No money down loans strategy help

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No money down loans strategy help

Joseph King
Louisville, KY · Member since 2015 · 209 posts · 58 votes

I apoligize if this is the wrong forum, it's the closest I could find for my question.

So essentially I was listening to a few of the podcast about creative financing and I came across a strategy I somewhat  understand and essentially its no money down investing. Now my understanding is going to be very general so don't blast me for leaving out details. So it starts,I came across a 12 unit deal for 400k assssed at 500k and 11 of the 12 are rented all the numbers look good and Im ready to finance this deal so I choose to use a commercial loan 20% down with a 25 yr amortization. Now I don't have 20% of 400k which is 80k, so I use a hard money lender to fund the down payment with a short term loan of 1 year im not to sure on the rest of the rates. So I get approved for the loan and the hard money lender funds the 80k. Now I close on the property. Next in a few months I refinance the property with the assessed value at 500k  and take out equity against the property 100k. I pay the hard money lender the 80k plus the interest and keep the remaining for repairs. 

Feel free to tell me how screwed up and confused I am, we were all new at one point. Also excuse any grammar mistakes.

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Doug P.
Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
10y

@Joseph King You have the right idea, refinancing is one way to buy property and have nothing out of pocket at the end. The way you described it used to work years ago but as @Jeremy Pace pointed out banks are stricter these days.

The preferred way to do this these days is either:

1. Purchase the property subject to the existing loans. Borrow the funds for renovations from a private source. Refinance and pay out the seller and the private lender.

2. Or buy the property and renovate it entirely with private funds and then refinance the money back out.

For either of these to work you need to pay less for the property in the first place. So if it will be worth $500k after repairs, your purchase price plus repairs would have to be no more than $400k.

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    I see my fist mistake with the 80k down  my loan would only be for 320k but Ill still only take out 100k in equity.

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  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King it looks like you are on the right track.  One thing to consider is loan seasoning.  It may be hard for you to get a refinance in as few as 12 months, because banks like to see longer timelines.

    Two things: has the property truly been assessed (recently, not by current owner) for $500k?

    If so, consider having the current owner loan you the remaining 20% on a longer term (10-15 year amortized) with a five or seven year balloon payment.  When it comes to commercial loans, oftentimes the bank isn't as focused on where the money comes from, as long as it all adds up.  This would avoid the use of hard money, with the crazy fees and loan terms that comes with it ... and the seller will end up making more money, and taking a softer tax hit too.

    1Reply
  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King it will be incredibly difficult to get any combination of banks to loan you more than 80% LTV, refi or not

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y
    Originally posted by @Jeremy Pace:

    @Joseph King it will be incredibly difficult to get any combination of banks to loan you more than 80% LTV, refi or not

     Thank you for your feedback. To answer for question I made up the 500k but no  I've learned that what the bank will asses thw property at and what the owner tells you the value is are two different things. 

    I understand, can you explain how they would loan me 20%. I'm a newbie so I want to limit my mistakes. Dumb questions might be asked 

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  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King not a dumb question at all.

    They would loan you the 20% (this example, $80k of sales price) as a mortgage against the property ('partial seller financing').

    The deed would transfer, the bank would get first lien position, the seller second.  Every month, you would make two mortgage payment (one to bank, one to seller).  After however long it takes, then you could refi out the seller.

    One additional thing to consider in this case:

    Often times banks want you to have six months of reserves accounted for in your accounts.  That's six months of PITIA (principal, interest,taxes, insurance, and association fees), and maybe even some maintenance money.  In this case, that could be tens of thousands of dollars.  That would also be a good opportunity to bring on an additional partner/investor if you don't just have a giant pile of money sitting around waiting to be spent.

    2Reply
  • Doug P.
    Investor · Kitchener-Waterloo, Ontario · Member since 2008 · 1k+ posts · 1k+ votes
    10y

    @Joseph King You have the right idea, refinancing is one way to buy property and have nothing out of pocket at the end. The way you described it used to work years ago but as @Jeremy Pace pointed out banks are stricter these days.

    The preferred way to do this these days is either:

    1. Purchase the property subject to the existing loans. Borrow the funds for renovations from a private source. Refinance and pay out the seller and the private lender.

    2. Or buy the property and renovate it entirely with private funds and then refinance the money back out.

    For either of these to work you need to pay less for the property in the first place. So if it will be worth $500k after repairs, your purchase price plus repairs would have to be no more than $400k.

    3Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    sounds good to me thank you for the help. 

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y
    Originally posted by @Doug P.:

    @Joseph King You have the right idea, refinancing is one way to buy property and have nothing out of pocket at the end. The way you described it used to work years ago but as @Jeremy Pace pointed out banks are stricter these days.

