Need help going from Hard Money Loan to Long Term Loan

17 Replies

Good morning all,

I currently have a triplex under a hard money loan because it did not meet the qualifications of a conventional mortgage and I needed to close quickly. I'm performing renovation on the property now, but want to start looking into my next step, which is refinancing the property into a long-term mortgage with a lower interest rate. I was required to put the hard money loan in a LLC name, and would like to keep it there if possible:

Below is some basic information on the property:

Purchase Price:     $255K

Loan Amount:       $281K (15% down + estimated renovation cost)

Loan Duration:      1 Yr

Loan Interest:        9.5% interest only

Appraisal ARV: $457K

I've contacted 20+ lenders, including commercial lenders which all have high upfront points and 8%+ interest rates. This is kind of ridiculous for a buy and hold property. There have to be some better options out there.

Thanks for your help!

If you want to get better terms than the Non-QM lenders will offer you, then you must put the property back into your personal name and then do a Fannie Mae refinance. This will give you the best overall terms. The question I would have is, what are the reasons that you want to keep it in the LLC? If there are specific goals or reasons, then you will be limited to what a Non-QM lender or a commercial or portfolio can offer?

If your just keeping it the LLC for the protection of the shell of the LLC, i would say your in a better position to put it back into your own name and get the highest liability coverage you can get on the Landlord policy and then follow that up with an umbrella policy. That's better protection then the LLC.

@Steven Wade

Your rates are high because it’s in an LLC. That means commercial loan products only. If you want access to Fannie Mae or FHA you’ll have to put in your name.

Kevin R. @Christopher Phillips Yes I understand that Fannie/Freddie are much better options. I already have plenty of properties under my personal name.

You can only have up to 10 properties in your personal name. Are you really telling me that people with more than 10 properties are doing buy and holds at 8% interest? I'm sorry I have a hard time believing that.

Also this is my first deal as a partnership. One of the two partners I have has a lot of cash but does not have good credit so we can't do a traditional mortgage.

Come on guys I'm looking for good ideas not the same ol' thing that everybody already knows.

I'm looking for credit unions, banks, or private money lenders who will work with investors who have a proven track record and will do buy and hold loans for long term without charging an arm and a leg and 2+ points.

If that was the case nobody can afford to buy rental properties after 10.

@Steven Wade

You didn't mention those other parameters...

Did you speak with banks about doing a portfolio loan?

Originally posted by @Steven Wade :

Kevin R. Christopher Phillips Yes I understand that Fannie/Freddie are much better options. I already have plenty of properties under my personal name.

You can only have up to 10 properties in your personal name. (1) Are you really telling me that people with more than 10 properties are doing buy and holds at 8% interest? I'm sorry I have a hard time believing that.

Also this is my first deal as a partnership. One of the two partners I have has a lot of cash but does not have good credit so we can't do a traditional mortgage.

Come on guys I'm looking for good ideas not the same ol' thing that everybody already knows.

(2) I'm looking for credit unions, banks, or private money lenders who will work with investors who have a proven track record and will do buy and hold loans for long term without charging an arm and a leg and 2+ points.

(3) If that was the case nobody can afford to buy rental properties after 10.

 1) No. Got a spouse? Spouse gets 10 too, tyvm feminism. Hopefully your lender has been doing good mortgage planning with you, and haven't been putting both of you on all the mortgages for no good reason.

2) There's also brokered & direct portfolio stuff with a Fannie-like rate, 30 year amortization like Fannie, but it's on a 5/1 or 7/1 ARM. If your go-to lender is licensed to broker, he gets all the same constant solicitations that I get. Tell him to open his junk mail and that you aren't going to flip out if it's an ARM -- these days, many lenders will not talk about ARMs unless the consumer brings it up first, simply because (in 2017) people tend to flip out if we broach the subject!

3) It's the ARM thing that scares most people off, I think.

LTV may still be a deal-killer. Will have to see where this property appraises.

@Christopher Phillips I've spoken to a about 30 banks and lenders.

- Lima One Capital doesn't like that the downstairs apartments are less than 700 sqft so they rejected the loan

- Patch of Land will let me refinance but the interest rate is above 7.5%.

- BB&T will let me refinance but only into a 15 yr loan.

- My hard money lender has a long term option but it doesn't make a lot of sense bc it is still above 8% interest.

@Chris Mason Do you think it is a good idea for my wife to get the loan in her name and then quit claim it to the LLC name later?

We are 3 investors working together and buying more properties. I mean even if we do the quit claim deed it would still be on her credit report yet she is not affiliated with the LLC.

As mentioned earlier we already have the house appraised at $457K and our loan is $281K. I don't think we have any issues with LTV.

I'm sure there are other options out there....there have to be. I mean biggerpockets tells you partnering up is the way to expand your business but apparently there are no good loan options? That doesn't make sense - unless they are factoring in 8% interest into their calculations.

@Steven Wade So let me get this straight. You want a loan to an entity where one of the partners doesn't have the best of credit and you want rates comparable to a Fannie Freddie loan? Not saying it doesn't exist, but with those perimeters you will be looking a for a while to find just that lender that can fit that box?

My suggestion is that you call all the local community banks that will do commercial or portfolio loans and work a blanket deal with them based on the portfolio that you have and will continue to build. They may cap you out at some point which would put you back on the hunt again, but typically they will go 20 or so before they cap you out?

