One more pillar for long term success

16 Replies

For years I have been investing in rental properties. My experience has always been with single family properties. I have also managed apartments and have always managed my own properties.

This year I have been working on branching into apartment rentals. Financing was an important consideration and I am glad that I found lenders willing to work with me.

Today, I finally found a private lender willing to invest in my deals. It is a friend of a friend kind of relationship and know that I invest in RE. They are offering 12% simple interest money with no fees that they would rather see paid back as interest only. It has taken some time for me to build relationships and finally find someone that can provide money like this.

Hi Charles, well congrats in finding someone, didn't see a question there....so I'll assume you might be asking how you might set that up.

If you can afford it, take all they have and no more than you need. Collateralize it with owned properties, not the properties to be acquired (at first).
You can make your note a future advance note, in the event you ever need more. Interest only, say a five ten year balloon and no prepayment penalty.
WIth your other properties encumbered you can buy new properties and then assign the needed collateral and release the other.
Now, there is a scam type deal out there that has an agreement where a borrower can substitute collateral at will, at their whim and on any property they choose, very dangerous! COllateral assignments must be agreed to by both lender and borrower and you have an agreement as to what will be acceptable, like based on a purchase price or appriased value, which ever is lower, would be conservative. Most likely you will be seen as the expert in your arrangement, so in the event anything blows up, having agreements that are conservative and customary will be good for both parties, IMO. Any ideas? Good luck, Bill

What do you mean by "rather see paid back as interest only"? If you're only making interest payments, the loan balance never changes. Do you mean a balloon?

That's the way I took it Jon, I have had investors like this, they don't want principal back since it is rather useless in small amounts, they would just re-invest it and it would be at a much lower rate. So, many like to say take it all and pay me the interest only. I took the funds and kept them in escrow and collateralized until I used them. I paid 10% and had more than I needed, which is a problem too! You have to have a balloon payment, as it needs to be repaid someday, but it can also be rolled over for another term. It's a great way of having OPM! Bill

I will be getting more information when he comes back to town. He has lent money to an existing client of mine that is growing their business. That client also happens to invest in SFR properties and cars.

Both have personal money to lend.

Bill, do you have promissory agreement that allows for additional future borrowings? Do you do a separate agreement that authorizes up to a certain amount and then separate notes for each borrowing?

My original thought was to use this money as a short term fall back while securing a cash out on a SFR rental.

12% interest-only money is pretty expensive for an apartment complex given that cash flow generally comprises the bulk of the return...at least in the early years. Using this money to take a distressed deal down and refinancing it may make sense, but I can't see using that money long-term.

Have they indicated what the loan duration will be and when the bullet will occur?

What do you mean by "rather see paid back as interest only"? If you're only making interest payments, the loan balance never changes. Do you mean a balloon?

This investor currently has $300,000 invested in my clients company. His desire is that the principal not be returned. He gets a monthly check of 1% each month. He treats it as a long term money market fund. I understand that he has an additional 500K he would like to invest in a similar way under similar terms.

Bryan, I see this more as short term transactional money rather than long term financing money. I have a large amount of equity in my SFR rentals that I would like to leverage on some apartment deals.

CHarles this is a great opportunity for you. You can line up all he has, set it up with a future advance committment and tap into it as you need it, but you also have to make money for him, so you have to take enough to keep his interest (no pun intended).

Yes, i can provide you with the future advance recitals. PM me or give me a call, happy to help. Later, I'm outta here! Bill

It is fine that it is considered long-term money from his perspective, but there will need to be a bullet with interest-only money. Do you have any idea how long you can use the money? Given that it is short-term funding I am guessing it doesn't really matter too much.

Are you trying to do a SFR to MFD equity swap? If so, you may want to look at doing an exchange.

I will be doing some 1031s along the way, but I bought properties that have development potential as well. For those with no development potential, I'll 1031 directly into a multi.

I have one property that I intend to short plat and sell the original house and develop the remaining land.

I have another property that I have had numerous offers from developers even now looking to build an apartment. The location is great and land in this area is hard to come by. The property currently has two homes on it and is a free and clear property.

Charles, have you considered other ways of using the money? It looks to me, from what you have stated, that your goals and his are slightly different. You consider his money expensive and want to quickly pay it off while he is looking for a long term relationship with steady income.

Have you considered approaching him with a profit-share type of arrangement? I like the idea of buying a multifamily with some upside potential, increasing its value and refinancing after a couple of years. You can ask the investor whether he might be willing to take a lower interest rate until the refi in return for a share of the increased value after the refi.

Having access to wealthy investors is a great thing and if you are able to use his funds in a manner that he finds exciting, he may tell some of his other wealthy friends and soon you will have a lot more investors lining up to do deals with you.

Vikram, my thought is to use the money long term, but only short term on deals like this. Pu the money need to a deal to secure i, pull the money out when other financing is fully arranged, move on to the next deal.

Good plan Charles, I used idle cash to buy notes Charles. Assign them as collateral in addition to the collateral you have pledged. There is no law against having borrowed money. There is no brokerage requirement if you buy or sell notes with your own funds. Money is yours that is not initially pledged or borrowed to purchase a note. It's a "Use of Funds" chicken or the egg scenario. Get with another investor and partner with them to buy properties, you use the money for transactional funding, take your fee, quit claim the property back to your "X" partner. Just more ideas for idle cash lying around. Later, Bill

Congratulations on finding someone to assist in financing your apartment purchases. During our 10 year stint with apartments, that was always the hardest part. I described it as backing up and hitting your head against a brick wall. Banks/Lenders would tell me it was a commercial loan so I contact a commercial lender and they state it is an investment loan and they do not do investment loans. After going full circle a few times you then get financing. It is a raw experience - referred to by many as a "financial strip search". They find out all the info on you, but you have no idea of their history or whether they have things to hide! Again, congratulations on your accomplishments!

Good plan Charles, I used idle cash to buy notes Charles. Assign them as collateral in addition to the collateral you have pledged. There is no law against having borrowed money. There is no brokerage requirement if you buy or sell notes with your own funds. Money is yours that is not initially pledged or borrowed to purchase a note. It's a "Use of Funds" chicken or the egg scenario. Get with another investor and partner with them to buy properties, you use the money for transactional funding, take your fee, quit claim the property back to your "X" partner. Just more ideas for idle cash lying around. Later, Bill

Though my overall goal is to buy additional multifamily properties to rent, I like the idea of using the cash available to me in other arenas in between deals. I look forward to learning more about these opportunities.

Congratulations on finding someone to assist in financing your apartment purchases. During our 10 year stint with apartments, that was always the hardest part. I described it as backing up and hitting your head against a brick wall. Banks/Lenders would tell me it was a commercial loan so I contact a commercial lender and they state it is an investment loan and they do not do investment loans. After going full circle a few times you then get financing. It is a raw experience - referred to by many as a "financial strip search". They find out all the info on you, but you have no idea of their history or whether they have things to hide! Again, congratulations on your accomplishments!

Realtyman, I know that it can be frustrating dealing with banks and brokers. Good contacts does help along with a good reputation as I'm that you have found out over the course of your many years of investing. Sounds like you are doing well in the mobile home arena.

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