If your plan is to buy and hold real estate, it is absolutely essential to find a bank (or more likely, banks) willing to offer you long-term financing at good rates. Indeed, securing “long-term, low-leveraged debt” is Joe Fairless’ second of three immutable laws of real estate investing.
Private loans and hard money loans are simply too expensive to keep in place on a property. And leverage is one of the key advantages real estate has over other investments. Unless you want to follow a very slow and safe approach, all-cash is not a particularly attractive option.
So, the question becomes, how should one go about finding good banks for real estate loans?
Finding Banks to Finance and/or Refinance Investment Property
First and foremost, you will need to have your ducks in a row. If you have bad credit, you will want to work on cleaning that up or at least finding a partner with good credit to go into the deal with you. And if you have no income, you will need to get a job or partner with someone who has a strong income or substantial wealth.
Finally, you need to have your accounting in order. This is especially true if you already own a few properties. A confused mind will say “no.” And if you provide a bank with a jumbled mess to represent your “financials,” they will politely decline almost every time. (The few exceptions will be when they rudely decline.)
In addition, make sure you know what you are looking for up front. These are the things you will want to ask a lender to see if they can offer you a satisfactory product.
- Interest Rate: The lower, the better. Usually, it will be a bit higher for investors than homeowners.
- Loan to Value: This is what percentage of the purchase price or appraisal value the bank will lend at. With FHA loans for homeowners, it can be as high as 96.5%. For investors, it’s usually 75% at best. (Or 80% in some more expensive markets.) It should be noted that for purchases, banks will also lend on needed repairs and put that money in escrow until the rehab is done or certain benchmarks are hit.
- Amortization Rate: This is how long you will have to pay off the loan. Typically, 30-year amortizations are better than 20 or 15 for cash flow and thereby preferred by most investors. But in many less expensive markets—such as the Midwest and Southeast—it is difficult to get much better than a 20-year amortization on investment properties.
- Term: The term is how long before the loan comes up for renewal. A bank will usually renew—but not necessarily, so you might need to pay it off. There are also a few fees to pay. The term is usually from three to 10 years. It’s nicer for it to be longer but not a major point in my humble opinion.
- Prepayment Penalty: Prepayment penalties require you to either pay points (each point is 1% of the loan) or yield maintenance (complicated and awful) if you pay the loan off early. You want to avoid these if at all possible.
- Seasoning Period (for Refinances): The seasoning period is how long before a bank is willing to lend on the appraised value instead of the amount of cash you have put into a property (purchase price and rehab cost). I’ve seen these range from the moment the property is rehabbed and rented to up to two years. If you are using the BRRRR strategy, you need to refinance at the appraised value. So the faster, the better. I would aim for six months or less. Also, make sure a bank will provide “cash-out” and not just pay off whatever debt is attached to the property.
How to Find the Right Banks to Use for Your Real Estate Investing Business
It has been my experience—and virtually every other investor I know—that local, community banks are your best bet for finding long-term financing for houses and small multifamily. The only exception is the 10 loans you can get as an individual under Fannie Mae’s 5-10 Properties program, which any bank can initiate and then sell to Fannie Mae. (The loans can be a bit arduous as the requirements are rather strict and you have to have the property in your own name and not an LLC.)
One way to find quality local banks is to simply look up “bank” on Google and start calling around. This can be time-consuming though, and you are going to get a lot of “nos,” as well as lukewarm responses that tend to just be long, drawn-out “nos.”
So here are some better ways to find a bank.
1. Look for Investor-Focused Marketing
Go to various local networking events targeted at the real estate industry and look for the banks marketing there or the bankers who attend. These are usually the banks who are looking for investors like you.
Good places to consider attending include your local REIA (Real Estate Investor’s Association), BiggerPockets Meetups (if one is nearby), and/or other local real estate meetups you can find on Facebook or Meetup.com. I would also consider checking out CCIM, which has a crowd more inclined toward commercial real estate. Many lenders attend, as well.
2. Ask for Referrals
This is one of the best ways to find just about anything or anyone in real estate. Go to meetup groups like those listed above or just find other successful real estate investors in your area. Then, ask which banks they’ve had success with. If a bank has lent to another investor doing what you are doing, they’re likely to lend to you.
Furthermore, investors aren’t hesitant to give up these contacts. Unlike with contractors who may not be available for your job if you refer them to another investor, the bank has plenty of money to lend to the both of you. And banks love their clients who refer them new business!
3. Do a Little Research
I mentioned this idea in an article I previously wrote. It is what I consider the most unique way to find a good bank.
- Login to ListSource, DataQuick, or any other data lists site.
- Search for properties with the following criteria:
- In the area you are looking in
- Owned by a non-owner occupant
- With a loan taken out in the past year (or purchased in the past year)
- In the price range you are looking to buy in
- Write down each bank that has made a loan to such individuals or companies, and give them a call.
If the bank has recently lent on investment properties like the ones you have or are looking at—especially those within the same price range—well, they are likely to lend to you. We have found two of our best banking partners with this method.
So there you have it. No more excuses. Go out and find the right bank (or banks) to get your deals done!
Do you have other tips you’d add to this list?