How to get a second loan?

10 Replies

There are a lot of talk about investing in RE with little or no money of your own but I asked a few lenders and they tell me that most lenders do not allow you to take on a second loan on a commercial deal because they are afraid you stretch yourself too thin.  So my question is how can you get additional financing to help with pay the downpayment that the bank requires if the bank doesn't allow it? How can you make the deal work if don't have enough capital to cover the downpayment if you are going at it alone?

@April Chim , I'm glad you asked this question, as it is a question I also had when getting started (I'm still a rookie, so bear with me lol).

There are many possibles ways to approach real estate with little to no money, but be warned, they will most likely require more time, effort, and creativity, than traditional methods. In essence, instead of using money to get started, you will have to use hustle, time, and creativity, Trading one for the other. 

One option is avoiding banks all together, AKA seller financing. Like I said much harder to come by, which means harder work to find. For this method you will need to find someone who owns their free and clear, and is willing to carry the note. This means they will act as the bank, and you will pay them monthly principle and interest payments, just like you would to a bank, and you get the title of the property in your name. The reason people can be swayed into doing this, is because you can explain to them that this option would spread out their taxes, they stay ahead of inflation, and the get a passive monthly income, without any responsibilities, not to mention they end up making way more than what they are selling the property for. Let me use numbers to explain: 

In scenario 1, they sell the property to you for $100,000, using traditional financing. They will have to pay around 6% in commissions to the agents, and also capital gains taxes (I believe it is around 30%, either way it is large, and they will have to pay it.), not to mention any closing costs they will have, I'll use $1,000 for this example. With these numbers they will end up selling for $100,000, but after all expenses and taxes, they will end up with $63,000 profit, that's a $37,000 expense!

However, you will present them with option 2, in which they will carry the note for 30yrs, at 6% compound interest, with no down payment, the number will look like this:

You will pay them $599.55/month for 30 yrs. Which means, they will make a total of $215,838.45 on the sale, over $100,000 more, and they will not have to worry about paying property taxes, insurance, doing maintenance, dealing with tenants and evictions, and so on. They will also be able to spread out the taxes from the sale over a longer period of time, instead of paying them all at once, and possibly at a smaller taxable %! As you can see both parties can greatly benefit. 

This is just one out of many methods you could use, other options include land contracts, private money lenders, partnerships, seller financing with a balloon payment, and so on. Remember, this is  about being creative, so the possibilities are endless. You will also have to use creative methods for finding these deals, you will likely not find them on the MLS. I think driving for dollars is a great way to go. Drive neighborhoods, look for houses that seem to be in distress, or vacant, write down the addresses, go home and look them up of the county assessors website in order to obtain the owners mailing address, and send them a letter asking if they want to sell, and let them know you might be able to help them. Again this is just one out of many methods of finding these deals, I believe the most important way to find deals and good opportunities, is to network as much as possible. 

I highly recommend you read the book 'Investing in Real Estate with Little to No Money Down'. When you are using creativity instead of money, you will need to "fill your toolbox", meaning read and educate yourself, so when you come across a potential opportunity, you will be able to present creative options to a seller, according to their particular situation. 

I hope that this information helps you, and that you will be able to find the deals you are looking for! If you have any questions, feel free to ask! Good Luck!        

@April Chim , if you ask a Portfolio (Asset-based) Lender, I believe you'll find that they "do allow you to take on a second loan on a commercial deal because they are not afraid you stretch yourself too thin", because of course, the deals that you'd be buying through them will always be more than paying for themselves, right? [ie. Your DTI ratio should be actually going down!]

It's all about finding (super-cheap) deals - pure and simple! [If you don't find those, why buy?]

Meantime, has your first deal got enough equity for you to take out an ELOC? My 2c...

Updated 6 months ago

Edit: By "super-cheap", I mean super-BARGAIN.

In addition to what's stated above you can have family, friends, etc invest directly in you or your business either as lenders or joint venture partners 

@April Chim If it’s a value add deal you can borrow money from private lenders as an interest only loan on a personal guarantee (you need to have strong relationships for this).  Add value through rehab and better property management.  Then refi the property and pay private lenders  back.  Now you own the property with no money down and no second lien.

Or if it’s not a value add, you can get a private lender to joint venture with you.  They give down money and get equity in the property.  Your sweat equity and finding the deal is how you get equity.  You just have to find out that magic equity % your investor will be ok with with you not putting skin in the game.

@Salvatore Lentini 

Even if it's a value add, banks are saying they have clauses to prevent secondary lender. Do you mean to have private lender agreement backed by personal guaranteed and money transferred to my account prior to deal contract/loan?

Originally posted by @April Chim :

@Salvatore Lentini 

Even if it's a value add, banks are saying they have clauses to prevent secondary lender. Do you mean to have private lender agreement backed by personal guaranteed and money transferred to my account prior to deal contract/loan?

It means: no secondary lender against that property! Get what I mean? 

They're saying: they won't allow you to already have a mortgage/lien on that property.

It shouldn't matter that your deposit is borrowed, so long as that property isn't what your borrowed deposit is secured against, and, the Lender determines that you can afford to repay that (and any other) existing debt, and their (1st position) mortgage! Cheers...

@April Chim are you applying for residential or commercial financing? Commercial lenders have allowed me to do seconds for part of the down payment many times  but I doubt a residential lender would. 

But even on the commercial it can't be so extreme where the debt service would make the cash flow negative. If you're trying to do 100% financing for instance I often find that doesn't pencil out. But a lender at 75-80% and a second for 10-15% is what I have done.

@Jeff Kehl I talking about commercial loan. Did you go thru portfolio lender or a traditional direct lender?

@April Chim all of the ones who have done it for me are portfolio lenders that hold and service the loans. They are either small banks with just a few branches or a similar bank that is part of a regional company that let's them make their own local credit decisions.

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