Are Bridge Debt and Pref Equity Good for Deals?

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Hey, what’s up simple passive cashflow listeners. Now I wanted to announce a new project I got going on. The rich uncle YouTube channel. So those of you guys have been following me for the past several years since we started this podcast back in 2016, simple passive cashflow started off with me buying some turnkey rentals, eventually getting my portfolio to 11 and 2015, and I felt the pinch and I realized these rental properties was not the path to financial freedom.

It was the path there, which I still think non-accredited investors under quarter-million half a million should definitely go on buy a rental property. You get that experience, feel what it is to be or moat landlord, and then move off to bigger and better things as you become more of a credited investor or on the verge of.

So it’s a transition into being more of a passive LP partner, diversifying yourself over multiple deals out there where you’re just an LP partner, little to no liability, no debt in your name. You can still Chavel hack all these credit cards, which we’ll have a feature podcast on that too.

And you can also partake in the value add strategy, right? When you’re buying turnkey rentals, which you’re essentially doing is your. Just buying an asset that has little to no built in equity in there other than your down payment. And there’s no business plan to increase the revenue, therefore increase the price where these a large apartments indications, mobile home parks, et cetera.

There’s usually some business plan to force. Appreciate the asset. And maybe we’ll get lucky with some market appreciation in there too. That’s typically real estate goes up in price, but the big thing is that force appreciation. The only way you can do force appreciation is if you do it on your own, in a burst strategy.

And that is that my first premiere video on the rich uncle YouTube channel. You guys can go and check out, So a simple pass, a castle podcasts and YouTube channel. We’ll continue on this path of, as you guys grow with me to be accredited investors, but lately maybe I’m just getting old, but I see a lot of kids these days between the ages of 18 and even.

Mid to early thirties, they already haven’t gotten it together, right? Their net worth is still under a quarter million, half a million dollars. And maybe for you guys listening, maybe this would be that cool hip fun video version of simple passive cashflow for kids where they can learn about this stuff.

Learn more about those basic financial things. In this first video, which we’ll be talking about is the burst strategy. Which you can give them. A lot of these people like to do this by rent, rehab repair. I frankly think it’s a waste of time and not a really good risk adjusted return when you could just be a passive Opie partner.

But what do you do if your net worth is lower and you’re not having any connections, that’s what this video is talking all about. So share it with your kids and listen to the rich uncle as they start to become old and grumpy. In the future, but for now it’s just rich. Uncle is a YouTube channel and on today’s podcast, I’m going to be quickly going over what is a bridge debt and private equity. And I think a lot of you guys have told me, you’re frustrated about other podcasts out there. Just sustain on lane thing.

And yeah, everybody does podcasts these days. They’re easy to be honest. Now, this is a sort of a sample of what’s you’re going to find in the syndication LPP course. And if you guys haven’t checked that out, please go to simple passive cashflow.com/syndication to check out the free guide the syndication.

And there’s a, be a link in there to the e-course. Now the e-course I think it costs like maybe a few hundred bucks. But it’s really good. It’s not just some lane book that just going to tell you every little thing that everybody other regurgitates over and over again, just runs through spin texts, application to regenerate the same old, a hundred page 200 page book, it’s going to tell you the secrets of what syndicators are doing out there to trick you guys into going into whatever deal. Not saying it’s a bad deal, but I think it’s just good to be aware of these things. And today’s podcast talking about. Private equity and bridge check is going to be a sample of what you’re going to find in the e-course, which I think it would , take most people 10 to 15 hours to go through the entire course.

But with that said, here is the content.

 I get asked all the time, so bridge notes on these large deals, as opposed to agency longterm, fix Fannie Mae, Freddie Mac, agency debt, is it good or bad? And, same thing pref equity, when there’s a small layer of a wan or pref equity investors, which sort of acts as like a mezzanine debt layer, is that good for a deal?

 

 It’s yes and no. And  I found this  analogy watching ESPN  it’s been the NBA trade deadline somebody, I forgot which player it was, but they were like, bringing over a person, who’s got their contract expiring soon to bring them on your team.

 

Do you do it or do you not right? Is it a good thing? Is it a bad thing? It can be a very good thing. It can be a very bad thing. And I thought this is a very analogous with  originals as a good or bad or pref equity is a good or bad. If you guys aren’t NBA fan or basketball fans, you guys can probably still understand the concept.

 

You bring over a player  a guy who doesn’t really want to be on that team and you bring it over to the new team. You bring them over to hopefully make your playoff run. , you get up and usually a pretty good talented player who wants out of their contract and is a free agent for part of a year, or maybe at most, a couple of years.

 

And it can be really good or bad. The bad thing is that this player doesn’t want to be where they’re at and they’re whatever. I’m just gonna play out to get my contract, , get my numbers up. So I can get my maximum value on free agency,  Which can be bad thing because they just want a ball hog and get their numbers up and they don’t want to play as a team and for  a playoff team, making that playoff run.

