Unsecured line of credit - follow up

35 Replies

A week or so ago, I posted about my financial situation and asked a slew of questions. I thought it might make sense to follow up after visiting the bank.

In the last post, I mentioned that Episode 239 gave me the idea of using an unsecured line of credit (or multiple lines) to get started in real estate investing. I went to a couple of local banks in Eastern Washington this week, but was disappointed by the conversations I had (though not detered!).

The largest line of credit for which I qualified, according to the bank was $15k, which is about 20% of one of the two credit cards I have. While I didn't expect to qualify for $75k I requested (anchor the negotiation to a big number....right?), I thought half of that was reasonable. Apparently income is far less important than liquidity and stability. Working for startups and living around the world for the past couple of years makes me appear risky, it seems.

This seems to confirm my suspicion that there are four ways to get started:
1) traditional finanacing (20% down)
2) hard money (10-20% down and expensive)
3) cash (if you have it)
4) owner financing (if you get really lucky)

This leads to my question. Are there options that I'm missing? Are there creative (and realistic) options that I'm not considering as I think about how to get going?

-Taft

@Taft Love To best answer your question, please give us an idea exactly the type of investing you want to do? Is it flipping, is it buy and hold, is it flipping into a buy and hold? how about wholesaling? are we talking about 1-4 residential units or 5+ multi's? With more details, we can come up with ideas that might help that are specific to what your trying to accomplish?

@Taft Love

I don't have all of your information as far as what you have to work with, so I'll just explain what we have done and are looking to do in the future.

My partner and I had some cash to start and decided to partner on a single deal and see how that worked out.

Our First Deal

We purchased a 2/1 on a double lot in town for 20k using his cash and I put up the 20k required for renovation.  We had no idea what we were getting into at the time.  On day 1 of renovation (Demo) our contractor called us to inform us that there was significant termite damage on the rear of the property where one corner was touching the ground.

Lesson number 1 - Termite inspection went on the checklist for future purchases.

So we agreed to have the property treated and complete demo to see the extent of the damage.  Upon completion of demo our contractor calls again...  He threw a bombshell in our lap that 90% of the structure was ate up with termites and basically the only thing holding the place together was the termites holding hands.  The renovation was going to cost around 40k instead of the estimated 20k.

Neither of us had 20k liquid to  tap into, so we started talking to banks to see what we could find.  We ended up finding a loan at a local portfolio lender that was a construction loan.  They would lend the 40k required on a draw type setup and roll into a permanent mortgage once the project was complete.  The numbers seemed to work out so we proceeded.

We ended up having to build temporary walls to hold up the roof structure, being that it was the only thing left that hadn't been reached by the termites...  and then re-building the entire house under neath.

Lesson number 2 - in hindsight we should have dozed the house and started fresh with a larger new house.

However we learned alot about the process, construction, changing direction when things go wrong, being flexible and rolling with the punches.

We ended up with a nice place that we paid almost 100% of the appraisal price for, but we only owe 40k and it cash flows well.  We didn't really make money but the education we got was priceless.

Before we rolled the construction loan into a permanent one we contacted a few more banks using referrals from some of the guys at the local REIA. One of them gave us a contact of their Loan officer which happens to be another investor. The loan officer asked us if we had any other collateral to put up and if so he could get us a Secured Commercial Line of Credit, which is what we really needed. Luckily my partner had a free and clear property and we ended up using that to secure the line of credit.

We have since used that Line of Credit to Buy, Renovate, Rent and Refinance 2 other properties that ended up being no money out of pocket and they are both cash flowing nicely.

You see, you will need to network with your peers in your area and find out how they are doing it, and emulate the same.  They may even share their contacts.

One issue we have been having is the hold time... Our LOC is only large enough to do 1 Purchase and Rehab per year and then we hold the property until we can refinance using the appraisal price instead of the Purchase/Renovation cost. This ties up our funds and doesn't allow for quicker growth.

We have been looking into using private funds for the purchase / rehab phase to allow for multiple deals a year.   We ran across a Lending Tree like site for private lenders where they evaluate your deal and bid for your business.  I have yet to use them but, it looks like it would be a good fit.  Here is the link.  http://cix.connectedinvestors.com/

I'm in no way affiliated with them other than being a member on their site for networking.

