Advice on best route for financing investment property

6 Replies

A bit of background first. A tax auction has come up on a property with great potential for profit. The property has unique (to say the least) challenges that require an equally unique skill set to solve. Some colleagues and I are positioned to solve these challenges and have decided to purchase the property at auction, correct the issues and resell the property. Our plan is to form an LLC to protect all our individual interests.

Our concern moving forward is financing. Winning the auction will allow us only 45 days to obtain the financing. Our concern with traditional financing is that we will be a brand new company with only our individual assets, the time required to actually get the funds and the high rates involved with it being a company and not an individual. The best option we can see is a hard money loan. The question is which state to get it through. We all live in different states and the property in another.

Any advice would be greatly appreciated. We're all new to real estate investing and a guiding hand would go a long way.

Hey Bryan,

Most hard lenders work multiple states. So I would go with the one who has best referrals and terms. Most can easily close within 20 days. So I wouldn't be too concerned with the timeline. Just put together a good presentation package and shop it around. PM me if you can't find good lenders to work with. I'm sure you would get some lenders here on BP. I have one who works multiple states with decent terms, 3 points 10-11 % I believe. No attorney fees. I can forward you there info.

Hope that helps.

@Bryan Lowman, welcome to BP. The policies of hard money lenders and the types of projects they fund vary significantly as do the lending laws in different States. The lender will be most concerned with the State that the property is in. It is that State's laws that they will have to comply with if they should have to foreclose. That doesn't mean the lender has to have a physical presence in that State. Start contacting lenders and ask them your question. You may want to hold off on forming your LLC until you get some feedback. The lender may prefer your LLC be in the State where the property is located also. Once you have gathered some background info it will be wise to contact an attorney. Since this appears to be a multi person LLC you will want legal advice for the LLC'c operating agreement. That may be the most important document for your venture. Best wishes.

I recommend you error on the side of obtaining everything in state the property is located, @Bryan Lowman. This is where your maximum liability resides and also where you'll find the most knowledgeable lenders for your situation.

The LLC will have to be registered as a foreign entity if you are using it to do business outside of the state it's registered, so there is little benefit to forming it elsewhere. Similarly, some states, like CA, will also require you to register where your office or home is. Their argument is that, strictly speaking, you are conducting business in two states, even if you are just making phone calls and signing papers. This can get very complicated very quickly, especially with multiple members in multiple states. You should talk to a CPA about it.

Also, not to overcomplicate, but if any of the LLC members are truly passive investors, you might have to think about a multi-state security registration. This also gets complicated very fast and can be quite expensive, but possibly overcome if everyone has a specific job description. I hope there is a lot of meat on these bones.

One challenge is that you have no collective experience and no local relationships. I have a bad feeling about any success with the banks, but you might as well try. Some local community banks would be your best bet. Hard money lenders as local to the property as possible will be familiar with the state's lending law and any local issues, compared to a nationwide HML. They might even know the property. These are the first people I'd call before I did anything else and spent any real money.

A good hard money lender could give you some advice on your strategy and will clearly define what they are looking for in a property and a borrower. In addition, they will generally be the most cost competitive and fastest compared to out-of-state HML's since they understand the local risks, though this is not always the rule. You'll likely need a good attorney too and HML's can be a good resource for these. Best to call around.

Hi Brian,

I am really impressed with a quality of advice you already received so I will address only the issues from HML prospective. Most likely you will not be able to get conventional financing because house is in disrepair. If you get a loan it will be commercial loan requiring 25% to 30% down payment. Closing conventional loan with all of you being in different states might became a nightmare. So as you already know HML is your best option. HML will also require about 25% down payment. They will also require proof of funds showing that you have enough funds to do the entire repairs, make required monthly payments and pay for closing cost. Most likely they will require detailed cost break down of all repairs. If none of you have any flipping experience then they might require larger down payment or licensed contractor bid for the repairs. Some HML will also provide controlled fix up funds. I am certain that you already did you analysis but you can also see the way lenders look at you project by going to my website and downloading a "FLIP CALCULATOR".

Good Luck,

George Krajacic

Originally posted by @Rafael Norat :

Hey Bryan,

Most hard lenders work multiple states. So I would go with the one who has best referrals and terms. Most can easily close within 20 days. So I wouldn't be too concerned with the timeline. Just put together a good presentation package and shop it around. PM me if you can't find good lenders to work with. I'm sure you would get some lenders here on BP. I have one who works multiple states with decent terms, 3 points 10-11 % I believe. No attorney fees. I can forward you there info.

Hope that helps.

 Hi Rafael - any chance you could provide me with your lender info as well?  Thanks so much in advance