Would you benefit from having access to hundreds of commercial lenders? The commercial lending space is quite different than the residential lending space. Commercial loans can be more difficult to receive as they are based on relationships, the property, and the borrowers’ track record. Large scale platforms that allow the borrower to compare lenders does not exist in the commercial lending space as it does in the residential lending space. StackSource bridges this gap. Tim Milazzo, Co-Owner of StackSource, joins the passive cash flow podcast to explain how people seeking a commercial real estate loan can benefit by shopping around for the best lender through the StackSource platform. Learn more at StackSource.com
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0:00 – Intro
0:38 – Who is Tim and what is StackSource?
2:18 – How to get commercial loans?
5:17 – How to apply to StackSource?
8:52 – Anyone else doing this?
12:15 – History of StackSource
14:25 – Banking relationships in rural America
18:20 – Good advice
22:17 – Contact Tim Milazzo
23:38 – For more info go to peoplescapitalgroup.com
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Tim Milazzo: There’s so much here to want to run your business the right way-
Aaron Fragnito: Right.
Tim: -above and beyond. Hey, let’s not miss some advantageous cost of capital and pay more in interest rate or get lower leverage just because I’m not feeling out the market.
[music]
Aaron: All right, ladies and gentlemen. Welcome back to the Passive Cash Flow Podcast. I’m your host, Aaron Fragnito. We have a special guest today, Tim Milazzo. How are you doing today, Tim?
Tim: Hey, Aaron, doing great. How are you?
Aaron: Excellent, my friend. Thanks for coming on here. I wanted to have you on the podcast today because you’re not just your normal banker or lender, you’re actually developing a technology and really improving a space, which is the borrowing space. I borrow capital to buy real estate. I work with different banks, and they’re not all created equal. Any savvy investor needs to shop around for the best cost of money, the best bank for their needs, just like you shop around for a piece of real estate. Talk to me more about what you do and what your company does to help investors like us.
Tim: Thanks so much for having me on, Aaron. really appreciate everything you’re doing, educating real estate investors of various stages. You can think of me as a financing guy from New Jersey, and you wouldn’t be wrong. You can also think of me as a tech entrepreneur, and you won’t be wrong either. My story is that we’re bringing in a platform to market in commercial real estate financing, which newer investors may expect, “Hey, this is the way financing should work.” You can go to a portal and you can see what different financing options are available and choose the best lender based on the interest rate and the terms and what other borrowers have said about the experience working with those.
You may think that exists in commercial real estate if you’re just getting in. Those that have been in here for a while know– No, that actually has not existed in our industry. This is like an offline process where you have to develop these relationships and it’s really hard to find the right lender. We’re trying to bring this common-sense innovation to commercial real estate finance, which is transparency about financing options, learn about what you’re getting into before you have to sign up with a lender.
Aaron: I love that. Right now, I’m buying a primary residence, and, of course, I buy about three apartment buildings a year. I’m dealing with regular primary loans, although the way I pay myself I actually don’t qualify for your average FHA loan. I’m a harder guy to underwrite.
Tim: Of course.
Aaron: Banks don’t like me. I pay myself– [crosstalk]
Tim: You and me both, Aaron. You and me both.
Aaron: Oh my gosh. Boy, I pay myself the refinance of real estate. I’m, like, “Come on, the money’s coming in.” They’re, like, “Well, that’s debt.” I’m, like, “No, that’s money in my bank account, my friend, based on solid assets.” Never mind, it’s a whole other podcast. The way you qualify for a residential loan is completely different than how you qualify for a commercial loan.
I am amazed sometimes. The banks, that give us commercial loans with many zeros behind them, based on the assets, based on our relationship, based on our real estate owned and our track record as investors and borrowers. It’s very complicated. It’s very relationship-based. It took a while to get here and actually qualify for those loans. Explain to me a little bit more how you make it easier for a guy like me to get commercial loans.
Tim: Absolutely. First of all, it is a great thing to have strong relationships with lenders that you’ve done business with. That’s a great signal because that means that you’ve done the right thing as a borrower and you haven’t gone wrong. Also, working with a lender and knowing that they’re going to hold up their end of the bargain, they’re not going to retrade you at the last minute, they’re not going to cut loan proceeds, they’re not going to screw you over when you’re doing a deal, that’s a great thing.
