Are their long term loans available for companies (15-30yr)
Justin HennigPro Member
Investor · Minneapolis, MN · Member since 2013 · 59 posts · 11 votesAre their long term loans available for companies (15-30yr)
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Real Estate Broker · Orange, CA · Member since 2008 · 380 posts · 87 votes
12yFrom a lending standpoint you're asking a lender to tie up capital at a fixed rate for a long time that is not backed by Fannie/Freddie that is the problem. Lenders like you are looking for will always do variable rates so they can get market value for their investment.
Think about it, would you loan me $400,000 at 3.75% for the next 30 years? Probably not because you thinking hey wait what if rates go up to 10% and I've got 400k tied up for 30 years at 3.75%.
20 Replies
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes12y
Yes, keep looking. Small banks with less than a handful of locations would be the most likely lender for this type of portfolio loan. Expect to hear lots of them say no way, and expect lots to offer what you have already been finding (balloon at year 3, 5, 7).
- Real Estate Broker · Orange, CA · Member since 2008 · 380 posts · 87 votes12y
From a lending standpoint you're asking a lender to tie up capital at a fixed rate for a long time that is not backed by Fannie/Freddie that is the problem. Lenders like you are looking for will always do variable rates so they can get market value for their investment.
Think about it, would you loan me $400,000 at 3.75% for the next 30 years? Probably not because you thinking hey wait what if rates go up to 10% and I've got 400k tied up for 30 years at 3.75%.
- Investor · Minneapolis, MN · Member since 2013 · 59 posts · 11 votes12y
I'm really surprised with what @Steve Babiak and @ed wood have answered above...
Maybe I'm not saying this right or I'm missing the point?!
I'm calling on experts and social bufferflys to help provide some more clarity...how about the expert posse... @brandon turner, @Aaron Mazzrillo, @chris clothier, @j scott, @sam craven, @jon holdman, @ben leybovich, ...(sorry, I'm leaving a lot of other people I respect out of this only because I can't think of them off the top)...
I find it unbelievable that there doesn't seem to be a long term lending solution for an LLC to borrow (thru it's member's own good credit) for Buy/Holds...only short term loans which I only see good for Flipping. So far have checked with a solid handful of lenders and haven't found anything yet...
So if I understand correctly, As an individual I can pay 20-25% down for a single/multi-family, take out a 15-30 year loan on the rest to maximize my cash-flow and leverage, and have personal liability
...OR
With a company (thru an LLC for example) there is protection from personal liability and only short term loans available, yet the long term loans are out of the question?
Part of my goal is to get many buy/hold properties with Deeds owned by an LLC, but if only short term loans are available, what are you all doing? I know @Brandon Turner is up to at least 35 units...Brandon, these can't all be under your name, right? And I've got to think most of these are long term loans.
Sorry for the rant but I just feel like this is a gaping hole in my real estate investing acumen and could alter my strategy if I can't figure out how to be a buy/hold investor while mitigating personal liability risk with a legal entity.
thanks in advance for your help and responses!
- Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes12y
Justin, after I completed my 4 investment property loans through traditional means falling in line with fannie and freddie guidelines I went to commercial notes. Mine are amortized over 15 years with a balloon after 5. However in speaking with the lending VP at my local credit union in which I get my commercial loans through, he stated that the loans are going to be renewed pretty much 95% of the time. Unless I let the properties fall into disrepair or my personal situation rapidly diminishes. The risk then is mearly interest rate. I might be weird in that looking through my economic model, I do not see a dramatic interest rate hike over the next 5 years. It might be higher but not unbearable by any means. Also by that point I will be financing roughly 50% LTV.
I usually advocate 15 year ammortization and seem to be a rare breed on this but it really made the transition to the next stage a lot easier as I was already conforming with guidelines, just added the balloon wrinkle with an interest rate adjustment at 5 years.