Going forward, we will be looking at doing 2 deals a year for a slow and steady growth rate until we get to 10 or 15 deals.  Then our first deal will be completely paid off and each consecutive one will start paying off each year thereafter.

Lots of information here, but mainly you will need to network and be flexible and see if what is being offered can be used to complete your goal.  Sometimes it's not exactly what your looking for or its what you need but just don't know it, as it was in our case.

Hope this helps,

Jeff V

@Kevin Romines Great question! Didn't think to add that.

My goal is to acquire long-term hold properties using BRRRR. I'm looking mostly for SFR, though I wouldn't pass up small MFR if the price is right. I'm specifically aiming for the $800-$1,100 rent range.

Basically stated, you need enough money to cover the down payment, closing cost and reserve requirements of whatever lender your going with. That one pot of money can be replenished or reimbursed with a Fannie Mae cash out refinance once you have been on title for 6 months or more. If you want to do more than 1 BRRRR at a time, then you will need to double that original pot of money.

As you go forward, you may be getting to a point where your getting more back from the refinance then you had in the deal. This helps build your pot of money that you can use for your downs, closing cost and reserves. Eventually getting you to a point where you can do many in a year.

One of the best ways to get your starting cash is to get a HELOC or home equity line of credit on a primary residence assuming you have enough equity? In that way, you are only making payments on the money while you have it out in use, if you pay it back, then the whole line of credit is sitting there waiting for you to use it again.

To start, you might have to partner with others that have the missing pieces of the puzzle that you don't have? Remember 50% of something is better than 100% of nothing. 

I know some hard money lenders that will fund 100% of the purchase and rehab if the seller will carry back 25%. This may be an easier sell to a seller than carrying 100% of the note?

Your comment on the hard money being expensive. Well, yes it is, but its the cost of doing business if you don't have any other alternatives, so build the costs into the deal and make sure the deal is good enough, then you should be fine. The nice thing about hard money is that they wont make a loan on something they don't see the numbers working out on. Because of that, its like you have another set of eyes on the deal (a professional set or eyes) to tell you if the deal is workable or not. A denial just might be the best thing for you on a given deal, as it protects you in the deal as well. 

As you get down the road, you can start looking for HELOC's on rental properties? They are out there, but rare and a bit hard to find. But with enough looking around, you can find them. They typically wont go to 100% but they may give you enough cash that your building your initial pot of money enough to do multiple deals at once.

As always, the struggle is in the beginning, after you are off the ground and have some deals under your belt, things getting easier and more options open up to you that weren't there before.  Like private money, its out there and available.  But any private investor is going to want to see a track record and feel confident that you have been there done that before and they can count on your numbers. They will want to feel confident that they can get their money back #1 and make a decent profit without headaches (having to foreclose) #2. 

So plan your 1st 1-2 deals, go execute them and keep a portfolio of the work that you have done. Compare your starting numbers to the deal to the actual reality at the end of the deal. Use the portfolio to obtain the private financing you may be looking for.

@Jeff V. Thanks for the info!

I think I'm in a position to do two deals per year now, but want to put myself in a position where I have the option to do more than that. I've saved around $40k and have a healthy W2. I'll definitely keep networking in my area and continue to ask how people are funding their deals.

@Kevin Romines those are all great options... all though finding sellers that will take a second behind HML I think is pretty tough.. and absolutely risky for the seller I would not do that or encourage a seller to do that personally.

I think what this person wants is a TRUE unsecured LOC that he can use as equity.. not a Heloc not cash he has in the bank etc etc.

and as we know a TRUE unscecured LOC from a commercial bank is only for those with Stellar balance sheets experience etc etc.. if your just starting out then your wasting your time..

low balance credit lines like he spoke of for 10 or 15 are like loans you could get from a credit card or a thrift or that type of institution.

there are NO unsecured LOC's of any size for those starting out unless your very high wage earner with a big cash balance in your account.. probably 3 or 4 times the amount your seeking it not more.

