Advice on lending for an inexperienced landlord

[Nick Littleton]

Hey all,

I have my first rental finally built that we paid for through private lending and equity through our personal house. The goal here is to have a lease signed, put a renter in there, and cash out refinance the property to pay back the private lender and most of my own money... a BRRR if you will, but in a roundabout way. However, my wife and I have not been landlords yet and a fellow investor/friend of mine told me I might have trouble finding financing if we don't go through a professional property management company since we are inexperienced. Have any of you out there run into this problem and if so what solutions have you come up with? Are there any lenders out there that are friendly to fresh property managers?

Thank you!

N&T

[Meg Harrison]

Hi Nick,

Congratulations!  I am a licensed broker here in WA who is also an investor and am an investor friendly broker.  I am not big on property managers or the punitive owner contracts that they offer here in WA.  I can however assist you if your bank just wants someone licensed involved.  We can discuss.  My number is 253-961-3613.  Don't let little things get in the way of doing great things :)

Meg

[Miranda Holland]

Private lending companies don't require experience at all to refinance. If your rents covers the loan and your property value meets the lender's criteria , you'll qualify 

[Robin Simon]

Some banks and private (DSCR) lenders will shy away from whats classified as "first time investors" or throw some restrictions on there, but there are BRRRR lenders out there that do not discriminate on experience

[Stephanie P.]

Quote from @Nick Littleton:

Hey all,

I have my first rental finally built that we paid for through private lending and equity through our personal house. The goal here is to have a lease signed, put a renter in there, and cash out refinance the property to pay back the private lender and most of my own money... a BRRR if you will, but in a roundabout way. However, my wife and I have not been landlords yet and a fellow investor/friend of mine told me I might have trouble finding financing if we don't go through a professional property management company since we are inexperienced. Have any of you out there run into this problem and if so what solutions have you come up with? Are there any lenders out there that are friendly to fresh property managers?

Thank you!

N&T

 Hey Nick

A lot is going to depend on the location of the property in relation to your primary residence. Most DSCR lenders don't care if you're going to self manage, but the property has to be close enough to you for that to make sense.

Stephanie

[Jared Rine]

@Nick Littleton...just adding my $0.02 and (full disclosure - I'm a mortgage broker)..most lenders should not have an issue with your experience, or lackthereof.  Given that you just did what sounds like a new construction build to rent, that's more than most will ever navigate.  Whether you self manage or have it professionally managed, should not matter necessarily to a lender. 

[Leo R.]

@Nick Littleton personally, I have not encountered this issue (I've done numerous owner occupant mortgages, refis, and HELOCs, and no lender has ever asked me about my property management experience, or whether I'm using a PM, or anything about how the property is managed...other than asking to see signed leases that correspond with the rent income I reported on my taxes), so I was surprised by what you described...

...I'm interested to hear from the lending pros on here: is property management or property management experience a commonly used criterion for loan qualification? 

[Marc Stevenson]

@Nick Littleton I do BRRRR properties here in Dallas. I've never had that be an issue. As a Texas only PM company we don't have a dog in the fight but a lender requiring a PM is not the reason to find you a good PM. A good PM will have great preferred vendors and a team that can save you a lot of time and grief especially with securing a good tenant. The good ones won't lock you in to a term and will allow you to try PM out to see if it's a good fit for you. Self-Managing can sure work but at some point, when you start to have multiple properties, you may find you'd rather spend your time securing more properties than managing tenants.

Best of luck and happy investing!

[Alex Bekeza]

@Nick Littleton In my experience, it's a bit of a mixed bag. Some of the more competitive DSCR based options for example would like to see that the borrower EITHER has 2 years of PM experience in the subject market OR uses a 3rd party professional PM. However, I have seen exceptions made on this based on compensating factors. (physical proximity to the subject property, work history in real estate management, PM experience in a different market, and things like that). The experience requirements become more hard and firm when going after 5 + unit MF. I'm sure I've had borrowers engage a PM (on a short term basis) just to get the financing closed up.

I'm assuming you're local to the property since you don't want to hire a PM right?  I'm in Los Angeles investing in MO so using a 3rd party PM was honestly never even a debate in my mind.  

[Nick Littleton]

Quote from @Alex Bekeza:

@Nick Littleton In my experience, it's a bit of a mixed bag. Some of the more competitive DSCR based options for example would like to see that the borrower EITHER has 2 years of PM experience in the subject market OR uses a 3rd party professional PM. However, I have seen exceptions made on this based on compensating factors. (physical proximity to the subject property, work history in real estate management, PM experience in a different market, and things like that). The experience requirements become more hard and firm when going after 5 + unit MF. I'm sure I've had borrowers engage a PM (on a short term basis) just to get the financing closed up.

I'm assuming you're local to the property since you don't want to hire a PM right?  I'm in Los Angeles investing in MO so using a 3rd party PM was honestly never even a debate in my mind.  

 Yes, local to the property.  Eventually we will end up going 3rd party after we acquire more properties, but not quite wanting to give up that 10% yet.

[Meg Harrison]

Quote from @Alex Bekeza:

@Nick Littleton In my experience, it's a bit of a mixed bag. Some of the more competitive DSCR based options for example would like to see that the borrower EITHER has 2 years of PM experience in the subject market OR uses a 3rd party professional PM. However, I have seen exceptions made on this based on compensating factors. (physical proximity to the subject property, work history in real estate management, PM experience in a different market, and things like that). The experience requirements become more hard and firm when going after 5 + unit MF. I'm sure I've had borrowers engage a PM (on a short term basis) just to get the financing closed up.

I'm assuming you're local to the property since you don't want to hire a PM right?  I'm in Los Angeles investing in MO so using a 3rd party PM was honestly never even a debate in my mind.  

