How to you get loan from banks to scale rental properties

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How to you get loan from banks to scale rental properties

Leela Gutta
Investor · Fremont, CA · Member since 2020 · 11 posts · 7 votes

I am very new to rental property investment. I just bought my first rental property and I am learning everyday. One of questions I have is how do you keep getting bank loans to scale on a large scale? I am going to cap at some point as I already have a primary residence mortgage. Appreciate if you can direct me to any resources where I can learn more about this. 

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Josh Caldwell
Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
5y

Simple answer, you can't scale with bank funds. At some point you will hit the glass ceiling.  Banks think (incorrectly) that having more mortgages equals more risk for them. That is why when you hit 4 or 10 loans, depending on the bank, that they will stop lending you money. That is when you will either embrace non-traditional lenders, hard money or private money; or you will need to learn creative finance.  We have all faced this problem.  The good news is that the real estate world is different than the banking world. Our funding avenues understand that your next deal might be fantastic, and the number of other loans that you have is basically irrelevant. 

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  • Josh Caldwell
    Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
    5y

    Simple answer, you can't scale with bank funds. At some point you will hit the glass ceiling.  Banks think (incorrectly) that having more mortgages equals more risk for them. That is why when you hit 4 or 10 loans, depending on the bank, that they will stop lending you money. That is when you will either embrace non-traditional lenders, hard money or private money; or you will need to learn creative finance.  We have all faced this problem.  The good news is that the real estate world is different than the banking world. Our funding avenues understand that your next deal might be fantastic, and the number of other loans that you have is basically irrelevant. 

    5Reply
  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    Hard Money/ Private money is much easier to scale with. For hard money - there are the C's - Cash - Collateral- Credit - You need two of the three. No cap on how many loans you can take out, no tax returns, no DTI. Also the rates are competitive with a banks. They say only about 20% of mortgages are from the private sector but I am projecting this number to rise substantially in the next 5 years.

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  • Leela Gutta
    OP
    Investor · Fremont, CA · Member since 2020 · 11 posts · 7 votes
    5y

    @Matthew Crivelli thanks Matthew. I read online that hard money comes with a higher interest rate. What would be the typical rate ? Also heard these are short term loans. Is that true? What are some popular companies that give our hard money?

    0Reply
  • Leela Gutta
    OP
    Investor · Fremont, CA · Member since 2020 · 11 posts · 7 votes
    5y

    @Josh Caldwell

    Thanks Josh. What do you mean by creative lending ?

    0Reply
  • Josh Caldwell
    Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Leela Gutta:

    @Josh Caldwell

    Thanks Josh. What do you mean by creative lending ?

     not creative lending, but creative finance. That is a wide subject where you agree to make payments directly to the seller and they agree to act like the bank and take monthly payments for their equity. I LOVE creative finance. Imagine that I am selling a house for 100k.  and you approach me and tell me that you would like to pay me 120k, and you will pay me $500 per month until you pay me off.  You are renting the property for $800, so you make $300 per month, I get more than my asking price, and everyone wins.  That is a super simple example of a subject that people have written entire libraries about. You can learn in here on BP  It takes skill in marketing and negotiation.  That is why newer investors tend to gravitate towards hard money or private money because those are much easier to obtain.  

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    @Leela Gutta Bridge loans are for rehab, there is also 30 year for rental properties. The rates on bridge loans are high but they are interest only payments. They are used for the brrr method.

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  • Arjan Manwani
    Investor · Louisville, KY · Member since 2021 · 9 posts · 2 votes
    5y

    Good day Leela, congrats on getting your first rental property. As a beginner myself, I offer some beginner thoughts on the matter of creative financing. You mentioned your primary residence. If you have enough equity, you may be able to HELOC that equity out to fund another property. At some future point, your first rental property will also grow in equity. Same thing, HELOC that equity out. I have heard that equity loans are the least expensive. Good luck!

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  • Momi Rapozo
    Los Angeles, CA · Member since 2015 · 42 posts · 28 votes
    5y

    @Josh Caldwell great explanation! Is this similar to SubjectTo financing? I heard about this through a podcast with pace morby

    1Reply
  • Leela Gutta
    OP
    Investor · Fremont, CA · Member since 2020 · 11 posts · 7 votes
    5y

    @Arjan Manwani Thanks Arjan. I would like to learn more about Real Estate investing. Would love to connect.

    0Reply
  • Chandra Venkat
    Leawood, KS · Member since 2014 · 33 posts · 14 votes
    5y

    @Leela Gutta if you get into multi-family, typically more than 4 doors, you can move into commercial loans, terms are different, but much easier to work with. Typically, the underwriting is based on numbers from the property so makes it easier. 

    3Reply
  • Tim DelaneyPro Member
    Buffalo, NY · Member since 2018 · 790 posts · 530 votes
    5y

    @Leela Gutta congrats on your first rental. Don’t worry about any caps until you get closer to them. Also understand exactly what they may be. Because you are just starting out, some banks may not consider your rental income in your Debt To Income ratio so you may already be temporarily capped out. Others will let you put conventional mortgages on 10 properties.

    There are also banks that lend on 20-30 year terms as portfolio loans which means they don’t sell them to Fannie or Freddy and therefore there is no limit to how many you can get.

    Another Avenue is commercial lending. The rates and terms are never as good as conventional, but you also have the ability to combine certain properties into one loan and save on closing costs.

    In summary, it’s great that you are thinking ahead and exploring options, but don’t get too bogged down or concerned with limits until you hit them. Things are always bound to change overtime anyway.

