Lending Options: Conventional or Commercial

5 Replies

First of all....Thank you for your answers and your experience!

I am using an investor and he has offered to go to any financial institution and get a loan and/or line of credit to help me grow our money.

I do not have a property picked out, but was made to understand that I needed to have funds ready to close the deal once found and secured.

I was thinking that a commercial line of credit would be best, because we would be able to use it for any deal and would also have enough available to perform any needed rehab to the property.

The business plan is to flip a few properties to grow my money to later invest in buy and holds.

So here is the questions. Do I have to have an established business with EIN and all to qualify for a commercial line or commercial loan? Will I need to provide a business plan or any documents regarding the property as it has not been selected or secured yet? Would a retail conventional mortgage be a better choice?

Do I have any missing pieces that you see that I can include to have a better chance of approval?

Thank you again,

Warren

@Warren Sterling  - So you are looking to start a flipping business and have funds from a private investor who is willing to go on the loan with you, is that correct?

@Brie Schmidt yes. Correct. I am starting a flipping business. I have an investor/partner that is willing to finance the project(s). Trying to figure out what type of products I should be asking for at the financial institutions.

Thank you for your assistance in advance.

Warren

@Warren Sterling  ,

I'm going to assume you're not super experienced at flipping since you're asking about the funding, so first, be sure you're comfortable risking someone else's money with your level of experience.. if I'm wrong, totally ignore me here.. 

Ignoring that issue, and purely speaking about the financing, unless your partner is EXTREMELY well-heeled, you will most likely need to post real estate collateral for a line of credit. So if you don't have residential RE, you can't do a HELOC type product on the residential.

So here is the questions. Do I have to have an established business with EIN and all to qualify for a commercial line or commercial loan? 

NO> You can set up an LLC specifically for a loan. There is no set number of years the business needs to be in operation for commercial loan. However, if you do not have a cash-flowing company with experience, you will not get a loan without RE collateral unless your partner has another business, lots of NW, liquidity, etc..

Will I need to provide a business plan or any documents regarding the property as it has not been selected or secured yet? 

If you get the line of credit based on the equity of an existing property, the new property won't matter as much. You'll probably have more freedom with a residential loan HELOC. Commercial HELOC might ask more quiestions, or restrictions on when you pay it back (like when you sell the flip property). Whereas w/ residential HELOC, you just take the money as you please. No questions asked. (as long as you don't sell the underlying collateral for the loan).

This is assuming you're getting the loan to buy your flip property with cash, and not trying to get a loan on the subject flip property. 

Would a retail conventional mortgage be a better choice?

I think the residential HELOC will give you more flexibility, if you have that collateral to post. They won't ask you much about what you're doing with it, or impose restrictions, as long as you meet the LTV and DTI requirements (or your partner does)

Do I have any missing pieces that you see that I can include to have a better chance of approval?

For commercial, a lack of experience may be an issue. Residential, they don't seem to look at any RE experience when assessing ability to repay a loan. 

Good luck!

@J. Martin Thank you for a very detailed response.

You pretty much hit every nail on the head..... I do not have any experience with "flipping". I guess where I have read that I need to make sure that I buy the property right and have multiple exit strategies, I did not believe that there would be very much if any risk. So no, I am not comfortable risking anyone's money. I just do not know how to move forward as he is the only person that is willing to give me a chance to make something of myself regarding real estate and at the same time make him a profit he did not have to work for, just let his money work for him.

He has 2 other businesses. Well he is a partner in two other businesses and makes descent money annually, but I am sure he would like to go up not down.

After I posted this in the forums, I have spoken with a couple people and with what we spoke about and my own ideas came up with what I believe may be a solution. Get a personal line of credit. If his credit is as good as he states, he should qualify. Then use personal funds with a conventional mortgage for the difference. Any personal funds for the down payment and the rehab could be covered from the personal line of credit.

Once the house is sold, everything paid off, profits split and reinvest!

Does this sound like I am more on track? Is there anything that you believe I could be doing better?

Just seems that if I do not start soon, I never will.


Warren

Originally posted by @Warren Sterling :

@J Martin Thank you for a very detailed response.

You pretty much hit every nail on the head..... I do not have any experience with "flipping". I guess where I have read that I need to make sure that I buy the property right and have multiple exit strategies, I did not believe that there would be very much if any risk. So no, I am not comfortable risking anyone's money. I just do not know how to move forward as he is the only person that is willing to give me a chance to make something of myself regarding real estate and at the same time make him a profit he did not have to work for, just let his money work for him.

He has 2 other businesses. Well he is a partner in two other businesses and makes descent money annually, but I am sure he would like to go up not down.

After I posted this in the forums, I have spoken with a couple people and with what we spoke about and my own ideas came up with what I believe may be a solution. Get a personal line of credit. If his credit is as good as he states, he should qualify. Then use personal funds with a conventional mortgage for the difference. Any personal funds for the down payment and the rehab could be covered from the personal line of credit.

Once the house is sold, everything paid off, profits split and reinvest!

Does this sound like I am more on track? Is there anything that you believe I could be doing better?

Just seems that if I do not start soon, I never will.


Warren

 Warren, I think your comments are at odds with each other. You are risking not just your partner's cash, but your partner's credit in this flip, since he is putting up the cash, and signing on both the proposed personal line of credit and the mortgage. Buying well and being flexible on the exit strategy can reduce the risk, but you bet your @** that there's still risk in the deal. The most common are an inaccurately estimated sales price, and underestimated rehab costs (some of which cannot be known when you start). 

You said  "I did not believe that there would be very much if any risk. So no, I am not comfortable risking anyone's money."

If you think you are risking little if anything, even though you have no experience flipping, I don't think you have a strong grasp on the risks associated with flipping. And I am not a flipper. I just know enough to understand the known and unknown risks that can pop up. No offense. Just to say that you've never done it, inventory is getting thinner, competition for remaining flip deals is higher, margins thinner, and you're not paying cash to get a great deal - but you're also not putting your partner's money and credit at risk? There are many opportunities to get a deal, but you may need years to regain your reputation if something goes wrong.

You're already not going to get the best deal if you're not paying cash w/ quick close. You will also be limited to properties without a lot of damage if you are buying with conventional financing. On top of that, you may not be able to directly draw from the line of credit for downpayment for conventional mortgage, because they usually want seasoning of two months on any funds put for downpayment (not directly from other borrowings.) And that's if your partner qualifies based on his business income and financials, not just a good credit score..

Not to discourage you. But just to warn that there IS risk, or it wouldn't be producing great returns for some, and some big disasters for others. Not sure why you have the impression there is little or no risk. 

"The devil's greatest trick was convincing the world he didn't exist."

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