There are hundreds or thousands of lenders, commercial mortgage lenders out there, you may be doing a different deal in a different spot, of a different size, you may be tapped out with your local bank because they can only lend so much to so many people than they need to diversify. There are so many reasons where you may be looking for your next lender, or you just want to see, “Hey, I trust this guy and I can take this loan at this leverage in this interest rate, but is there something better out there?”
You should always be looking for your next source of capital as a real estate investor whether you’re brand new, whether you’re scaling. Heck, the biggest real estate funds don’t always work with one lender, they are constantly making the lenders compete for their business. That’s the only way to keep it honest and that’s the only way to get market-rate financing. The best the market can offer you, time after time, is let the market make you offers.
We facilitate offers for debt financing in the easiest way so far for this industry. You enter information about the loan you’re seeking and the property address. We’re not reinventing underwriting. We’re making it so that multiple lenders can compete for your business without you doing extra work, and we make it easy for the lenders as well. That’s the role of our platform, StackSource. We make it easy for both the borrowers and the lenders so the market gets a little bit more efficient. Efficient market means better cost of capital for borrowers.
Aaron: Absolutely. Absolutely. That’s the name of invested properly as well is making sure that your cost of money is not overriding the value of the deal. A lot of investors in this business who are really great at sourcing deals, keeping their costs down on construction, working with management companies to get a property leased up properly, they’ll go to Home Depot and they’ll shop around and they’ll save 98 cents on this and that.
I agree it’s important to keep your cost down and keep a well-run tight-knit business as we try to do every day, Seth Martinez and I. Then, it comes to money, and a lot of these guys– I’m, like, “What are you paying for?” They’re 18% or something. I’m like, “My buddy gave me a loan and I’m just going to give him back. He gave me $100,000 and I’m going to give him back $150,000 at the end of the year.” I’m, like, “Ah. That’s illegal, actually, the amount of interest you’re paying.”
I run into people all the time, and they’re just like, “I don’t want to deal with the bank” or “I don’t want to deal with this or that” or “I don’t know why I applied to one bank and they turned me down.” They’re paying out the wazoo for capital. I’m, like, “Well, how’s your credit score?” Like, “Good.” “How is your income?” Like, “Okay.” You can get much cheaper money. The process is daunting. It’s expensive, there’s cost sometimes. Is there a fee to sign up or apply on your site? How does that work for the borrower?
Tim: Typically, no. Never is there a fee on the front end. The way StackSource works is very similar in business model and in fees to the way it would be working with a traditional commercial mortgage broker. A couple of differences, but that model is we take a small percentage of the loan as an origination fee at closing. We’re getting paid out of the loan proceeds. You’re not cutting a check to StackSource to start the process for you or anything like that.
We are a little bit different than a traditional commercial mortgage broker in a couple of ways. One is on the fee side. I don’t know if you noticed, Aaron, or if you do and you’re savvy enough, I don’t know if all your listeners would know this, but in residential real estate, it’s illegal for a mortgage broker to say, “Get an extra fee under the table from the lender.”
In commercial real estate, in commercial mortgage brokerage, it is not illegal and it happens to be common so that your mortgage broker that’s supposed to be going out to market and getting you the best loan, they may be bringing you the loan where the lender is kicking them a little something-something.
That is something that we never do at StackSource. We have a transparency, we have a StackSource guarantee that we show you every fee that will be associated with the loan, the lender’s origination fee, StackSource’s origination fee, and we’re not hiding fees. You can actually hide fees inside the interest rate. You’re getting the best rate at StackSource because we’re not hiding an extra fee inside the interest rate.
The other way that we’re different is we have this portal. Real estate investors are clicking Get A Loan on our website or they’re using one of our tools for loading up loan quotes on listing platforms. You’re getting access to multiple financing options and seeing what lenders are potentially a match for your deal, and then you can see those lenders making you offers which you can compare and analyze in our platform.
There’s a speed and a transparency to this that we’re really trying to push, to put everything in the borrower’s favor. Putting everything in the borrower’s favor– Lenders actually like that we are more efficient and we give them a clean package immediately. Lenders love it as well, but we’re on the borrower’s side and we’re unapologetic about it.
