Real Estate Investing Tips-Equity Finance vs Debt Financing

HIS Capital Group Managing Member Rick Melero explains the concept of ‘DEBT SERVICE COVER RATIO” (DSCR). Investors need to understand how to buy and ask questions: “How much are we willing to risk based on debt? This commercial real estate investing tip shows the limitation of over leveraged finance.

Do that is to make sure you always have a very strong debt service coverage ratio anybody know i’m doing the nexus one ratio that service coverage ratio you understand i right there red it’s what i call buck and a quarter of income to a bucket expense that’s typical example but if you want to be saved it could be a buck fifty how they come to a expense it can

Be two dollars of income versus a dollar express that’s the ratios you want so that’s one of the best ways to protect yourself because again if you own the property three clear the market tanks right it doesn’t matter what you’re hedging yourself against this debt that’s my gosh how simple is this dead and like to go out i would pay 40 million dollars for this

Deal if i can literally buy and make a hundred thousand dollars of positive cash flow every single year as long as i have to worry about any that right so the reality is not even the price point that matters what matters is that if the time to go down and you do have to lower your rent or you experience my vacancy you’re going to be able to pay mortgage right so

If you’re free and clear what do you care and really that’s why a lot of investors that especially bigger funds the way they heads themselves even though they called lots of lots of leaders saying is ok our value of this building or six million now it’s three we lost money that’s by the way that’s how banks are getting in trouble because because thanks for lending

Money they loaned it based on a certain remote to value ratio now the property values came down dave i’ll all have to now we calculate their numbers which means you’re backwards so now they either need to get the money back from the actual tenant or then you have that money in reserves which is can you that’s the reason why this bank here when done didn’t have any

Reserves so the bigger band came and took them because their reserves are there and they got those that’s a discount i love this country and that amazing so the reality when you say rick what is it what you’re saying is rigged how much am i willing to risk based on debt because here’s the thing and this is an amazing thing i’ve never really got out i was talking

To you i mean because before i was kind of like you guys i was just man this is awesome i’m so excited and i’m spent on these old guys my old buddies and it is laughing at this market like oh may i hope it just lasts just one and a half more years moving by five more properties i mean that’s the way they see it like all men i’m really hoping comerica goes down so

That we can take this property right here that’s really cool does that go what you’re doing yeah oh yeah absolutely but the reason for that i mean if you look at there’s a hotel in i can’t with the guys name he’s friends with one of our guys he owns a ton of hotels in downtown elena this market is pretty tough when you rick yes so if you got a lot of debt like most

Hotels who leverage you’re hurt that’s why i was going bankrupt but notice that when they go bankrupt most of them will be buying them back they’re doing their own joy sales him anyway so was i sayin i just totally got lost we’re talking about yeah hotels are here hotel back this guy is incredible now you can’t you can’t really do this with the more luxury hotels

Yes but he buys everything fifty percent earthly fifty percent debt if he uses a problem okay now that’s a very conservative approach but here’s a beautiful thing about it there is a certain limit to most people that are in debt then they can lower their prices because then they can’t pay the mortgage so then we’re gonna go so they have to experience make it seem

Well this guy does is whenever he has any vacancy at all specialized more hotels just say okay so today nine o’clock in the morning your rate is $89 tonight noon today $68 in that you can go down midnight can get it for 15 bucks what does he care he just made fifteen dollars on an empty room and not to count the fact that in the morning when you wake up and you’re

Hungry you get a pic for you gonna get a movie or whatever you’re going to get there’s extra opportunity to make income so be over i mean every time he’s dominating the market while everybody else is making their full because people that can afford it now can move and stay there and they’re saving money so it all depends on how much you have so they give an example

The reason what we’re so excited about this particular building itself is because if you really take a look at the numbers okay the average rate is eighteen dollars a square foot and in the class v office building what if i told you that the very first year i’m going to give you twelve dollars per square foot use excited right really okay i will come in now here’s

The deal year to $14 wit with your three sixteen thousand-square-foot by the way you have a sudden your contract you need math all of the sudden you’re escalating your income which making money now something that’s gonna be bacon well you can do it because the copper whoppers got dead he can only go so low that makes its quest over here has got some debt so quest

Is not going to give you some discounts while cobia bank has got the same thing family winces has the same thing because they all have some sort of debt so they can only go as low as inked up but if we own this building free and clear i can charge literally ten dollars a square foot and still they put a charge four dollars per square foot and still they run do

You see the difference so do i even care i’ll be one hundred percent occupied while everybody else is twenty percent vision because i below with my prices to the place where i’ve done bringing all the tents

Transcribed from video
Real Estate Investing Tips-Equity Finance vs Debt Financing By HIS Capital