As far as being capped by Fannie Mae to 10 loans. Well that's true for most people, unless you know how to get around that? I do, and with the solution, Fannie Mae will gladly continue to give you many loans past the point where you have more than 10 financed properties. Now before I tell you the method to do this, it still requires you to have a good relationship with a commercial or portfolio lender. So you going to want to put the time in calling and visiting the community banks in your area, but I have them in my area that will give terms close to Fannie Freddie on 5 or 7 year balloons or calls so they can adjust the rates at that time. It's about the best your going to get on those deals. And yes, other investors factor that into their costs of doing business.

Now, on to the solution to the 10 financed property rule with Fannie Mae. Fannie Mae considers LLCs somewhat like you holding property on a personal basis, my guess is because they tend to be pass through entities. However, Fannie looks at Sub S Corps, and other corps such as a C Corp differently. That means that if you move some of the properties that you currently have a Fannie loan or any conventional loan on, over to the Sub S and go get a commercial or portfolio loan on it, even if you are required to sign as the guarantor, it will not count in the 10 financed property rule. Thereby opening up more slots for you to buy your next property or refinance the property using a Fannie loan. Giving you the best terms available. 

As @Chris Mason  mentioned earlier, another alternative is you and your wife can both finance 10 properties in your own names. A 3rd alternative is that there are no limits on the numbers of financed properties, if you are buying an owner occupied home. So if you want to get another rental, just go buy another owner occupied home and make the last owner occupied home a rental.

So the best way to build the portfolio is to use the Sub S method in conjunction with buying them via Fannie Mae loans. So buy them in your personal name, then age out the oldest that you have financed or the ones with the smallest balances to the Sub S and get commercial / portfolio financing on them at the best terms you can find. Rinse, repeat to as many homes as you could ever want to finance. 

See the actual guidelines below:

See below from the reference guide for FNMA multiple financed properties in MyKey. If they own 25% or more of the LLC or partnership then it would count.

Type of Property Ownership to include in Financed Property Count:

 Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property).

Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner

of the corporation; however, the financing is in the name of the borrower.

 Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

 Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have

an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the

obligor on the mortgage.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined

ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower.

 Ownership of a manufactured home and the land on which it is situated that is titled as real property

Type of Property Ownership NOT to include in Financed Property Count:

 Ownership of commercial real estate.

 Ownership of a multifamily property consisting of more than four dwelling units.

Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation.

 Ownership in a timeshare.

 Ownership of a vacant (residential) lot.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership.

 Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).

Hey Steven, Permanent loans are based upon cash flow and credit. First of all the property will need to be rented and have some degree of cash flow that, coupled with your income, is reasonable for the lender. Secondly, be prepared to share income information and have your credit in line to be acceptable to a permanent lender (680+ credit score).

@Kevin R. I'm not looking for fannie/freddie rates but I am not looking for 7%+ on a buy and hold property either. I'm happy to be in the middle. I have excellent credit, a good W-2 paying job, and have owned rental properties since 2004. 

This partnership is new and one of my other partners is in a similar situation with good credit,  good income and rental properties. The other partner does not have good credit but has money to fund the deals and gets a % of the income and refinance amounts. It's a good deal for all of us, however the only missing piece is getting out of the hard money loan into something that makes sense. 

Theoretically we could put the equity partner at a lower than 25% ownership, but even talking with lenders they would still want to see his tax returns and information, so I don't really see how this is advantageous unless you know a lender that would work with us.

While I appreciate you sending me the full details on how fannie/freddie work, that is a lot to read through and is not 100% relevent for this situation. I understand that they do not like LLCs and that you need to purchase a house in your personal name. I also understand I "could" buy a house in my name and do a quit claim deed afterwards. This limits my home buying power however and as mentioned previously on this post I will need to reach out to others such as my wife purchase a home....

I've already moved her around enough times and with a newborn on the way the option of doing more owner occupied homes are not likely. Plus I don't buy turnkey homes. 

@Bobby Montagne Understood. My credit score is fine and the house will rent out for $3,500+ a month once the renovation is completed. I just purchased another rental property (in my name) and provided this information. I'm familiar with that process.

@Steven Wade It sounds like your looking for a commercial / portfolio lender that will give you rates near 6%. Okay, so spend the time required on the phones calling all the community banks to see what their best terms are? Most portfolio lenders can take a not so strong borrower in combination with a strong borrower, so having 2 strong borrowers should help. 

I feel confident that there are many community banks or credit unions near you that get this deal done.

Happy investing!!!

@Kevin R. I've spoken with a few however any recommendations are appreciated. As mentioned I already tried Lima Capital but they have an issue with the sq ft of one of the apartments.

Thanks,

What was Lima One offering if they were satisfied with the size of the apartments downstairs?

@David Weintraub I didn't make it that far because one of the apartments is less than 700 sqft. According to their brochure it would be in the high 5%to low 6% range which is fine for me. 

One of the reasons commercial/investor brokers exist is for W2 borrowers to continue their day jobs while the broker finds a lender that fits their parameters.  There are numerous lenders that will do that loan. Find a good broker and stop wasting your time going direct.

Originally posted by @Steven Wade :

@David Weintraub I didn't make it that far because one of the apartments is less than 700 sqft. According to their brochure it would be in the high 5%to low 6% range which is fine for me. 

Just got rejected by Limaone also because one apartment was less than 700 sq ft.  It was the first time I had ever heard of such a thing.  It's not listed in their paperwork as a limitation!  And we had just spent $$$ using their appraiser, etc.  Until I saw your post, I thought they were just BSing me because they didn't want to do the loan despite meeting every single other requirement.   Hope you found a solution.  We are scrambling for an alternate now.

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