    The preferred way to do this these days is either:

    1. Purchase the property subject to the existing loans. Borrow the funds for renovations from a private source. Refinance and pay out the seller and the private lender.

    2. Or buy the property and renovate it entirely with private funds and then refinance the money back out.

    For either of these to work you need to pay less for the property in the first place. So if it will be worth $500k after repairs, your purchase price plus repairs would have to be no more than $400k.

     First how do I tag instead of  quote. 

    It sounds like that is a fix and flip method, I'm looking to use as rental property. Sorry if I mis understood. 

    0Reply
  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King

    use the @ symbol to tag other thread participants or your colleagues.  Then start typing their name.

    1Reply
  • Tony Ho
    Wholesaler · El Paso, TX · Member since 2016 · 33 posts · 7 votes
    10y

    They meant you could do something like a BRRR. (Buy, rehab, refi, repeat the process if you want more rentals)

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Tony ho.  I see, I have more studying to do but I like the idea of using the seller to finance the 20% down payment as a second mortgage instead of using the hard money lender because it gives me a longer amortization period. My question though on the rehab portion is that let's say the property only needs new windows (12k) once I refinance would I really gain much equity? Again using a made up example the property is bank assessed during the 1st loan at 500k and and the sales price was 400k and I put 80k as a down payment. From my understanding I have 180k I  equity already or am I still not understanding?

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y
    Originally posted by @Tony Ho:

    They meant you could do something like a BRRR. (Buy, rehab, refi, repeat the process if you want more rentals)

     I tried to tag using the @ but It didn't work 

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Jeremy Pace So to be clear your suggestion would be to have the owner seller finance the 20% (80k) as a second mortgage. Take the 20% use that as the down payment to finance the commercial loan. Next I rehab then I refinance and take out equity of the new appraisal to use for future projects. If I am correct how long is the usual wait to refinance, I'm assuming longer than a year.   

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  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King you'll do one closing.  You'll have the seller come to the table with the bank, and you'll have loan docs to sign with both.  They'll get a huge chunk of cash, and you'll owe them more on paper.

    Once the loan is seasoned (12-24 months, I'd say, maybe you'll luck out to less) you refi the whole thing to one note, and pay off the original owner.  This will save you from paying a ton of hard money fees and the incredibly high interest they want.

    It sounds more complicated than it is :/ but after the first time, you'll be an expert.

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Jeremy Pace ok I see. Have you successfully completed this method, if so do you have any recommendations for commercial lenders? I have read other post and others have said it is difficult to find a lender who would support this method.

    0Reply
  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King focus on credit unions, they're pretty interesting in this kind of thing ... and you can be honest with them about what you are doing, which is nice.

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Jeremy Pace ok, being military I have navy fed, so ill look into them once I correctly analyze my deal. I appreciate all the help.

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Jeremy Pace Getting a little more detailed with my deal I'm looking at a package of 3 4plex's by the same seller and are side by side , will a commercial lender finance this in a lump sum or will I have get separate loans?

    0Reply
  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
    10y

    @Joseph King you can get a commercial loan from a bank, credit union, mortgage broker, or commercial lender.  They just have to be willing to underwrite the loan.  Separate loans will cost a lot more, since you'll have four full sets of closing costs.

    0Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Jeremy Pace thanks.

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    I see the approach, but has anyone actually completed this process?  Could they provide actual numbers?

    My understanding is you would need to disclose the other loan to each lender.  Both lenders would need to agree. They will both need to provide their part of the money at closing.  Each lender will want to know they are securing their loan against an asset with 20% equity.

    The other concern is this is really high risk.  If anything goes wrong and you can not refi, you still have the hard money loan to cover and they typically are looking to be paid off in 12-18 months.

    If you can get the owner to hold the paper, which is not always easy, you will be far better off than taking hard money. 

    1Reply
  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Lesley Resnick Thank you for your advice, I have ruled out using the hard money lender for that reason and that I wouldn't be able to refinance in time. I have decided instead to talk to the seller and see if they will seller finance the 20% as a second mortgage as long as I can find a bank that will agree to those terms as well. 

    0Reply
  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    Sometimes you can convince the seller to finance the whole deal.  This is the ideal scenario.

    Banks have become stingy with their equity and the risks they will take.

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  • Joseph King
    OP
    Louisville, KY · Member since 2015 · 209 posts · 58 votes
    10y

    @Lesley Resnick I will look into that as well, my only problem is that most sellers would want a down payment, in which my deal would be 80k that I dont have 

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  • Lesley Resnick
    Real Estate Agent · Jacksonville, FL · Member since 2015 · 1k+ posts · 1k+ votes
    10y

    Best approach is to find a partner, friend, family, etc.

    No money down is very very rare

    None of your own money is rare, but possible

    0Reply
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