Aaron: No, I like that. That’s great because I do feel like a lot of times, the mortgage broker, we get it. I know they’re getting fees here and there that aren’t disclosed in the commercial side of the business. I don’t really mind that the people are making money, but at the end of the day, it doesn’t seem to work out to my best interest, and we like our relationships with certain brokers, and we’re big with a couple of banks that have worked well for us. I would say it’s pretty uncommon for us to borrow from the same bank more than twice because they change their terms, they change how bullish they are in certain areas, and things like that.
Then, just other banks pop up with far better terms and more aggressive terms. I love this. This type of technology is very popular these days. It reminds me a little bit like Zillow in a way. You used to need to call up a realtor and get the big book to look at real estate years ago now. You go on Zillow now and that’s really how you find your real estate residential place.
Even just like with buying a car, there’s similar structures like this, so this makes a lot of sense. This structure has worked in other industries, and it sounds like and I guess there are competitors in the residential space doing something similar to this, but then, I don’t know. I’m sure there’s plenty of them out there, but in the commercial space, I don’t really know of anyone else doing this. Obviously, I don’t want you to name your competitors here it might off theirs. Are you one of them?
Tim: Let me say you’re absolutely right. That industry after industry, there are a couple of things it’s not just about the fact that you can click a button, that’s not the magic here. Because, yes, we’ve all grown up with technology now and certainly the next generation they’re going to expect that you can click a button and make things happen. A lot of the magic, is in feedback loops.
If you think about Uber, if it’s the exact same price as a taxi, you’re going to care about a couple of things. First of all, which one is going to get to me first? Is it going to be the taxi or the Uber? It’s not just, “Oh, I like clicking a button.” That’s not it. Is it going to get to you faster? Is it going to be more reliable? Then, the ratings of the drivers. Can I tell Uber whether I’m having a good rating or a bad rating? You can get in a taxi and that taxi could be a really bad experience.
He’s going to be braking really hard and you’re going to feel sick in the backseat. It’s going to be loud on the phone. You can have a bad experience, but you can never know because there’s no ratings, there’s no feedback loop, these people are not kept accountable, so there’s something to it. Keeping the industry accountable and the players of the industry accountable, keeping lenders accountable is really important.
In residential mortgage, the most valuable company now is Rocket Mortgage. They’re worth $50 billion because they brought the process online, they made the closing and the underwriting a little bit less painful, they shaved days off the process. Shaving days off the process is one of these things that can make your real estate investing business more effective and you can win more deals because the brokers now know that you can close. There’s so much here to want to run your business the right way, above and beyond, “Hey, let’s not miss some advantageous cost of capital and pay more in interest rate or get lower leverage just because I’m not feeling out the market.”
Aaron: Actually, Rocket Mortgage was exactly what came to mind as far as a comparable system in the residential space. You see them everywhere, they really came in and took over a lot of market share. In fact, I was curious I actually ended up applying on their site because I thought maybe they had something that other brokers didn’t, but they ended up being just the same. If you don’t fit in the box, you don’t fit in the box. If it worked for them, then the commercial space is even larger. The loan sizes are much larger therefore the potential here with this business could be much larger. How long have you guys been around?
Tim: We launched in 2017. The team at that time was me and two software engineers with a prototype that was duct-taped together, barely working. We barely had any lenders on the platform to start. Fast forward to 2021 and we’ve got hundreds of lenders active on our platform. In commercial, you’re right with Rocket Mortgage, by the way, there are two or three or four different loan programs, that you may get it from a different lender and the pricing may be slightly different, but there’s only a few different underwriting boxes.
In commercial, when you have hundreds of lenders, they all have a different underwriting box and it can vary quarter to quarter. Some regional bank that you love working with, their credit committee, not your loan officer don’t– Usually, if something goes wrong with the bank, it may not be your loan officer’s fault, it’s usually not. There’s a credit committee. There’s a chief credit officer and his committee that decides we’re overexposed in multifamily, we need more of these types of properties, or we need properties in that county.
You don’t know how their credit box may be changing. Now, I would say our platform is vastly more powerful and valuable than it was when we were starting in 2017 because we represent all these hundreds of different lenders, there are different credit boxes and different leverage points, and all of this. 2017, me and a couple of software engineers with a dream launched this thing, started getting some small loans in the middle of nowhere done where brokers weren’t helping people anyway, and we’ve really built up from there.