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    3Reply
  • Josh Caldwell
    Investor · Dallas TX, United States · Member since 2014 · 1k+ posts · 1k+ votes
    5y
    Originally posted by @Momi Rapozo:

    @Josh Caldwell great explanation! Is this similar to SubjectTo financing? I heard about this through a podcast with pace morby

    Exactly like a subject-too deal. there are some twist that you can add in there, but the important part is to close the deal with a real estate lawyer so that you are covered legally. Find the lawyer that other local investors are using.  

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Josh Caldwell:
    Originally posted by @Momi Rapozo:

    @Josh Caldwell great explanation! Is this similar to SubjectTo financing? I heard about this through a podcast with pace morby

    Exactly like a subject-too deal. there are some twist that you can add in there, but the important part is to close the deal with a real estate lawyer so that you are covered legally. Find the lawyer that other local investors are using. 

    Subject to while sounding great and it can be.. is a very tough sell to most sellers especially in todays market.. ITS THE SELLER that needs the Lawyer NOT the buyer  The seller has many ways to get harmed in these transactions..  The buyer also can be harmed if the seller goes into bankruptcy and the loan is still in their name..  and a myriad of other factors. NOT to mention those that do sub too  and I have done over 100 of them personally as a buyer.. its a business niche its rare for a one off investor to be able to find these deals and execute on it makes for great internet fodder though..  In areas of depressed or semi depressed which Rural PA is one its much easier to pull off than any where on the west coast were you are located..  I mean I am funding homes within 60 miles of Pittsburgh right now today for 10 to 40k EACH cash.. did 14 of them in June alone.. why go to all the trouble of sub too.. just pay cash and enjoy the cash flow.

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  • Jo-Ann LapinPro Member
    Loan Officer · Tustin, CA · Member since 2015 · 3k+ posts · 713 votes
    5y

    For sure hard /private money may be a good alternative for you to scale up. Hopefully a company that understands your long term goals and can grow with you . 

    [email protected]
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  • Momi Rapozo
    Los Angeles, CA · Member since 2015 · 42 posts · 28 votes
    5y

    @Jay Hinrichs ok got it! I appreciate the details I was having a hard time understanding exactly how it worked.

    1Reply
  • Jacob Trogan
    Lender · Kansas City, MO · Member since 2016 · 142 posts · 71 votes
    5y

    @Leela Gutta Hey Leela a few lenders responding on here 😂 as far as what caps you might see I am also a lender and the best place to learn for conventional financing is just going directly to Fannie Mae or Freddie Mac website and reading the guidelines. Honestly I was worried about this but now being a lender I realize we compete for your business so you just have to shop around to find someone who can make it work for you, just worry about estimating 25% of gross rent goes to expenses outside of PITI and you will be similar to what traditional lenders calculate. Obviously as mentioned many other methods too. Not to mention if you use business credit it does not show up on personal credit reports so not calculated in dti 👍 dm me

    1Reply
  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    5y
    Originally posted by @Leela Gutta:

    I am very new to rental property investment. I just bought my first rental property and I am learning everyday. One of questions I have is how do you keep getting bank loans to scale on a large scale? I am going to cap at some point as I already have a primary residence mortgage. Appreciate if you can direct me to any resources where I can learn more about this. 

    You need to shift to portfolio loans from lenders that will lend to you as a commercial mortgage. You'll find these at local banks. Usually going to be an adjustable rate with a 20 year term. Once you build a relationship with the bank you can usually negotiate a slightly better term and possibly longer rate locks. At this point you'll probably have a LLC because there's no benefit to keeping anything in your personal name since you won't get better financing terms as a result.

    After you reach 4 to 10 loans your options with 30 year fixed mortgage start to evaporate. But that's ok as long as you've been building your network of lenders. 

    1Reply
  • Michael Kuldiner
    Lender · Feasterville Trevose, PA · Member since 2015 · 69 posts · 23 votes
    5y

    @Anthony Angotti private or hard money is the quickest way to scale. Once you stabilize your portfolio, hook up with a local small bank to refinance and cash out. Then repeat.

    1Reply
  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    5y
    Originally posted by @Michael Kuldiner:

    @Anthony Angotti private or hard money is the quickest way to scale. Once you stabilize your portfolio, hook up with a local small bank to refinance and cash out. Then repeat.

     It's also exorbitantly expensive if you can manage the down payment on a portfolio loan at a local bank. 

    0Reply
  • Michael Kuldiner
    Lender · Feasterville Trevose, PA · Member since 2015 · 69 posts · 23 votes
    5y

    @Anthony Angotti it’s not expensive once you stabilize the property. They usually go up to 75% ltv and by the time you stabilize it i am sure you’ll have it by then.

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  • Anthony Angotti
    Real Estate Agent · Pittsburgh, PA · Member since 2015 · 1k+ posts · 846 votes
    5y
    Originally posted by @Michael Kuldiner:

    @Anthony Angotti it’s not expensive once you stabilize the property. They usually go up to 75% ltv and by the time you stabilize it i am sure you’ll have it by then.

     Points, rate, etc. 

    Hard money and private money are almost always more expensive than commercial financing with a local bank. 

    The benefit to hard and private money is usually they don't require much of a down payment, there's less criteria on the performance of the property at purchase, they can usually close a little faster, and there's little to no underwriting on you as a borrower. 

    There is a great niche filled by hard and private money, however it's never in saving cost. I've done both kinds of loans in the past, own over 100 units, and have done this for a while now myself and with customers as an agent. 

    There are benefits in ease and speed of which they can close, but in exchange for the lender taking on more risk you are always going to pay a lot more in points and interest than you would on a commercial loan with a local bank. 

    1Reply
  • Leela Gutta
    OP
    Investor · Fremont, CA · Member since 2020 · 11 posts · 7 votes
    5y
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