New Hampshire / Rhode Island · Member since 2018 · 10 posts · 25 votes
While starting out in real estate, in doing my initial research and listening to the podcasts and such I hear of the hard money lending and private money as well as loans from the bank. My question is while you borrow this money for investment properties how does the re-payment work? For example, a bank loan will take 15-30 years to pay off, is that the same with private investors? I am concerned about constantly being in debt to others while investing, how do others tackle this problem?
Rental Property Investor · Indianapolis, IN · Member since 2018 · 189 posts · 141 votes
7y
@Matthew Yeoman
I believe you can have 10 mortgages in your personal name. We do commercial loans on our properties. No limit on the amount or number of those you have.
The hard money/private lending are short term financing options. Generally less than one year, hopefully 6 months as the money is expensive. You then either sell the property as in a flip and payback your investor and keep the profit or refinance as in the BRRRR strategy and then you have a convential loan while paying back your investor. The chance of having available cash for everything is difficult if not impossible when you scale your business.
It does require a different mind set if your very conservative and like to pay off everything. It’s the concept of OPM (other peoples money) even if it’s bank money.
How long you are in debt depends on the length of the loan. Another way to look at it is your tenant is paying your mortgage for you. The advantage of a longer term for a loan is the payments are smaller. You have to factor in interest rates, but right now they are pretty low. The lower monthly payments means there is more money left at the end of the month and you can put that towards other properties or investments.
So if I understand it correctly Hard / Private money is just a quick short term solution so you can make a deal faster and then sort our a bank loan later on?
Have you ever run into a problem with having too many mortgages, for instance is it common to have ten homes and be paying a mortgage through tenants on all of them?
@Matthew Yeoman There is a limit as to how much you can borrow and how many mortgages. I've heard others mention 7-10, but I don't know as I'm no where near that number. For me it was a matter of how much I could borrow. All of my mortgages are covered through rent from the tenants along with property taxes, insurance, etc.
For any rental property, you want the rent to cover the mortgage, taxes, etc along with some money for repairs and vacancies.
Correct the hard/private funding is short term. Its purpose is to fund the deal and rehab if possible depending on the lender. You can put down 20% and borrow at the onset and not use hard/private lenders. I typically buy distressed, therefore traditional lending is not possible. Using other peoples money provides building positive relationship on multiple fronts. Another funding source is always positive when you are trying to scale your business.
@Matthew Yeoman There is a limit as to how much you can borrow and how many mortgages. I've heard others mention 7-10, but I don't know as I'm no where near that number. For me it was a matter of how much I could borrow. All of my mortgages are covered through rent from the tenants along with property taxes, insurance, etc.
For any rental property, you want the rent to cover the mortgage, taxes, etc along with some money for repairs and vacancies.
There is no limit to how much you can borrow. Just a limit of how much money you have to put down and how much debt can you service.
Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
7y
If you're buying a property that needs work in order to bump the value, that is usually where HML come in. If you get a mortgage you have to hold onto it for a set time before you can refinance it and it is generally a much bigger PITA to get construction costs and get the checks cut as work goes on. It will just drag out the process, if you can even get the construction loan for it at all. So you go to a HML and show them the deal, they like it, they finance it and you get it done much quicker (for a price) but once it is done you can now go to a bank and get a normal loan to pay off the HML and hopefully get some or all of your money back from the rehab. It just streamlines the process and avoids the time you have to hold the initial mortgage before you can refinance.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
7y
I had no choice but to start with seller financing & rehabbing my way to a higher appraisal & hopefully a refi.
It was not unusual to have several properties maxed out as were my credit cards & I had to rent rooms in all to survive. I was able to secure a couple more back in the day with mortgages through the local banks as I did earn an excellent income.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Matthew Yeoman If you are looking to grow your portfolio, you'll always be in debt. You have to be comfortable with debt to be successful in real estate. If you arent comfortable with debt, you'll need a boatload of cash to invest.
Rental Property Investor · Indianapolis, IN · Member since 2018 · 189 posts · 141 votes
7y
@Matthew Yeoman
I believe you can have 10 mortgages in your personal name. We do commercial loans on our properties. No limit on the amount or number of those you have.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
7y
A rental property is just a tiny business. It has revenue and expenses. You can choose to maximize the return by leveraging the business with debt or you can purchase for cash and reduce the risk and the return investment (or any level of leverage in the middle). I purchase at ~75% LTV and add value; so, my leverage goes way down within a short time period (and cash flow goes up).
@Syed H. Isn't there a limit as to how much they will loan you based on your income and the income to debt ratio? There is in Canada.
For loans in your personal name, sure.
For commercial loans no. You get financing based on the asset first & experience. Net worth & income could be important on borderline deals or high leverage but not on high cash flowing deals that you are putting 25% down on.
That's why I said there is no loan amount cap. You are limited more by how much capital you have for downpayment, your experience and/or your dscr. I can go get a loan tomorrow for a $50m property if I had $12.5-15m to put down and the building covers a 1.25+ dscr. My personal income is irrelevant.
Bound Brook, NJ · Member since 2018 · 171 posts · 37 votes
7y
@Bryan Richardson
If you have a partner, would it be better to do each loans under both of our names or alternate each property under individually? If we do it together that would mean we can only do 10 together but if we do individually we can do 10 each (20 total)? Am I getting this correct?
Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 736 votes
7y
@Matthew Yeoman It is not uncommon to see your score drop 50-100 points when you start investing. As you migrate to business capital and leverage money by using Private Money your score will go back up.
You need to be a business entity with an EIN/Tax ID and business bank account to do this as a business.
Rental Property Investor · Upstate, NY · Member since 2012 · 3k+ posts · 3k+ votes
7y
@Nate Marshall Watched my score drop 63 after I put many of the school taxes due on my Business Credit Card. Avg tax runs $2200 so it was quite the hit (not to mention the cash back) but we ALWAYS pay it off each month, yet it still took 2 months to recover the 63 point drop.
Real Estate Consultant · Evergreen, CO · Member since 2018 · 1k+ posts · 736 votes
7y
Yeah. Your FICO can be raised simply by adjusting your balances to around 30-40%. We also recommend FREE DESSERT. Call your credit card companies and ask for increases in limits. But don't use it. Massage your balance.