Aaron: Yes, that’s interesting too because you got some of these rural markets. I, for one, invest in Southern Vermont is a rural market here. It is hard to get the right banking relationships in place. I’d say I tried maybe 15 different banks and ended up with one credit union that was able to service me very nicely, but it was not easy getting here, and if we didn’t have a $17 million portfolio behind us and a 10-year track record, I don’t think I would have gotten help.
Tim: Would have been even harder.
Aaron: Yes.
Tim: Yes, would have been even harder. We’re working on our first loan in North Dakota right now. At this point, we are very much nationwide. We’ve closed loans in 34 different states, but the further out you go from the city centers, you’re going to find that that number of calls that you need to make to find a lender, just a lender that’s going to give you a good term sheet, it’s going to increase and it’s going to multiply. We heard from another client that they called 41 different institutions before coming to StackSource and we have the term sheet within a week because you just don’t–
We have, at this point, north of 20 professionals working at StackSource and it’s all we do full-time. We’re not looking for deals. We are not competing on trying to syndicate equity. We’re just looking at financing and talking to lenders all day, every day, and we talked to 900 lenders now. You can make calls, but you’re not going to make 900 calls and get all the same lenders that we have nor should you. I mean, that’s not the best use of time for a real estate investor. You should be going and getting more equity, you should be going and finding more deals, and you shouldn’t be making 900 calls to lenders.
Aaron: When should I go to StackSource and start the process? Let’s say I’m shopping around for a deal, I don’t quite have it under contract yet. Should I go on and fill out an application? Can I even do that yet without a property or how would that work?
Tim: It will depend a little bit on the type of deal. If you’re talking about ground-up construction, for instance, we’d love to chat early and talk about the underwriting and start to figure out whether that underwriting makes sense, but it’s going to be a long process. You need to get to a point where you’re going to take away a lot of risk on the deal and the entitlements and the construction permits before a lender is going to commit to you. On an acquisition deal, light value add or certainly stabilized, I’ll answer stabilize to next. If you’ve got a stabilized deal, multifamily, it’s 90%-plus occupied, if it’s going to have a loan of at least $1 million on it, we can get an instant quote. That is where Rocket Mortgage and Better Mortgage they can give you an instant quote online.
We can do that for a 90% occupied multifamily where you just want a current underwriting, you want a non-recourse loan. We do that with the credit box of Freddie Mac Small Balance Loans, and we can instantly quote that product. When you’re talking about, “Well, I’m not going with the agency route, I’m not going to go with the Freddie instant quote here,” usually, you want to have an accepted offer or you want to be in a best in final with a broker because if you’re just underwriting a deal and you’re going to underwrite 20 more deals before you finally get one under contract, you’re going to burn your credibility and we don’t want to see you do that. Asking lenders for quotes over and over.
You should come to your StackSource capital advisor, as a matter of fact, and chat about financing strategy for all 20 that you’re looking at rather than, “Hey, I’m going to come back to you three times a week for different quotes on all of these.” The lenders will start to see, “Oh, it’s this guy wasting our time and we’re not going to respond.” You should talk about strategy for all 20 and what loan programs are available. When you start to hone in on an accepted offer, that’s when you’re going to get live quotes from multiple lenders that will actually compete for that particular acquisition financing.
Aaron: Wow, that’s amazing. If you’re working closely with StackSource, you can even actually run some ideas by you, get a little bit of guidance from your group there, and have someone advise you a little bit on the right strategy to get the mortgage. That’s very impressive. That’s a nice service you put out there. I really like that.
Tim: I think every single real estate investor should have that kind of conversation with somebody. A capital advisor at StackSource would be someone you can have that conversation with that’s an expert. They’ve been lenders, they’ve been mortgage brokers, they’re working on financing every day. If it’s not us, talk to an experienced real estate investor that’s doing more deals than you. Talk to talk to one of your relationship lenders about what they’re seeing. If you’re not doing that a few times a year, you’re doing yourself a disservice because you’re going to have old financing assumptions in your proforma Excel that’s sitting on your computer and it’s going to have six months ago capital markets assumptions when the market may have shifted. Treasury rates may be different. What the federal reserve said a couple of weeks ago is going to impact this.
