Why Most Real Estate Investors Get Rejected by Lenders (And How to Fix It)

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Show Summary

In this episode of the Real Estate Pros podcast, host Michelle Kesil welcomes Mike Reyna from Barrett Financial, a commercial lender. The conversation centers around the importance of crafting compelling investor presentations that go beyond mere data dumps. Mike emphasizes the need for investors to tell a story, articulate value, and build trust with lenders to foster long-term relationships. He discusses common pitfalls in investment strategies, such as lack of focus and poor due diligence, and stresses the importance of a structured approach to minimize risks and maximize opportunities in commercial real estate.

Resources and Links from this show:

• • • Investor Fuel Real Estate Mastermind
    • Investor Machine Real Estate Lead Generation
    • Mike on Facebook
    • Mike on Instagram
    • Mike on LinkedIn
    • Barrett Financial Group’s Website
    • Mike Reyna on Facebook
    • Mike Reyna on LinkedIn
    • Mike Reyna’s Phone Number: (210) 602-5013
    • Mike Reyna’s Email Address: [email protected]

  Listen to the Audio Version of this Episode

  Investor Fuel Show Transcript:

  Mike (00:00)
  Okay, so I’m going to spend some time with you talking about the investor presentation and why I think it’s so important. Typically what happens is as someone going to look to get a project funded, they do a serious data dump. It’s all about the data. They don’t talk about the project. They don’t talk about the macro, micro components of the property. They don’t really spend a lot of time on the team and the experiences.

  Michelle Kesil (02:01)
  Hey, everybody. Welcome to the Real Estate Pros podcast. I’m your host, Michelle Kesil. Today I’m joined by someone I’m looking forward to chatting with, Mike Reyna of Barrett Financial, who is a commercial lender. So excited to have you here today, Mike.

  Mike (02:15)
  I’m excited for you to be my first podcast. This is going to be fun.

  Michelle Kesil (02:19)
  Yeah, absolutely. think our listeners are really going to take something away from how you’re approaching people get the right deals and supporting your clients. So let’s dive in.

  Mike (02:27)
  Okay, so I’m going to spend some time with you talking about the investor presentation and why I think it’s so important. Typically what happens is as someone going to look to get a project funded, they do a serious data dump. It’s all about the data. They don’t talk about the project. They don’t talk about the macro, micro components of the property. They don’t really spend a lot of time on the team and the experiences.

  I’m a little bit different. I encourage my investors to craft story, articulate value. ⁓ Most importantly, building trust and trying to create long-term relationships with those lenders. The last thing you want to do is have to go to a new lender every time. You want partners.

  that you show that you can prove that you can keep your commitments, you can grow the asset value, you’re making money, you’re repaying your debt, and you wanna move on to the next project, and you want that same partner, lending partner, to walk with you. And in certain cases where they can’t walk with you, they’ve created such a relationship that they are comfortable giving out another name for you to contact, and you have an open door to come in.

  Again, they lead with a lot of financials. The investors want to understand the why, the opportunity, the market, the strategy, how you’re going to make this thing work before you get into all of the minutiae. So how I structure my presentations or my recommendation to clients is to have a clear, concise story. You move from the big picture down to the granular level. You want, at the very beginning, to

  create a safe project that you’re minimizing risks. Ideally, within the first 15 minutes, the person you’re talking to is grab their pen or pencil. They’re interested, they want to take notes. It’s, for lack of a better term, the hook. You want them to be engaged. So,

  I want to spend a little bit time about why investments don’t work and why it’s so important to go through this exercise as you go out and look for investment because you have to be disciplined. You have to be structured. You have to be patient. So I’m going to go through and I’m going to read a little bit some of the common reasons why there’s failure, lack of strategy and focus.

  You don’t have a clear plan or you’re chasing too many opportunities. Michelle, have you ever been at a rodeo and you see that little pin for the kids to go find a baby sheep, a lamb, and they’re so close to getting that target, that opportunity with that lamb, and then they jump to another one and then another one,

  and they don’t stay focused and ride that opportunity to get to a go-no-go situation. And I see that a lot. Poor due diligence. ⁓

  They’re rushing through crucial, crucial analysis of the property. They just have a gut feeling. And some of this stuff is repetitive, but I think it’s so important to hone in on. ⁓ You have to go through that exercise. You have to go through the due diligence to minimize the risk and make sure that what you’re doing is going to lead to being very successful. You don’t want to get yourself in a bad financing environment where you’re looking at negative leverage and you can’t your debt covenants.

  It’s just not worth the stress. You’re overpaying based on past trends. It used to be great, but not so much anymore. Emotional decisions. Hey, I grew up in this place. It was great. I love it. I know the people. It would be a great place to go invest in an asset. No. You have a lack of diversity. All you have are multifamily, and all you have is in the sub-market of an MSA.

