BiggerPockets

I have done flips for some time, utilizing private and hard money.

Now moving into more of a hold position, while still focusing on rehabs.

QUESTION: financing the rehab, what is the experience of all as to the right way, the wrong way, and the smartest way? Especially in the sphere of a L.T. hold, as the money costs become paramount when compounded with time. And to simply personally finance heavier into properties, results in a constraining of the volume potential.

100K can go a long ways when using O.P.M., or a microscopic distance when used alone.

Personally, I like to pay cash for everything and then work with a local bank to refi using a portfolio loan. This allows me to make cash offers with very quick close-times, but then allows me to recoup a good bit of my investment once the rehab is complete and the property is cash-flowing.

I also try to keep my leverage around 65-70% LTV; this provides the leverage I need to boost my returns by also keeps a relatively large safety margin in the case the market drops some more.

Just to clarify, a "portfolio loan" has nothing to do with having a portfolio (or even having other properties); it just means that the bank holds the loan in-house (using it's own funds) as opposed to selling it on the secondary market. And because the bank holds the loan in-house, they make the lending rules, not the secondary mortgage buyers like Fannie Mae and HUD.

And when they make the rules, they can do things like lending against the deal (instead of just against your financials), lending when they want (for example, refi immediately after purchase, which most banks won't do), and lending any amount they want (they can lend at higher LTVs if they want to).

That's why portfolio loans are great -- they can be negotiated however you and the lending institution agree (though they generally have their own guidelines for most borrowers).

Now, how do you find these lending institutions?

Normally, portfolio lenders are very small, local banks (think 1-4 branches in one or two adjacent towns/cities) and you essentially build the relationship on a case-by-case basis. Start by talking to the VP of Commercial Lending and verify that they offer portfolio loans. If so, verify that they'll against against residential property, as many will only make "commercial" loans. And lastly, find out what their specific terms generally are (again, it may be negotiable, but it's where they will start).

Generally -- in my experience, at least -- portfolio loans will be interest-only, amortized over 15-20 years with a 1-5 year balloon. Interest rates are around 6-8%, with 1-3 points upfront.

They will look at your experience, the specific deal/property, your financials, your credit and a host of other factors. They may ask that you open a personal or business account at their bank or perhaps collateralize the loan(s) with something other than the property(s). For example, the first bank I worked with offered to finance up to $250K at a time, but I needed to keep a $50K CD at their bank for the first year, which was held as collateral. This was mostly because I had little experience at the time.

The other nice thing about portfolio loans is that they can be much faster to fund than conventional loans (less than 2 weeks), have in-house appraisers in many cases, and will actually know who you are, so you get the benefits of a good relationship.

Good stuff.

Anyone have any info to add as to the use of tapping into commercial financing to use, or some twist of a SBA type funding?

Example: an associate of mine has a open line funding account of 2 mill total (mix of flips and holds), that has preset parameters for LTV and so on, which he readily uses. Down side, he pays interest on the entire bulk, any funds not in action, he is still paying on them. I believe the balloon is 2yr. Upsides are it is a good safety net to draw upon while constructing and moving with other financing, in my opinion.

As R.E.I. we own businesses, we are businesses, although I seldom hear of anyone using or drawing upon business centered funding, and the coveted "free money", such as grants and special gov funding. And yes, I have personal experience with just that, a former client who owned many many sec8 units received 6 and 7 figure funding to improve properties. Much of it under "forgivable" terms in I believe it was 5 or 7 yrs.

Anyone else ventured into tapping into any of this?