How healthy is the mortgage-backed security market? These are things that a financier will know and you can talk strategy with them and nobody’s going to get, as matter of fact, they’re going to love hearing from you every couple of months, a few times a year to talk strategy. Then especially when you come back with your deal, you’ve already talked about the basics of where the market is and then it becomes about, “Okay, let’s maximize and let’s execute on this one.”
Aaron: Now, what’s the minimum loan amount what’s your maximum loan amount?
Tim: We have no minimum loan amount per se. If you are doing– Now, here are a couple of things we can’t do. We cannot finance multi-family that’s less than five units, so if it’s a duplex, unfortunately we can’t help. You need to be five units or more to be in commercial mortgage territory. You technically can get a commercial mortgage for less than five units, but we can’t do it. We’re not residential mortgage brokers and we’re not going to touch it.
If you’re doing the very smallest commercial deals at like $100,000 or $200,000 value of the building, that becomes difficult too. If you really need the guidance and the help, we’d set up a situation where there’s a minimum fee we’re charging because the 1% fee on 100,000 is not going to– It’s also harder to find that lender that’s going to underwrite that well, so we’re going to have to negotiate and roll up our sleeves and make our lender relationships do a favor. For that reason, there’s a minimum fee for the smallest deals. We have done deals as small as $250,000, but you’re paying more than 1% of that fee.
Aaron: Yes, understandable. Then the maximum size, I guess, really sky’s the limit, depends on the lender and the borrower and the deal of course. [crosstalk]
Tim: Yes. No maximum per se either. The largest loan that we have done so far this year was a $58 million construction loan for a new student housing tower in Texas.
Aaron: Very exciting.
Tim: The sky is the limit in real estate and in the middle market where there are some of these large towers in cities, it’s still advantageous to go and check that you have the best market financing. Those people we find, sometimes they want to get through the advice-type of conversation much more quickly. It’s like, “All right, guys, We know this. We’ve done 100 loans. Who do you have for me today? What capital sources out there that I don’t know about today?” That ends up becoming the conversation with these $60 million loans.
Aaron: Yes. I like those clients. They’re the real experienced ones. When I got on the phone with the guys they’re like, “Yes, [unintelligible 00:22:04] reels my whole life. I own as much as you own. What have you got?” I’m like, “Okay.”
Tim: What have you got?
Aaron: [laughs] That’s my type of guy. All right. Very cool, Tim. How can people connect with you and learn more about you and apply for a loan possibly?
Tim: stacksource.com is our website. My email address if you want to reach me directly is tim@stacksource.com. Tim Milazzo, search that on LinkedIn, Facebook, or Twitter and I will be the first one up. stacksource.com should be a good hub to start or even just read our blog about what’s happening in the financing market.
Aaron: Very cool. Well, I’m going to talk to my business partner about this, and we’re buying about three to four apartment buildings a year. I pay broker fees all the time and I enjoy the process and the service. It sounds like I might get a little more bank for my buck when I’m working with you. We’ll definitely consider going to stacksource.com and fill out that application and I think we’re going to possibly do some business together.
Tim: Aaron, as two Jersey guys as we were talking before lived in the same town of New Jersey looking over New York, we should get together and maybe do some business and hopefully somebody learned something here just about financing and the need to find the best financing. Let’s maximize some returns.
Aaron: Absolutely. Absolutely, my friend. All right. Thank goodness for Jersey. [laughs] It gets a bad rap, but I’ll tell you, it’s a nice place.
Tim: Some of the people are very, very nice.
Aaron: Some of them are. Some of them are. [laughs] All right. Thank you so much, Tim, for your time, and thank you listeners for tuning in to the Passive Cash Flow Podcast brought to you by Peoples Capital Group. You can learn more about investing in real estate with Peoples Capital Group at our website peoplescapitalgroup.com. There we buy apartment buildings all the time with passive investors, we have inhouse management, podcast that comes out every two weeks, webinars every month. Take advantage of our free education, our content there, and see if what we do is a fit for your investment goals at peoplescapitalgroup.com. Thanks a lot, Tim.
Tim: Thanks, Aaron.
