Building my real estate portfolio
Real Estate Broker · pensacola, FL · Member since 2010 · 50 posts · 4 votes
Building my real estate portfolio
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Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
14ySame old thing. The areas that experienced the largest property value drops (and thus have the greatest deals now) are the areas where the local banks have been burned the worst, and these banks are under pressure from their regulators and their own Boards, and have either completely withdrawn from investment property lending, or are severely limiting it.
You would also be well-served to cultivate some private lenders, and disintermediate the banks out of the picture, as they're just a PITA. Offer to pay your potential lender 8-10% for 5-10 year fixed-rate money, 65% LTV 1st position on appraised value, rehabbed and tenanted, using a 3rd party loan servicer, pre-executed assignment of rents and pre-signed QCD that can be executed in event of 30-day delinquency (sidesteps foreclosure step for your lender), and use an experienced real estate attorney. If you have some experience under your belt, and can lay out a track record of success. Start with people in your circle of influence, one lender per property.
Some of the models that are being used successfully by investors:
1) Sell your rental property to a turn-key passive investor at a reasonable markup, where the investor then bears the risk of performance. Of course, to maintain your reputation for future business, you need to do everything reasonably possible to make sure this is a successful investment, such as performing a quality rehab, placing a good tenant, and staying in stable neighborhoods that are attractive to good tenants.
2) Sell your rental property to a passive investor at a reasonable markup, where you then lease it back from them at a somewhat below market rate. For that reduced rent, you guarantee them the rent for 5 years, and cover maint. costs. Capital expenditures are evenly split (this seems like it could be problematic to make these determinations).
3) Obtain a straight 5-10 year loan from a private investor, and you keep all the profit and risks above the borrowing costs.
4) Obtain a 5-10 year loan from a private investor at a lower rate, and you and the investor split the equity (net sales proceeds minus note balance) when the property is sold in the 5-7 year time frame.
5) A lot of the big turnkey companies are combining (1) and (3) by selling the rental to an investor and matching the investor with a private lender that they’ve cultivated.
Obviously, option 3 is the only that that is just like dealing with a bank.
19 Replies
- Specialist · San Dimas, CA · Member since 2011 · 350 posts · 122 votes14y
Mic,
My short answer is the following:
1. Talk to other lenders. I probably spoke to 15 different lending institutions before I found one that would give me a loan on properties 5-10.
2. You may need to consider taking less right offs and show more "taxable" income. I know this sounds crazy, but the banks like seeing profit. As you know, this will "cancel" the debt service in the lender's eyes and allow to re-borrow.
3. Price of future properties. Due to your income, definitely stick with properties under 100K anything more and I don't think you're likely to get a loan.
4. Partner - If you have cash you may want to consider taking on a credit partner.
Just my 2 cents.
AG
- Investor · Union, NJ · Member since 2011 · 838 posts · 295 votes14y
Hi Mic,
I have a similar problem with my multi family portfolio. I own 4 investments and then my primary. Fannie guidelines get tighter when you aquire #s 5 through 10 properties. Unfortunately banks are balking at these loans b/c I guess they see them as more risk/exposure as well as alot more work involved to underwrite the loan when they can underwrite much simpler loans and make the same money for alot less work.
There are definitely banks that will do it for you, just have to find the right one. I would say ask around and just be upfront with the lenderr so you don't waste your time and get so far into the process only to be turned down later due to having too many properties in your name.
good luck,
Chris - Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes14y
If my lender loaned based on my tax return, I'd never get a loan. The lender needs to understand how to put derpeciation, capital gains etc in the return. I make hundreds of thousands in actual income off interest, rents, installment sales etc and show a "taxable" income of 10 K and pay nearly nothing in taxes. Find a lender that can dissect your figures etc. Rich
Originally posted by Rich Weese:
If my lender loaned based on my tax return, I'd never get a loan. The lender needs to understand how to put derpeciation, capital gains etc in the return. I make hundreds of thousands in actual income off interest, rents, installment sales etc and show a "taxable" income of 10 K and pay nearly nothing in taxes. Find a lender that can dissect your figures etc. RichWe see this constantly with banks. Its amazing how many commercial bankers in the real estate dept don't understand tax losses. We constatntly have to talk them off the ledge when they see the tax returns of some of our real estate entities.