  A lot of folks do that. They’re comfortable in that area. And unfortunately, it’s not ideal from a diversification perspective in case you do have a deal that starts to struggle. You can manage through that. Key takeaway ⁓ for funnier and CREs, it all is around the investor’s mistakes. It’s not about the market collapse.

  And so the importance of this exercise is twofold again, as I stated, to have a presentation available for the investors, but more importantly, making sure the sponsored group understands the risks and how to get through those risks and mitigate them. And I came across this thing from a gentleman named Ben at Reinberg back in August of 2024. He did a blog and I’m going to read what he wrote because I don’t want to do a disservice to him.

  But it’s time of what are the risks and opportunities in commercial real estate investing. And the blog’s pretty easy. It’s a nice blog, and it’s a really interesting website. I encourage folks to check it out. But he talks about credit risk when tenants can’t pay. His response, and the beauty of this to me, was he talked about mitigation and what you can do. We can talk all about.

  white people make mistakes, but how do you avoid those mistakes? How do you prevent them up front? And he talked about diversity a tenant makes. So you have a shopping center. Do you have a national tenant? Do you have someone that’s going to bring consumers in that want to spend that will also potentially look at your other tenants? Strong credit checks, structured leases with protections, personal guarantees and security deposits.

  It’s surprising that in some cases people are so in a hurry to get their occupancy rate up, they don’t do some of those things. He talks about exposure to economic downturns. He said focus on recession resilient properties like medical and industrial. And again, avoid overexposure to single sector or geographic areas.

  Sensitivity to leverage and refinance. If everybody wants to use other people’s money, where you can have a conservative loan of value, that’s a good thing. Secure, financing and maintain a strong DSCR. And we’re going to talk about that from a sensitivity analysis later on a couple of times, but it’s so important to keep your eye on that DSCR and make sure that when things aren’t going well, you’re able to maintain that. Rising costs versus static income.

  He likes triple net leases, escalators tied to CPI, and having realistic budgets around operating expenses. If you have an insurance claim, you know your insurance rates are going to go up. Typically taxes, property taxes, go up, and you know that. ⁓ So keep those in mind as you go. He talks about asset prices can swing.

  Again, underwrite conservatively and stress test assumptions.

  rent growth, operating expenses, occupancy. Know what your break-even is on a minimal revenue income line. Know it, memorize it, understand if things are happening that is getting you start to move towards that. And determine what would impact that minimum DSCR. Some people say 125, 13. You really want to know what happens to get you down to that point.

  investors know that these opportunities, high risk, high reward. You want to minimize the risks. So with that, laying the table out, what I go into with my clients is talking about why this, why now. If we’re out this executive summary, it’s a billboard. It’s a snapshot. It’s a 30,000 foot view of what we’re doing.

  It’s the hook again to get that investor across the table for you to grab their pen or pencil. It’s not about every detail. It’s not about, it’s just absolute highlights. It’s not what we’re buying, where we’re buying it, what our ask is, and why we want to partner with them as an investor. That’s the big idea. And really you want to make sure that investor that’s looking at you is going, okay.

  It’s 15, 30 minutes to listen to this sponsor group talk and what they have to bring to the table. Then you want to talk about your core strategy. So you kind of start to evolve into the details of it. Is it a value add? Is it core plus? Is it a distressed property? Is it ground up construction? And what’s the specific secret sauce? Is it the location? Is it the micro environment that this place is in? What’s going to happen?

  When you look at, as an example, one of the examples I use is you have a Class B building that is at a significant discount and that’s because it’s in an emerging sub-market. Sounds great, right? So what are you doing? Well, we’re going to upgrade the common areas and amenities. We think that’s going to help level up occupancy rent rates.

  And you’re creating value. We’re going to rebrand the property. Rebrand it, excuse me. And so one of the things that you want to be able to be prepared to discuss is that J-curve. You want a five-year pro forma that takes you from a bridge environment into permanent financing. And when is that going to occur? So we’re spending money today to seek benefit in the future. That J-curve says in year three that’s going to happen. And so.

  It’s really important that that be part of the deck. There’s not a lot of that type of minutiae in it at the beginning, but it’s what you do. Then we go into the macro and the micro picture of the property. What’s the population growth? What are the employment trends? Corporations, are they coming in or are they leaving? We had a huge corporation here called AT &T that left that cost them havoc for a little bit.

  in the real estate market, especially in the location that was at. ⁓ What infrastructure improvements are coming in? Most cities have to talk about it. They have to get approval. You know what’s coming. ⁓ Supply and demand dynamics of where you want to be and how that works. Then you look at the micro view. How does this property stack up against direct competitors?

  Are there other people in there that are in a value add that are doing capital improvements? Have they been successful in that particular area that you want to be in, the demographics of where you’re at? Is it student housing? Is it medical staff? Before and after type situation where you have concepts, site concepts, graphics that show what it’s going to look like. And that is, you know, four or five bullet points that kind of give you

  what you want to do and you wanted to their attention. Then we talk about the team and the numbers, the credibility and the profitability of the deal. Investors invest in people as much as they do the properties. And they want to like you. And you want to be likable. And I’ll tell you a quick story. A few years back, we had a nanotechnology for cancer.

