Approaching banks in early stages

3 Replies

I'm looking to dive into real estate in the next couple months, probably via fix and flips. My starting liquid funds are about 100k cash, 150k HELOC, and 250k in a self directed IRA. I'd like to form a partnership with a local bank and will begin the search process soon. I'm not really sure if these are great questions but what are banks going to be looking for out of me? How much money can I expect to be able to borrow? Are there any creative but legal ways to use my personal funds and the SDIRA on the same projects? What sorts of loan products are available to me? Am I an attractive borrower (I have great credit and only debt is home)? Should I already have an LLC set up when I approach banks to look like I'm better prepared? So many questions with regards to most effective use of debt to scale quickly.

Banks, in general, are stupid and fix and flips are risky for the uninitiated. To use both personal and Sidra funds you need to set up an LLC and partner. Check with a specialized lawyer like Mark Kohler out of Salt Lake City. (say I recommended him). He can give you the ins and outs of that type of strategy.

How well prepared are you for fix and flips, how well do you understand the markets and values? These are the important questions. A better way than a consumer bank is to get a commercial banker. Buy the house you want to F&F for cash keeping the money aside for repair. Put the house into a trust and ask a commercial banker to give you a line of credit on the free and clear house. You can now use the loan to fix it and sell, or you can repair it with your cash to improve your equity and ask the banker to extend your credit line. Now you have a "credit card" like loan based on your property equity. You may write a check for your next house and put it in the trust, each time asking your banker to extend your credit line to cover your improved equity. Rent each house for a year and take advantage of the lower rate for capital gains tax when you sell. Sell each house, in turn, paying back your loan and keeping the profit for yourself. Build your line of non-recourse funding to the point where you can use it to buy something substantial like an apartment complex or strip center without the need to get an approval from the bank. You essentially become a cash buyer based on your line of credit and may shift things in and out alternately buying and paying.

I hope this helps!

Holler if you need me.

Mark

Extremely helpful...one thing I need clarification on: in your scenario when I write the check for the second property from what funds am I writing that check? The new commercial LOC? If I then put that second home in my trust, how does that improve my equity if I just used equity to purchase it?

yes, the check is from the loc. The first home secured the LOC, the second home secures the addition because once you pay cash it is free and clear. At that point, only the first home is encumbered. You are forcing equity into the LOC with an additional property.

I hope this helps!

Holler if you need me.

Mark

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