When will the bank cut you off

Question

What are the things to consider regarding a starting out strategy? Should one lump a good bit of available cash in on one rental or try to stretch that out with 10% down and taking out a mortgage across the first 5 or so deals? I am just wondering when the bank would not be comfortable to lend to someone who has 5 mortgages even though they are providing income. Any feedback would be appreciated.

Arthur Garcia · Answer

Hi Jarred,

A few thoughts . . .

1. Leverage - before purchasing your first investment property, take a little time and learn about the power of leverage.  Many investors, myself included, think you would be wise to lock-up three decade long debt at ~5% (pending cash flows).   Over time you debt will get paid back with your tenant's cheaper dollars and your money will multiply much faster than an all cash purchase.   You'll need to keep adequate cash reserves, but I think this is best bet in today's market.

2. Opportunity costs - another reason I would argue to put 10-25% down is to keep your cash liquid.  This allows you to take advantage of any great deals that come across your desk and let's you keep plenty of reserves on hand.

3. Loans limit - you can get up to 10 mortgages, but only certain lenders will go the full 10.  Your best bet is to work with a direct lender and setup a game plan for the next several acquisitions.   The first 4 will be easy (20% down for SFH or 25% for Multi family).  The more you acquire the trickier it gets.  You'll need 6 months of cash reserves per property, a credit score above 630 for the first four and 720 for mortgages 5-10.

There is a lot of info already on BP about this, but let me know if you have more specific questions.

Best,

AG

Bill Gulley · Answer

When can they cut you off.....anytime they like! As to any bank or credit union just keeps on making loans, that's possible until that one borrower hits a loan concentration point, no one just keeps on getting loans. Alot of my commercial brokerage came out of banks who had millions outstanding to one entity or borrower, they would send me the deal, I'd get it funded, the bank would retain servicing and fund at the table and pass it through to the other lender, not a participation but it would appear that the original bank did the deal. You never know.

A change in management can cut you off, one loan officer that you usually use can get suspended or fired and his portfolio will be reviewed, cutting off his borrowers until the smoke clears, a bad or poor rating on an examination will usually cause an internal loan review and limit amounts or types of loans, and all of these types of issues will go totally unknown to the public as confidential bank information.

So,  when can they cut you off? Anytime they want to.    :)

Nathan Emmert · Answer

Brian Hoyt Yes, they are all through a portfolio lender.  Typical terms are 5.5 - 6.5% interest amortized over 30 years with a 10 year balloon.

I didn't go conventional for 2 reasons... the biggest being a short sale on my credit report from June 2010 which didn't allow me to go conventional until very recently... the 2nd being they wouldn't have done the 70/30 financing with the seller carrying a 30% 2nd position note.  I do intend to start refinancing in the next 6 months as some of the properties I've purchased are under 75% LTV even financed at 100% purchase price due to the appraisals.

Scott W.  That's a secret ;)  Actually it's just a local credit union.  The credit union finances at 70% Loan to Purchase Price and allows the seller to carry a 2nd position note for the remaining 30%.  So while I haven't found a bank that will do 100% financing, I have found a bank that will allow 100% financing.  The harder part is finding deals where the seller has enough equity to cash out with only 70% and is willing to carry a note... but I've found a few and all generate at least 1.5% of the purchase price in monthly rent.  The higher rates are definitely squeezing my DTI closer to 40 - 42% but after refi's I will get down to a more comfortable 30 - 33%.

Scott W. · Answer

@ Nathan Emmert - how in the world did you get 100% financing in this day & age?! who is the lender?

James H. · Answer

Nathan Emmert,

Are all your properties financed through a portfolio lender? If so, what are the typical terms? Why did you not go conventional?

Nathan Emmert · Answer

My portfolio lender is cutting off my 100% financing at 7 (though they're considering an 8th commercial property)... that's mostly because I don't have the tax records and financial history on the properties yet (all 7 closed this year).  If things continue to go well I believe they'll continue to make loans... just need to catch our breath :)

Jon Holdman · Answer

With the right lender, there's no limit.  A day-job co-worker has several dozen properties he's purchased over the last few years.  All financed with a local portfolio lender.  He and I were talking the other day and he said "I dunno, they just keep giving me money."  If you're buying right, every rental improves your DTI.  If you're working with a portfolio lender, you don't have to worry about the four or ten fannie/freddie limits, you can get as many as you want.

10% down isn't going to work, though.  Figure 20-25% and 15 year loans.

When will the bank cut you off

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