Where to get capital from...

Question

Hello all.  I am seriously looking into making the plunge into the REI field, primarily flips in the beginning and then onto rental units, but I am currently strapped for liquifed assets.  Below are current standings;

- FICO score of 766
- ~$95k in IRAs
- (2) 1.5 acre vacant lots R1 soon to be part of new downtown (~$40k ea)
- $90-100k equity in primary residence

I don't think I would have a problem obtaining a second mortgage, but I would need money for repairs, etc.  I would like to ditch the lots, but being the new downtown, I have a feeling the value will drastically climb once utilities are put in.  I wouldn't want to borrow from the IRAs because of the penalties, so the only other option I can see is a HELOC.  Is this the way you more experienced people would go?  Is there a need for a private investor?

Also, what could one do to ensure the ability to obtain a third and fourth mortgage as other properties come along?

Thank you so much for your time,

Mike

Account Closed · Answer

Mike,

It all comes down to the LLC's lack of assets, history, credit and income.

Until the LLC has the history and potential that you have the lender prefers you to be on the loan. If you are flipping and using a lender who does not care about credit (only equity) then the LLC is fine for most deals. As the LLC builds up cash it starts to have substance so more conventional lenders will consider lending to it.

Also note that many lenders who do lend to an LLC figure that as the LLC is a company the loans should be made on commercial terms. Higher rate, shorter term and lower LTV compared to what an individual might find.

The above are broad statements. There are always specific exceptions. If you guarantee the loan then an LLC can get better terms even if its history is short. Other times lenders will suggest you borrow in your name and then move the property to the LLC while the loan remains in your name. You get some liability protection but the loan is still on your credit.

If you want the loan to show up on the LLC's credit report there must be a reason. It is that same reason why many lenders want it on your credit.

Expect some speed bumps until you and the LLC have a history of performing.

John Corey

N/A N/A · Answer

John,

Thank you for your input.  Very valuable indeed.

What other issues might I face?  Rental income is definately a possibility once capital is suitable.

Thanks,

Mike

Account Closed · Answer

Mike,

Make a personal loan from yourself to the LLC. Best to write up a note to document the loan with all the terms. That way if you are not around someone else can pick up the pieces and know what took place.

There are other issues with the LLC and financing if you expect to hold long term. If you are just doing some short term cash deals then no problems will come up. As the LLC builds up cash it can be used to reduce the risk to a lender later. Work on establishing credit in the LLC's name (phone, Home Depot, gasoline charge card, small loans with the LLC as primary).

John Corey

Account Closed · Answer

Here are some ideas. Ideas that need to be developed further but this should get you started.

1. The lots can be pledge to secure deals. You retain title but given another seller a note secure by the lots. Most real lenders will not touch the lots but a private deal can use them at face value.

2. You can use your IRA to invest. Technically the IRA can buy and sell real estate. Hence short term flips could be purchased with all cash from the IRA and then when the property is sold the IRA receives the profits. Self-directed IRA is the phrase.

3. You can get HELOC. All the normal assumptions.

4. You can partner with someone who has cash. You can even put your lots into the pot. Partners are a pain if you pick the wrong one. Like a bad marriage.

5. You can use hard money if the deals make sense.

6. With good credit and other assets a working line of credit that is not secured by the home is possible. Mostly from local banks. They will expect a track record before they lend serious money.

John Corey

N/A N/A · Answer

Thank you both for your input.  You learn something new every day.  Like I have read in many places in this forum, the key is "Just Do It!!!"  I guess that is really the most terrifying part.

Although, I do have one other question.  If I form an LLC, which I probably will, then the houses will need to be purchased under that LLC's name right?  So, if that's the case, then I guess I would just do the HELOC, or whatever way I go, and just account for that as startup capital?  So, for the books, would I just consider that a loan from my personal account, and then any payments would be debited from the LLC to my personal account and then I would pay on the loan from there?  I realize this isn't an accounting forum, but I would just rather have my ducks in a row before get myself in trouble.

Oh, profile location has been updated to Albuquerque, NM   :wink:

Thanks,

Mike

Jon Holdman · Answer

So, to do flips, you should be able to find a local hard money lender.  Join your local REIA or just go to the meetings and try to make some contacts.  Between one of those and the equity in your primary residence, you should be able to handle a reasonable size flip.  You should update your profile to show where you are.  Maybe where you are even a small flip is big bucks.  Around here, you could certainly find something you could do with $50K in available funds and a hard money loan.

You can't borrow from your IRA, period.  You can take a distribution, but you'll pay tax and penalties.

Jon