to make sure that when we do, we can proceed.
Seyla:
Got it. Got it. Alejandro, is there anything else regarding the commercial loans for self employees or professionals that you would like to share with us, with our listeners that I haven't asked?
Alejandro Szita:
That's a very good question, Seyla. What I can say is this, we have a connection to one of the biggest Fannie Mae and Freddie Mac commercial bank issuers because some people don't know this, but like you have a Freddie Mac and Fannie Mae loan to buy residential home, Freddie Mac and Fannie Mae also have enormous pools of money and I'm talking about deals 10, 20, 30, $70 million. Fannie Mae and Freddie Mac can be used too to buy multifamily. Absolutely amazing terms for those clients that want that. We have a connection with one of the biggest lenders and then we work with them. So that's what we do for those clients. We are not really good on industrial, we're not really good on retail. If it's small industrial, meaning below 5 million and small retail, a couple of million, we can really help. But we really excel on the one to four and we really excel into the one to four solutions, whether institutional or through our soft money. And we can really connect the institutional multifamily buyers with the premier Fannie Mae and Freddie Mac supplier. That's basically our expertise. We don't do the other type of loans very well. That's why we don't do them.
Seyla:
That's awesome. Alejandro, I really appreciate you coming on the show today. Talking to me about your real estate journey, about your companies and about your different type of loan programs that you have to share with our listeners, the DSCR loan and different programs that you have. So if our listener wanted to find out more about you and about your company and wanted to work with your company, getting the loans, where can they go?
Alejandro Szita:
The easiest way is to do a free appointment consultation on our website. If you go to our website, which is prosperity, like something prosperous, prosperitylending.us, in most of the pages, you'll see a green link on the top right hand corner that says free consultation. Just click on it and select one of the dates that I'm available and we can have a 30 minute zoom call or phone conversation and that is the best way that I can answer your questions.
Seyla:
Got it. Alejandro, thank you so much again for spending time with me today. We appreciate you.
Alejandro Szita:
Thank you Seyla, very pleased to meet you, and thank you for having me on your show.
Seyla:
Thank you.