  And the scientists that developed it was from a different country, different culture, different personality, and different style.

  So I was on the team. There was probably seven, eight, nine ⁓ medical professionals on it. And I came up with the plan with a couple of the other doctors to have him be in the laboratory. And we would do the presentation with the investors. We’d walk him back to the laboratory, where he would be in his most comfort environment.

  comfortable environment and kind of talk about the technology. Well, he wanted to be in the meetings. They failed miserably. He wasn’t likable. I mean, think about it as an investor. Do you want to make a phone call to someone you really don’t want to talk to? You don’t. And so it tanked it. That nanotechnology for that cancer treatment is still sitting on its shelf because it’s just the scientists unfortunately passed away and ⁓

  It just sits there. You want to talk about relevancy. What experience do you have? What history do you have with projects that you’ve acquired? What asset classes are you comfortable with? What did you do? And then, of course, you want to highlight key team members, those folks that are going to lead the presentation and why they’re leading it.

  You certainly could be an alpha man or woman, but you have empathy, you’re affable, you’re open to mentorship, to being challenged about what you’re doing. And we’ll talk about that a little bit in a minute, but that’s all really important. I had one of my colleagues, we were talking about this, and she said, dude, just tell them they can’t fear the bridge. And I said,

  What does that mean? Well, a bridge loan is a 12 month, 18, 24 month loan. You have to perform. There’s no short-circuiting that one. You have to perform. All the credibility is there. And then it goes back to that pro forma I mentioned. You’re going to show how you’re going to transfer to a permanent loan. That is very important. And I thought that was very interesting. You want to show safety reserves.

  Do have a cap fund? Do you have funds set aside to pay for interest rate that you’re doing during the breach loan if it exceeds two or three months before you get permanent financing? And you want to talk about, for me, the sensitivity and risk analysis. And that’s really not negotiable. It’s the what ifs. Every bill has risks. Transparency builds trust. So what happens?

  if the occupancy is not there, what happens if you can’t get the the rental rates that you want? What are you going to do? You have higher CAPEX. You got to model these out and their impact on the DSCR. And this is going to just simply show that you’re foreshadowing this thing and you’re preparing for it and you’re not going to be surprised. A lot of people don’t do that. They just, this is my plan. This is what’s going to happen.

  We’re going to be at a 1.6 DSCR. We’re golden. The underwriter is going to chop that up. So get ahead of it. And in cases where you can, make that lender part of the mitigation strategy and what they’ve seen in the past and how they can make it work. And then kind of look at the exit strategy again. What are your plans? Are you going to sell it?

  What’s it going to look like five years from now? Are you going to keep it for a long term hold? Then what’s to ask? I’m asking for this much money from a bridge and a perm or just a perm. This is the rate I’m looking for. This is the return on the investment we’re looking for as we pay you back and trying to finish up the deal. it’s rather high level.

  But ultimately, the presentation isn’t about just selling the property and what you’re trying to do. It’s about selling the partnership, the vision, ⁓ long-term relationships as you move forward. ⁓ You have a narrative beyond just the data points that you’re talking about. And ultimately, you want to make it easy for Michelle to say, yes, I want to partner with you. I want to invest. I want to move forward. And if we can put those things together,

  that I think that is going to minimize some of the risk, if not most of the risk, for that investor. And it shows your investor partners that you are looking at this thing holistically.

  Michelle Kesil (20:02)
  Awesome. Thank you for sharing all of that, Mike.

  guess like when it comes to supporting investors, what are you looking to focus on for this year? Do you have any goals for like solving or scaling to the next thing?

  Mike (20:17)
  It’s to continue to

  the platform that we have, ⁓ the fact that we have 2,500 lenders, the fact that these lenders have identified the types of asset class they want to participate in. ⁓ And that is a one-time event that we put into an environment that…

  It goes out to these investors automatically, whether it’s commercial, credit unions, insurance companies, private equity, those that will do bridge and perm, and really make it easier and simplified from an investment standpoint for a commercial

  Michelle Kesil (21:04)
  Got it. Thank you for sharing that.

  Mike (21:05)
  You’re welcome.

  Michelle Kesil (21:06)
  So before we wrap up here, if somebody wants to reach out, connect, learn more about what you’re up to, where can people find you and connect with you?

  Mike (21:14)
  My ⁓ direct contact number is 210-602-5013. My email is [email protected]. And I’m happy to answer questions, talk to folks, take a look at their project, help them in any way we can to get them their funding as quickly as possible.

  Michelle Kesil (21:37)
  Perfect, well, appreciate your time and your story. Thank you for being here.

  Mike (21:41)
  Thank you for having me.

  Michelle Kesil (21:42)
  And for the listeners tuning in, if you got value, make sure that you’ve subscribed. We’ve got more conversations with operators like Mike who are building real businesses, and we will see you on the next episode.