 

This can be not good for your success. On a championship runs to have a roll guy who’s just trying to  pad their stats. It can be a very good thing. On the other hand right now, here’s this player who’s really motivated and maybe they’re coming out of bad situation to coming on new team. And they really want to, they’re trying to make that playoff push and they want to win that championship.

 

It can be a very good thing. Is it good or bad? I don’t know. There’s, it can go both ways. And now we’re bringing us back into what the question of the day here, bridge notes, ? When you’re going in with a bridge note, ideally you want to be going into a situation where you have severely under market rents.

 

So you know what this bridge, no, the bridge is ideally from one to three years, you might have some extensions to be able to add on to it. But the bridge note is you exactly what name implies. You’re bridging yourself over to the side where you can refinance with that new net operating income to be able to capture that higher worth.

 

And at this point you pull out a lot of equity. You give back a lot of returns to your investors and you get an maybe at that point, you go into the longterm agency financing. So it can be very lucrative and very good idea. But sometimes, and I’ll use this term are the same bridge notes pro equity in mix.

 

Good deals better. And worst deals worse. Makes good deals better. And worst feels worse. It’s a magnifier. So it’s not as simple as Oh bridge don’ts are bad. Bridge debt is bad or preface equity and situations are good. It’s bad. It’s always, if you have a good deal. And this is what’s hard for most passive investors.

 

You don’t have the P and L you don’t have the rent rolls. You’re not able to do your own analysis. You’re really taking  what your general partner is saying. You gotta really trust them. Who knows? They might be doing a bad deal and trying to push it through. And at this point, a bridge note or private equity may be bad.

 

Yeah, the bridge, no, ideally you want to be having that situation where you have undermarket rents, so then you bump it up. You get all the value out and that’s the perfect situation, right? The bad situation is maybe it’s not that under market rents and you have your struggle and you’re essentially already know by getting that extra leverage and kind of behind the gun.

 

It’s  not as sure thing as fixed rate debt. It’s a bridge note and it’s taking a little gamble in the beginning and sometimes gambles don’t pay off. It’s a calculated risk, right? And I think in that situation, we’re using it the right way that calculated risk can be way more returns, maybe way more reward and certain situation.

 

It makes sense. Now, moving over into the pref equity, Situation. Now a lot of times pref equity is seen as a small layer of mezzanine debt or additional leverage, right? The bank will give let’s just go with 80% loan to value on a property or maybe 70% loan to value on the property. They might be, the sponsors might be using a small thin layer of pref equity.

 

It’s always a small there, maybe five to 10% at most sometimes of the capital stack. So they’re going to get loan for 70% of that. And then maybe you get an additional layer of 5%. So if overall, be at like maybe 75 to 80% on the value, sometimes it’s possibly even to get higher than that. If the bank is giving you 80% on the value.

 

And you’re able to stack another 10% of pref equity. Now you’re 90% on the value. Most investors on sophisticated investors that are know a little bit about this stuff. They’ll be like, Oh my God, that’s too high loan to value. I always say as investors, you got to look at it and not just, obviously that’s probably like that knee jerk reaction.

 

Oh my goodness.  It’s too risky. But let’s pause that way. If you’re covering your debt service coverage ratio every month, like a 1.2, five, as far as coverage ratio is what the bank is looking. Is it really that dangerous? You could have a terrible deal at 50%.

 

Loan to value and it’d be still bad deal. At that point. You wouldn’t want to stack another layer of private equity on there, but if you have a really sweet, strong, solid deal, where under market rents strong financials, then, it is prudent to put on additional risks, which is pref equity and get that leverage point higher.

 

So  it’s all situation based and yeah, I think that it’s hard as most passive investors. They can’t make that determination, even if it’s a good deal or bad deal. Yeah. A lot of things in the pitch deck, it’s very misleading in most cases. And. Passive investors are not able to do to competence this period.

 

You guys can go on rent to meter, whatever the websites, but it’s just hard. And unless you walk the property, then you know, what kind of vibe the property is, or you, especially, if you walk calm, so you don’t have that delayed GTE to do this. I to close out right bridge Nolan’s prep, equity.

 

They can be good about. But yeah, if you guys have any questions like this, let me know. But will stick this into the e-course in the originals and pref equity section. So you guys can refer to it in the future. And if you guys want to learn more about this, go to simple passive cashflow.com session syndication, check out the free guide.

 

 If you want to get that. LP syndication e-course the links will be on there too. simple passive cashflow.com session syndication, I don’t think there’s anything else like it out there for plastic LP investors to be the best LP investors you can be. You’re not gonna be underwriting specialists, but there are things to be aware of, right?

 

The little tricks and games out there that are being played at least know, eyes wide open going into a deal, is this a good deal or is it, are these just sucker assumptions that the sponsor is using? If you guys have any questions email isLane@simplepassivecashflow.com. See you guys next time.

 

Bye. 

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