- Real Estate Broker · pensacola, FL · Member since 2010 · 50 posts · 4 votes14y
All of your comments are exactly what I'm dealing with. I don't understand banks either. Obviously If I were losing money with my 5 rentals, I wouldn't add more to my portfolio. All of my properties show a profit before depreciation. I was actually thinking about lying and say I make more income than I do just to get a loan.
Its basically paying for a couple of loans. Given the rate/terms of conventional loans, I'd say it may be well worth it.
I'm a little surprised that they aren't adding depreciation back though. Everyone knows you have to do that for real estate.
The one thing I'm wondering is if you're expenses are up there as well though so even with depreciation added back, you're expenses are giving you a net loss as well. Sometimes that is exaggerated when you're buying houses and can expense some things.
Last year, I had my cpa capitalize as much of my expenses as I could. I'm not completely giving away those monies. I'm just moving them over to my tax basis where they can depreciated at a later date......
Might be worth trying instead of lying about how much the entity is making. Just move your expenses over to your tax basis so it can be depreciated at a later time and it should be much easier to show a profit.
Again, I would double check the depreciation thing again though. I'd be shocked if there's any lender out there that isn't adding it back......
- Real Estate Broker · pensacola, FL · Member since 2010 · 50 posts · 4 votes14y
I've only tried 4 lenders. I think its because I just submit my 1040 and they don't ask for the schedules. They just look at the front page. I forget the line # but it will be like -400.00 for the year. So with a 39k income and 4 financed properties my debt to income ratio is already over the limit.
I wonder if I can place my primary home in the LLC and pay rent to it so I can boost income or would that mess up my homestead exemption.
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes14y
Originally posted by Mic Nguyen:
... I was actually thinking about lying and say I make more income than I do just to get a loan.Hmmm, "liar loans" and "stated income loans" ... Good luck going there.
- Residential Landlord · Indianapolis, IN · Member since 2010 · 592 posts · 138 votes14y
Send the 1040 and the schedule e and attach a note that shows your AGI + depreciation = income to be considered for loan. Make sure you specify when talking to the lender about your loan that you want them to consider your income with depreciation added back in, if they don't want to do that call the next lender on your list.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Kevin can you define specifically "solid commercial projects" you are seeking?
- Property Management · Memphis, TN · Member since 2009 · 668 posts · 362 votes14y
I read so many posts about banks not wanting to lend when you reach 4 properties. This is one of the reasons why I only bought properties that I were able to pay cash for. Most of my homes are in the C- area of town, but it turned out to be a great investment for my business mortgage free. I said all of this to say maybe people are looking at the right place for financing, but the wrong place for properties. I have a great relationship and bank accounts with two local small banks outside of my city. I did alot of business with them during the real estate boom. I occasionally get calls and emails from them almost every month about properties they made loans on and are about to foreclosed on. They are more than happy to finance 5 to 10 properties at a time with very favorable terms for me. Writing new loans and getting these bad loans off their books looks good for bookkeeping. I have a great track record with them so they are more than willing to accommodate my needs. In the past I was told that I was allowed to buy in bulk meaning more than 3 properties, but every third home they chose for me. This is a great way to break into portfolio building with great financing terms with almost nothing out of pocket with good credit. One thing to keep in mind is that some homes my be out of the normal area you like to work in, and many of the properties I looked at already had tenants in place. So instead of looking for REOs on the mls, go to your bank and ask do they have a foreclosure list. Lastly, In the past I found a bank foreclosure for sale on the mls. I looked the property up and seen that Regions Bank owned that property. I have an account with them and my loan officer was willing to finance that property for me with only 3% down including renovation money for two years. I hope this helps!
