Need BP wisdom on my next lending strategies.

3 Replies

Bigger pockets mentors,

I am looking for your take on my situation and what strategies you suggest I explore further. I have read forum after forum, Blog after blog and decided to get some of these wise answers specifically catered to my situation.

I apologize for my poor writing skills I am dislexic and writing/punctuation is difficult for me.

A little background:

All through college my business partner and my self ran a construction company renovating other peoples kitchens , bathrooms, decks, etc. ( doing all the work ourselves). I Graduated college and had no intention of entering the corporate world. My self and my business partner have business degrees and the construction skills. Through college we also worked as contractors for a REI doing buy/hold & flips. My partner and myself agreed contracting had a ceiling on it we felt was too low. So we planned to transition into REI. Two weeks before graduating college we bought and rehabbed our first rental with our own cash. The following two years we bounced back and forth from doing a high end kitchen and or bath for someone and taking that money and putting it into the next rental. By doing this we have now bought, COMPLETELY rehabbed, and rented 8 single family houses with our own cash. We have slowly almost phased our self out of working on other people homes as our cash flow has increased. The past six months we have spent a lot of effort learning how to work on our business rather than in it. We have come up with current and future organizational structures. business plans. As many systems and processes as we can document so when the time comes that we can climb our own organizational latter. Filling the spot we left should be as simple as handing the new person the guide we have wrote and over seeing.

Our numbers are fantastic when it comes to cash flow / ROI ( not a surprise when you buy cash and do all the work yourself)

Now the issue, Buying these houses all cash, I have not forced my self to understand leverage, financing, and all aspects of raising capital creatively. I know that our next steps will be getting conventional cash out refis on as many of the properties as we can. We have already found a mortage broker who is sure he can get myself and my partner each two individual cash out refis 70% LTV at approximately 5% but beyond that we may need to get creative. I have begun creating a portfolio for private money lenders to look over. Once that is finished I plan to take that to my attorney and discuss the legal aspects of approaching this strategy. I would defiantly begin with my close network of family and friends and then branch out to my previous clients of my construction company. They are most likely accredited and most really liked me and my partner. Some points to note when considering lending strategy:

1) The properties are in an LLC

2) Because we put almost everything back into buying the next properties our income is LOW (Before tax I personally made 15-16k in 2013) my partner is the exact same.

3) I have literally no debt. apart from my CC I pay in full each month.

4) my credit score is 730, partners 760

5) I am 24 years old so regardless of my numbers private lenders & loan officers may be hesitant.

6) I am located in Cincinnati OH.

7) Our properties have an ARV of 45k- 75k (conservative)

8)All but 2 properties have 12 months seasoning

9) our purchase price is usually 40% or less than ARV because we buy highly distressed. We can easily change this strategy if needed.

 I re-read my own forum post and thought my question was unclear. I will try to simplify.

Based on the information above how would you maximize growth with the cash out refis? And then when those run out what strategy would you take? I was kind of thinking mixing the cash out refis and private money covering my "skin in the game" with the funds from the cash out refi. 

Wow that was long. Any one who made it, Thank you!

The first piece of advice is to ruthlessly comparison shop. It feels like you are asking someone a favor to lend you money but its a business. You are the opportunity. In my experience, everything with loan products varies ... closing costs, interest rates, LTV, terms and there was never a purchase that needed to be shopped around more than a loan.

In direct response to your question, nobody here can tell you what is the best financing option. It depends on what your actual options are. So you have to go out and figure out what they are, and whether they make any sense at all. You seem to be aware of the reasonable places to go.

Second, in your post you talk about the $15K per year you take out as income and the reinvestment as an expense. From your business's perspective, what you take out to pay yourself is an expense, what you reinvest is your income. If your company has a loan, you will have to pay the debt service rather than reinvest income, but hopefully the loan gave you substantively more working capital to invest than you are paying in debt service.

Before you try to get a loan, talk to an accountant who can show you how to represent your financials and talk about your business ... the reinvestment is income that you had been choosing to use to increase equity. And if you had more cash, you could increase that income and pay down loans.

Run some models in a spreadsheet of how this is going to work for yourself with a loan. You have a rental that you own outright. Now you take out a loan on that rental... does the cash flow from that rental cover the loan payments?

You use that money to buy and renovate another property and that brings in cash. Is it more than you were getting before, or did you just put in a lot of effort to end up where you were before? Are you counting on the value of the property to increase to make money? How likely is that?

It's not clear in your post whether you are going to borrow to buy new properties or refi your existing properties. That makes sense, but you have to run different models taking into account closing costs of the different scenarios.

It seems like you want to find the one right strategy and then run out and get multiple loans against many properties. Try it with one or two options that seem viable and see how it works out. Continue shopping for loans, test your business model. Try something else. Don't assume you're going to figure it out the first time around, and don't let that stop you from trying something.


Katharine Thank you for your time to type out that response. 

I will respond to some of the things you brought up to hopefully help clarify further for future readers. 

I agree with you I need to work on my financial vocabulary. I mentioned my Personal income, not business because we are going to be doing the cash out refis in our own names rather than the business. We believe because of our low income as we will only be able to each have to in our personal names rather than the current limit of four each. 

We have run over model several times and our current properties all cash flow very well so much so that even with the addition of debt service it would still be cash flowing approximately  $350. We really don't look at appreciation to hard. Kind of the cherry on top deal. When analyzing I always expect zero appreciation over 30 years not likely but better safe. 

We defiantly are not doing all these cash out refis all at once. We have and will begin with one and see how it goes. 

Your response keeps me thinking and moving forward!

No one is going to lend money to someone who makes 15K per year. Your income proves you are exceptionally frugal, but there is no way to cover debt service on that salary any way you slice it. So you will have to find a way to represent your rental income as part of your income.

There are many tests before a traditional lender will consider self-employment income. But one of them is being in business in two years, and I think you meet that test.

Once borrowing becomes part of the strategy, then how you structure your company and represent your financials to obtain loans becomes part of your borrowing strategy.

Yesterday I learned that the loan product with substantively the best terms won't work if it is held by my company. So next week, that property will be deeded in my name. Banks are highly constrained in what they can do, but you are not.

That said, I hardly need to explain this to someone so young who has built a business as you have. Obviously, you figure things out. But I hope by talking it through you are finding your solution.

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