Most businesses operate under these terms and even when private money is involved I try to keep them for a shorter term. I am sure if you dig enough you could find a local independent portfolio lender that would have longer terms but I decided to not fight that battle which comes with more restrictive guidelines and chances of drying up. I model my business under the premise that capital can easily be obtained with the above mentioned guidelines of 5 year balloon and 15 year ammortization. This has just kept me to focus on purchasing great deals that fit into this model.
I don't think I gave you the answer you were looking for but I would strongly consider adjusting your plan to what is easily available.
- 12yRoy N.Pro MemberRental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
Up here on the other side of the 49th, all notes/mortgages have terms of 10yrs or less, the most common being 5-years. The amortization may still be 15-30 years (25 being the most common for residential, 15-20 for commercial), but you will be renewing your mortgage 3-5 times over that period.
For John & Jane Homeowner, shorter mortgage terms encourages accelerated pay down of the mortgage principal - or, rather, it use to... statistics now indicate Canadians have ceased to be a nation of savers.
From a business perspective, having shorter mortgage terms (we've gone as short as 2-yrs, but you can go as short as 6-months) gives you the opportunity to shop around your mortgages at their anniversary and secure the best available interest rate for the next term. Over the past decade, as interest rates have fallen or stayed flat, this has been extremely beneficial.
I would also argue that shorter mortgage terms increase the attractiveness of variable rate mortgages - at least in the Canadian context. All our current residential mortgages are 5-yr term, variable rate mortgages (some have caps, some have the right to convert to a fixed rate mortgage). The interest rate differential between variable (2.6%) and fixed (4.0 - 5.34%) 5-year term is about 1.5%. Rates would have to raise dramatically before the fixed rate mortgage would be more beneficial.
I do admit, the fixed rate, set and forget, 30year term mortgages available to USA investors have an ease-of-use attractiveness to them. However, shorter term mortgages give you better interest rates and can lower your overall financing costs (perhaps at the expense of slightly less cash-flow in the short term).
There was a historical, statistical study of the Canadian housing market performed in the late 1990s which looked at mortgage rates from the end of WWII through to the mid 1990s. The study assumed a 25yr amortization w/ no prepayments and looked at the difference in financing costs between variable rate and fixed rate mortgages. The mathematical conclusion was if you took any 25yr period in the window of study, it was always more cost affective overall for the mortgagor to go with a variable rate mortgage versus a fixed rate. Yes, there was more volatility in mortgage servicing payments, but in the end, less interest was paid.
We are just beginning our journey into the U.S.A. real estate market and have been educating ourselves on how US mortgage products work - especially ARMS. Everyone is telling us to go long-term fixed, but I'm not convinced the math agrees with the popular sentiment.
- Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes12y
OK - So, you have to be a human to qualify for a Fannie/Freddie note. On the other hand, you can take out a commercial loan in either your name or entity. You have 2 questions:
1. How to get a commercial loan with longer amortization? Or,
2. How to get Fannie/Freddie Notes transferred into an entity name?
1. There are many local banks that I can go to and get a commercial note amortized over 20 years with 20% - 25% down. They are going to be ARMs, but they not have balloons and will be fully mortised. I don't know if you are speaking to the right people, or if this is a regional limitation, but I've never heard of not being able to find commercial financing that is amortized...
2. Transferring the note, even if to a single-member LLC does trigger Due on Sale and Acceleration. You can try to approach the bank to get permission, but I do not recommend doing it behind their back. Sure - they'll probably never look, but what if they do...
Sounds to me as though you need to find a portfolio lender who does amortized notes if you are committed to sticking those things into an LLC.
- Commercial Loan Officer · White Plains, NY · Member since 2013 · 18 posts · 3 votes12y
Justin,
find yourself a local Mortgage Broker, you can get what you want.
Good luck.
- 12yBrandon TurnerPro MemberInvestor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
Hey @Justin Hennig -
It's true, it's tough getting the bank to lend on an LLC. I've not found one yet that will do it and still give me long term mortgages. So, the way I've done it is through creativity.1.) Seller financing - 24 of my 42 units are in one apartment complex, and it's seller financed.
