If your friend trusts you, put the money into a separate savings account in your name for at least two months. Then qualify for a loan, after the two months have passed, giving evidence to the monies through bank statements. Banks usually will only check for the latest two months of bank statements. So, this will get around the banks requirements for indirect funding.
While you are making arrangements with your friend, draw up a partnership or an operating agreement noting that the monies your friend is providing is a loan and describe ways that your friend can get his money back. This is best done through an attorney and is highly recommended because friends and business never mix well.
Just as Jon said, borrowing money through a partnership makes the transaction more complicated because there are more conditions with which things can go wrong. Having a well thought out agreement which addresses all the "what if" scenario's can help with getting funding.
Another method, is to secure hard money loan (HML), at a higher interest expense, until both the ownership has seasoned and you have a tenant performing. In my experience, you will get a better rate if you have done all the necessary repairs, secured a tenant, and seasoned the loan. Usually you can do this for 6 months and simply refinance the loan through a lender who does income property lending.
Ultimately, using hard money does save you money because you can avoid the 20 to 30 percent Downpayment requirements.
For instance, say you secure a mortgage for a purchase of a house. Much of the time, you will need 20 percent down payment which could exhaust your entire capital reserve (down payment loan for your friend).
Contrarily, you can secure a hard money (HML) loan which will likely still require a downpayment. The difference is, when using the HML, you can under certain circumstances, be required to use less of a DP.
Why HML?
Often times, you may be able to leverage the fact you are purchasing the home under fair market value and will have to put less down. Contrarily, traditional investor terms are a flat percentage of the purchase price usually 20 percent or more.
Price of the short sale house is $100K. You have a $20K in capital. The fair market value (FMV) of the property is $135K.
Under the conventional loan scenario:
You secure a $80k mortgage with a required $20K downpayment.
Under a HML, the lender may lend up to 65% of FMV with a minimum DP of $10K. (This is the program I use.)
Since the purchase price is $80K and the HML will lend up to 65% of fair market value or $87750 which is more than 100% of purchae price, then you will only be required to put down $10K.
With traditional bank financing you have zero money left for repairs or capitalization. Under the HML program you would have $10K still left to do repairs or invest in another property.
Under both programs, you could refinance in six months and cash out some equity. The major difference in my opinion is the lower downpayment possibility leaving more money in your pocket for further property acquisition or renovation.
Another reason to use HML's are usually much easier and quicker to fund which is important if your doing a short sale.
HML will cost you more in terms of interest and points, but since I only use them short-term and all these expenses are tax-deductible, I am able to take the capital saving to secure more properties.
Whichever you decide to do, shop around for rates especially local lenders who cater to investors. I also recommend joining a REIA in your area if you have one. They are great source of information and advice.
Happy Hunting!
Sep 22 '09, 10:55 PM