Alex is proving his experience with this answer.  I have been doing short term representation, just through financing, for clients in Washington state for the past 10 years.  I use an agreement that satisfies the institution and lets the client out quick.  It's a win-win as it is just one more non-cookie cutter tool I can offer to help people grow their portfolio without being hampered by expensive and too often punitive management contracts when not needed.

[Wale Lawal]

@Nick Littleton

Here are options to consider for financing a real estate purchase:

Conventional financing
Conventional loans for real estate are offered by banks, credit unions, and savings and loan associations. Conforming conventional loans must adhere to standards set by Fannie Mae and Freddie Mac, including minimum credit scores and maximum loan amounts.

Conventional fixed-rate loans with a 30-year term may be a good financing option for real estate investors buying and holding rental property for the long term, because interest rates and the monthly mortgage payment amount do not change.

FHA financing
Loans backed by the Federal Housing Administration (FHA) are another option for financing real estate. FHA loans are intended for people purchasing a primary residence and not rental property.

However, investors planning to “house-hack” by renting out part of their home or a unit in a multifamily property may find an FHA loan worth considering. That’s because the down payment amounts and loan qualification criteria are usually less strict than with conventional financing.

FHA 203(k) loan
A 203(k) rehab loan backed by the FHA allows a borrower to wrap the purchase price of a home, plus any needed renovations or repairs, into a single loan. FHA rehab loans are usually available with fixed interest rates and 15- or 30-year loan terms, or with adjustable interest rates.

FHA 203(k) loans may be used for home purchases and renovation projects, such as installing roofing or flooring, bringing a property up to code by repairing health or safety hazards, or replacing plumbing or electrical systems. As with FHA loans, 203(k) loans are only available for owner-occupied homes.

VA financing
Veterans Affairs (VA) loans are available to service members, veterans, and eligible surviving spouses to help make owning a primary residence more affordable. The V A guarantees a portion of the loan that is originated with a conventional lender.

Some of the benefits of a VA loan include no down payment requirement, no private mortgage insurance (PMI), limited closing costs, and low interest rates. While VA loans are intended for people purchasing a primary residence, they may also be used to purchase a multifamily property, provided that the borrower lives in one of the units.

SDIRAs for Real Estate
An SDIRA may be a good option for purchasing real estate for investors who have a significant amount of savings in a retirement account. A SDIRA for real estate is created by transferring a traditional retirement plan, like a 401(k) or SEP IRA into an SDIRA. Funds in the SDIRA may be used to purchase real estate and for the down payment of a non-recourse loan.

When using an SDIRA to purchase real estate, investors should ensure there are sufficient funds within the retirement account to pay for any needed capital repairs or operating expenses during periods of negative cash flow.

Home equity loan and HELOCs
Home equity loans and home equity lines of credit (HELOCs) are 2 ways of borrowing against the equity in an existing property without having to sell. As a rule of thumb, an investor may be able to borrow about 80% of the equity in a home to raise funds for the purchase or down payment of a rental property, or to make renovations or repairs.

For example, if a home has a market value of $350,000 and the mortgage balance is $200,000, an owner may be able to borrow about $120,000 ($350,000 home value - $200,000 mortgage balance = $120,000 equity x 80%).

A HELOC is a line of credit against the equity in a home and is used to access equity when and if an investor needs it. HELOCs work similar to credit cards, with any borrowed funds repaid with periodic payments of principal and interest (P&I).

Private money lender
Private money lenders are typically business people or other real estate investors who prefer to invest in real estate debt rather than equity. A private lender makes money by collecting fees and interest on funds loaned to a borrower. An investor who can’t qualify for a traditional loan or is looking for creative financing options may find a private money lender to be a good option to consider.

Hard money loan
Hard money loans are intended for borrowers looking to raise funds fast for a short-term loan. Interest rates and fees are typically higher than other sources for financing real estate but may be a good match for a borrower with poor credit or an investor seeking flexible loan terms.

Portfolio loan
A portfolio loan is a mortgage that is held by a lender instead of being sold on the secondary mortgage market, as conventional loans usually are. Because a lender holds a portfolio loan on its own books, down payment amounts and loan terms may be more flexible, with stricter qualifying standards, although interest rates and fees may be higher.

Blanket mortgage
A blanket mortgage is a single loan used to finance multiple properties, with the individual assets serving as collateral for one another. Blanket mortgages generally have a release clause, which allows a borrower to sell a property and pay off the property’s share of the outstanding loan balance without having to refinance the remaining properties.

Limited liability company
Limited liability companies (LLCs) are another option for financing real estate. Rather than owning real estate directly, the LLC owns the property and investors own membership shares of the LLC. Depending on how the LLC is structured, members may loan money to the LLC in exchange for P&I payments, or invest in equity and share a percentage of any net operating income and profits made when the property is sold.

Owner financing
Sometimes sellers who own a property outright, or with a small outstanding mortgage balance, are willing to provide owner financing. Rather than receiving a lump sum payment from a buyer, a seller acts as a bank and receives a down payment plus installment payments of P&I from the borrower. Any existing loan must be paid off before seller financing can occur, unless the existing loan has an assumption clause.

All the best!

[Dylan M. Davis]

If  you're seeking a bridge loan (12-24 month) financing then experience flipping or holding investment property is necessary but not exactly what we consider for a DSRC (perm financing cash-out/ 30 yr 1-4 unit) loan. There's a questionnaire we have borrowers fill out but its not something that will kill a deal. what i'm interested in knowing here is how much skin in the game you have. You don't have 30+% equity in the house there will be no cash to take out, however you can still do a rate/term refinance and pay off the debt outstanding.