2.) Partners - My partners will fund the down payment and get the loan in their name. Title will be in both our names, and I find, manage, control the deal. We split everything 50/50.
3.) I bought some with my personal name, and then transferred them into LLCs after. The bank I use has even suggested this as a viable option, though I believe it could technically trigger the due on sale clause. But I think that's doubtful.
4.) I know some smart investors, like @Karen Rittenhouse have used Trusts in a unique way, but I haven't yet.Anyways, hope that sheds some light! Check out A Strategy For What To Do When The Bank Says No
- 12yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
@Justin Hennig - You've gotten some pretty good responses so far. Your best bet is going to be either purchasing the properties in your own name - seasoning those properties as you build into a portfolio - and then refinancing them with short-term rollover options in the name of the entity. You may be able to get longer term financing with commercial lenders, but as everyone as been saying, that may or may not be more advantageous. You are definitely going to have to continue working for your options.
I do believe there will be more options for medium size investors who have portfolios of 10+ properties and portfolio value of $500,000 and up. But those options are still going to be tied to some short term option for the bank to refinance you depending on rates.
As a side note, I am not one of those investors who believes that an LLC is a good structure for personal asset protection. IMO, there are too many variables that allow a good lawyer to pierce the corporate veil. And even if they cannot, an aggressive lawyer will try to include the owners of any entity in a lawsuit anyway. I am not saying you do not need one, but I believe the best protection for your personal assets is layered and structured insurance.
I have been sued before on petty issues, nothing like the horror stories that you hear for the people selling DIY entity kits or lawyers who will set up entities for you. I would make sure I was properly insured first if my main goal was asset protection.
- Flipper/Rehabber · Greensboro, NC · Member since 2010 · 623 posts · 615 votes12y
Hi Justin:
To have asset protection when placing your properties into an LLC, you must be sure your LLC is set up correctly with the proper operating agreement (tells how you function and your business intent) and articles of incorporation (to set you up properly with your state). It also needs to be a Partnership LLC to have the available tax and legal benefits. If you set up an inexpensive LLC online or with an attorney who doesn't know what's needed for real estate, your LLC will ultimately offer no protection (which you typically find out only when you go to court....).
As far as funding, banks are scary because they hold all the power. Our neighbor was recently wiped out because, after years as a very successful commercial developer, his lender decided they would no longer handle commercial loans and refused to renew his. Banks make the rules and change the rules so we avoid lending institutions.
Check with your local lenders and maybe even credit unions. Avoid the big guys.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Originally posted by Ben Leybovich
2. Transferring the note, even if to a single-member LLC does trigger Due on Sale and Acceleration. You can try to approach the bank to get permission, but I do not recommend doing it behind their back. Sure - they'll probably never look, but what if they do...While I agree that any title transfer would trigger the DOS, I do not agree that it is a true risk or that you should ask the bank for permission first. Likely in all cases, they have to tell you "no" because it does in fact trigger the DOS by contract. I have transferred (and know tons of others who have done the same) and never was the DOS enforced. In one case, I was told the bank did threaten to use the DOS but after the investor called their bluff and showed proof the payments were being made, they let it go. Worst case scenario, they call it, exercise it, and you have to sell it to pay back the note. I will assume that you buy everything under market value and as such, would not lose out on anything.
As far as asset protection, the LLC alone is simply one (and a breakable one at that) layer of protection, you should have more than adequate insurance coverage too. I fully understand my recommendation of doing the transfer without permission violates the DOS, but again, it is something that is always talked about yet nobody I have heard of (including here on BP) has posted how they lost a home due to the DOS. So take some of the cards from the hands of the bank and place them in your hands!
- Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes12y
@Justin Hennig - re-read my earlier post. Although most banks will give you a balloon (because of lender concerns of being locked in at a low rate when rates start rising), there are those who will do longer term. You have to keep hunting. The proverbial needle in a haystack maybe, but those lenders are out there. For those posting who say it can't be done, they just haven't located the lender who is willing.
