Hello from Houston Texas
I am an advanced newbie which means i am reading the books, listening to the podcasts so i can dive into my 1st S
FR buy. I am committed to the concept of building passive income and firmly believe in hard assets as a way to create legacy wealth.
I am a little unsure about the following, the financing piece. I am starting to understand that financing for SFR through conventional means is difficult. How do you scale the business from one to many buys? What is the best practice for a buy and hold strategy on SFR's? There are turn key resources that mention intro's to preferred lenders who will mortgage?
Thoughts and guidance are sincerely appreciated.,,,
@Jerry Polio I'm right there with you Jerry. There are so many options of scaling outside of conventional financing. For example, you can probably get a few properties with conventional financing, but by the time your looking to scale, you've hopefully built a solid reputation for yourself as an investor.
This reputation will allow you to tap into things like hard money lenders (if you can do some cash out refinances on earlier properties to pay off the higher rates hard lenders expect). You can also look to partner with other investors who may have the cash but not the time to invest. The better you can network in your area, the more individuals you'll have to potentially bring deals to. Another option is to ask the seller for seller financing terms where they carry the note and you won't have to worry about it affecting your debt to income (as calculated by banks).
I think that it will be harder to really scale with only SFRs. Consider having 20 SFRs spread across Houston vs having one 20 unit apartment. The economies of scale to that apartment building would give you much more time to look for other possible apartment deals to scale that way.
It's called "Creative Financing" for a reason, and I'm sure there are many awesome posts on BP that dive deeper into this subject :)
Best of luck!
Hey Marshall appreciate the feedback. Curious how did you posture your first couple of buys?
SFR's or right into multi-unit? There's upside and downside in both. My neighbor just moved to a remote area in Wyoming from Houston....
@Jerry Polio Still waiting on my first deal. I have, however, had two deals in the past six months where I had everything set to go but backed out of. In these deals, financing was not the issue.
The first deal was a condo down in Destin, FL which I intended to use as a vacation rental (Airbnb/VRBO). For this one, I knew the owner and was planning to use owner financing. Ended up backing out before signing the contract. Looking back, I think it was the right move - a vacation rental would be a lot of work from 1,000 miles away.
The second deal was a small duplex in western Nebraska. My financing would have been through a local bank. The best product they could offer me was a 5/5 ARM. The purchase price would have been around $50K and not many banks like to do a 30 year conventional on that type of property.
I've looked at the market here in Wyoming constantly and it's pretty rough. Properties are very expensive in the larger cities - so much so that I really struggled finding a quality investment. In the more rural areas, prices are obviously cheaper, but they have there own issues such as fluctuating demand because of oil/coal booms and busts, limited selection of tenants and property managers, etc.
Jerry/Marshall let me share some information on Commercial lending that might make some sense. I used to own 8 SFR/ townhomes that were financed thru the secondary market- fixed ( now down to only 2 ) money for 30 years. As an investor you are allowed 10 for yourself - 10 for your spouse ( assuming they have W-2 income separate from yours ) for a total of 20. We grew our SFR very quickly since 2015 purchasing now 32 SFR all financed in the commercial world. I have a LOC ( line of credit ) where I am able to pay cash for my purchase - we will use 50k as an example. I put 20 in rehab it then appraises for 100. I pay off the first 50 get my 20 back and then refi out do it again and again and again. Currently I have 3 SFR in production phase. Back in 2015 because of my 8 loans in the secondary market difficult to grow my portfolio so turned to a local community bank about $500M in assets - sister bank somewhere in the $4B range. I would recommend this approach for 2 reasons:
1.) Gives you a chance to grow your portfolio quickly
2.) The secondary market will require you to have at least 2 years of tax returns showing you have / can manage investment property. Once this is verified you can then refi from the commercial world into ( for a fixed rate longer term loan as commercial loans are typically 5 year balloons that reset after 5 with current rates ) the secondary market. Other thing to be aware of is secondary market has some strange rules about reserves once you reach anything over 4 units.
I would /have interviewed 2/3 lenders ( community banks not the national lenders as they have much more flexibility / also credit unions are a great source ) and shop just like anything else. I have meetings next week with 2 new lenders for a very large project we will be building and will be using some of these thoughts I have shared.
Hope this helps Happy hunting!
At the risk of sounding stupid what is the secondary market?
Creative financially is my first suggestion. It is something that I feel strongly about. From seller financing to lease option.
I like what was said about using community banks and credit unions that have investor loan options. Definitely a good leveraging tool. I would also line up that line of credit both personal and business because they can be a huge tool.
I think that another thing that hasn't been mentioned are partners and cosigners. Partnerships are a great thing becasue you can leverage their money and experience. You could do different partnerships for different projects. And with cosigners a similar track if you are a bit short or a bit tied up with your other projects.
And putting the loan under your business entity that way you can do more deals.
Thank you for the insightful replies much appreciated. I am learning there are are many options to the finance piece.
Check out my post called "Real Life BRRR"
It give an example of how to use creative financing