I think you hit one key point there - you built up a relationship with them over the boom. The hardest thing I'm dealing with is when I start to build a relationship with the local bank, they dump their investor loans. Its happend at 3 banks already. And those are the few that I was able to find.
I have literally tried contacting every bank within a 40 mile radius of my area. There just isn't the portfolio lending going on here in Illinois that some areas in other states have.
But congratulations to you on your situation. If you could buy houses 3 at a time and, for some, only have to put out 3% down including rehab, you must be making out like an absolute bandit right now. The prices right now are unbelievable. And in the c- areas, they are beyond unbelievable.
Its gotta feel like Xmas every day for you. :-)
- Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes14y
Same old thing. The areas that experienced the largest property value drops (and thus have the greatest deals now) are the areas where the local banks have been burned the worst, and these banks are under pressure from their regulators and their own Boards, and have either completely withdrawn from investment property lending, or are severely limiting it.
You would also be well-served to cultivate some private lenders, and disintermediate the banks out of the picture, as they're just a PITA. Offer to pay your potential lender 8-10% for 5-10 year fixed-rate money, 65% LTV 1st position on appraised value, rehabbed and tenanted, using a 3rd party loan servicer, pre-executed assignment of rents and pre-signed QCD that can be executed in event of 30-day delinquency (sidesteps foreclosure step for your lender), and use an experienced real estate attorney. If you have some experience under your belt, and can lay out a track record of success. Start with people in your circle of influence, one lender per property.
Some of the models that are being used successfully by investors:
1) Sell your rental property to a turn-key passive investor at a reasonable markup, where the investor then bears the risk of performance. Of course, to maintain your reputation for future business, you need to do everything reasonably possible to make sure this is a successful investment, such as performing a quality rehab, placing a good tenant, and staying in stable neighborhoods that are attractive to good tenants.
2) Sell your rental property to a passive investor at a reasonable markup, where you then lease it back from them at a somewhat below market rate. For that reduced rent, you guarantee them the rent for 5 years, and cover maint. costs. Capital expenditures are evenly split (this seems like it could be problematic to make these determinations).
3) Obtain a straight 5-10 year loan from a private investor, and you keep all the profit and risks above the borrowing costs.
4) Obtain a 5-10 year loan from a private investor at a lower rate, and you and the investor split the equity (net sales proceeds minus note balance) when the property is sold in the 5-7 year time frame.
5) A lot of the big turnkey companies are combining (1) and (3) by selling the rental to an investor and matching the investor with a private lender that they’ve cultivated.Obviously, option 3 is the only that that is just like dealing with a bank.
We've had a lot of success working with small commercial banks to finance our deals. A lot of these commercial banks will finance "residential" properties. Obviously commercial terms are not as attractive as residential terms but the advantage is that it's never been an issue the amount of mortgages we have. In fact, commercial banks like to see more mortgages because of the cashflow that services the debt. They like that you can show a track record as that minimizes the risk from the bank perspective.
- Real Estate Broker · pensacola, FL · Member since 2010 · 50 posts · 4 votes14y
Doug, did they loan to you personally or through a business entity?
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Yeah, you are most likely going to have to go outside of the standard residential mortgage that gets sold on the secondary market because not only is it much tougher to get a loan after you already have 4, but there is no way around the income problem because that is part of the standard documentation.
What you need to find is a bank that is going to keep the mortgage on their book or go the commercial route because they can then add back in the interest and depreciation that is skewing your numbers. The interest rates might be a tad higher but its better than nothing at all. Also, when you go the commercial route, you will be able to leverage the equity from one property for the next property.
- Wholesaler · Chicago, IL · Member since 2011 · 219 posts · 38 votes14y
Mic Nguyen I would start going the route of private lending and find a good hard money lender or a few of them. It is definitely harder to get a bank loan these days but there are still plenty of private lenders out there. If you have good potential deals but not enough money, start presenting these deals to them. This way, you won't have to worry about not being qualified or going through the process of getting a loan.
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