- 12yDarrin CareyPro MemberLender · Dayton, OH · Member since 2008 · 1k+ posts · 705 votes
@Justin Hennig I expected very different responses to your question. In Dayton, Columbus, and Cincinnati Ohio, I have lenders who will lend with the property in the LLC name (you must do a personal guarantee), and actually prefer it. We are also are putting people in commercial mortgage with 15-25 year amortizations, and no balloon. The rate can be a 5/5 adjustable, or for a higher rate you can go fixed for the term.
I find it hard to believe these scenarios are limited to the Ohio region. As @Steve Babiak said, keep looking.
Based on the responses, I think I need to find a few national lenders to work with us.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
30 year fixed rate loans are purely created by Fannie Mae/Freddie Mac. If these entities did not exist, neither would these loans. 30 year fixed rate loans, even for homeowners, do not exist in Europe, for example. So, if you want these terms you have to play by Fannie and Freddie's rules.
However, I know of at least one lender here in the Denver area who will do 15 year fixed rate investor mortgages for properties owned by LLCs all day long. Those lenders do exist. You may need to contact 20, 30 or 50 lenders to find one, but they are out there.
- Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes12y
Originally posted by Jon Holdman:
30 year fixed rate loans are purely created by Fannie Mae/Freddie Mac. If these entities did not exist, neither would these loans.Jon, what about conventional loans, there are plenty that offer 30 year fixed with 10% or 20% down for owner occupants, they are not from Fannie or Freddie.
As far as investor loans, as others have stated, keep looking as there are lenders that do longer term loans for non owner occupants.
- 12yDawn AnastasiPro MemberRental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
Originally posted by Jon Holdman:
However, I know of at least one lender here in the Denver area who will do 15 year fixed rate investor mortgages for properties owned by LLCs all day long. Those lenders do exist. You may need to contact 20, 30 or 50 lenders to find one, but they are out there.If they are so secret, how come with the power of the internet, there isn't a "database" somewhere of who these lenders are? Why is it so hard to find them?
- Residential Real Estate Agent · Broomfield, CO · Member since 2013 · 390 posts · 125 votes12y
Lots of good responses above, I strongly suspect that unless your LLC is VERY well capitalized, you will have to be a personal guarantor on the note - why would a bank lend to an LLC with no or little assets otherwise?
Also, there are other ways to get entity protection, such as getting the property in your name and renting to the LLC, then having the LLC rent to the end renter. Talk to a qualified attorney and CPA to fully understand all the options.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
Originally posted by @Will Barnard:
Originally posted by Jon Holdman:
30 year fixed rate loans are purely created by Fannie Mae/Freddie Mac. If these entities did not exist, neither would these loans.Jon, what about conventional loans, there are plenty that offer 30 year fixed with 10% or 20% down for owner occupants, they are not from Fannie or Freddie.
Sorry, I missed this question. Fannie and Freddie don't make loans. They buy them after they are originated by someone else. The term "conventional" really means "complies with the rules set down by fannie and freddie". Even if not all conventional loans get sold to fannie and freddie, a significant percentage, perhaps even a majority, do. It is the presence of these two entities in the marketplace that creates the possibility of these loans. If they disappeared, so would, IMHO, 30 year fixed rate loans. I could be wrong. Its possible that "the market" (i.e., other lenders) would step in and offer these loans. But the fact that they are unheard of except for "conventional" loans tells me others would not. Residential loans would look a lot more like what we see right now for portfolio loans - shorter terms, ARMs, or, perhaps, balloons. And they would be harder to get.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes12y
NPR did a story on this topic today, driven by the appointment of Mel Watt to head the Federal Housing Finance Agency (FHFA). FHFA currently controlls both Fannie Mae and Freddie Mac and determines what they are doing. The stricter controls were being put in place by the previous head of this agency, Edward DeMarco.
Mel Watt: A New Captain For America's Housing Market
A quote from the story relevant to my claim above regarding 30 year fixed rate mortgages:
So, there's a number to give an idea of the significance of fannie and freddie to the mortgage market.
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