Also the folks that posted about the small balance construction loan that would be very hard to get on the West coast.. most lenders have minimums so a 40k loan would be next to impossible..

and again a construction loan with no real experience from a commercial bank also is not happening.

at least in my experience.

to me this OP needs to find some cash with partners family whatever .. or if they want to take a big risk start stacking up credit cards and pulling cash.. problem most run into then and why it does not usually work for buy and hold is it hammers your FICO score and DTI

@Jay Hinrichs I agree, it can be difficult to get started when you have not got your starting cash that you will need to get a hard money type loan or a private loan or any loan for that matter. I also don't think the carry back makes much sense and can be a waste of time in most cases. It also puts the seller is an inferior position, so not something to take lightly by any means.

I also agree that a partnership may be an option. If the partner has the parts of the deal that you don't have, then it can make for the right deal. But a partnership is just like a marriage, so you need to tread cautiously and document all agreements in writing. 

Ultimately, its about getting someone off the ground. Once they are off the ground and have a few deals under their belt, things become easier and clearer as to the choices available.  

@Kevin Romines   or sweet talking your self into owner financing  :)   in some markets were you have a ton of distressed assets that's not to tough.. but out here on the west coast pretty tough... not that it can't happen.. but usually you pay a premium for seller carry back.. so not sure its worth it in a buy and hold scenario..

one could target hoarder houses and really rough stuff.. get into title use your cash for fix up then refi.

but bottom line.. its mainly hyperbole that one can make money in this business with NO money..

its the tag line for all the wholesaler Guru's seller their systems.. but you need money to buy their system.. and you need marketing money etc etc.

Its amazing to me how real estate has morphed into this public conscience as a highly leveraged and get rich slowly or quickly idea..

you know guys like us we had to work our way up.. !!!  younger generation they want to have 4,000 doors in 18 months all with no money out of pocket  LOL

This is all great info. I have a healthy W2, but the fact that I have moved around a lot and changed jobs a few times in the past few years makes underwriters nervous. I work for startups and manage teams in three offices, so it's the sort of thing that looks bad on paper but isn't actually very risky.

If I didn't have a day job, I'd focus on finding creative ways to fund deals, but it's not realistic for me to do in a relatively strong market. I think I may just have to use more of my own money than some other people have done.

Oh I don't see it as a mountain that must be overcome to getting your first deal or two done, but it may feel like that to someone starting out. In the end, yes, it takes some cash on your end to get the deal done. And that's a good thing, cash or skin in the deal make the borrower go in with their eyes more open to the down falls of the deal as well. They have something to lose. 

The main point I try to make is that they have some options with where and how they come up with this starting pool of cash they will need. I know it can be nerve racking to get started, but in the end it takes action and putting your self out there to get a deal done. Be committed to the deal or don't do the deal. 

Again, once you have successfully completed a deal or two, things become clearer, easier with more options for financing down the road. The main thing to focus on is getting the deals done, maximizing profits while your paying for your education on the 1st couple of deals. You gotta risk it to get the biscuit,  so to speak!!! LOL

Originally posted by @April Crossley :

Joint venture :) Bring the deal, bring sweat equity, someone else brings the funds. That’s how I got started with zero money.

This is exactly what I'm trying to work with. I bring the deals, my partner provides the sweat equity, 80% of the purchase cost plus all the other cost(closing, renovation, holding, unexpected, etc.). Now I'm looking for a partner to bring the 20% ARV I need.

Please read “Set for Life,” be BP’s Scott Trench. I used to give out Dave Ramsey’s “Total Money Makeover”, still a great plan, but if I had to recreate my 20 something year old self, and had Scott’s book as a roadmap, life would be different now. Supplement with “The One Thing” by Gary Keller and you’d be a powerhouse in no time. :-) Cheers!

@Jay Hinrichs   I summarize the lending requirements of an unsecured line of credit this way...  "If you need one, you do not qualify."

Originally posted by @Taft Love :

This is all great info. I have a healthy W2, but the fact that I have moved around a lot and changed jobs a few times in the past few years makes underwriters nervous. I work for startups and manage teams in three offices, so it's the sort of thing that looks bad on paper but isn't actually very risky.

If I didn't have a day job, I'd focus on finding creative ways to fund deals, but it's not realistic for me to do in a relatively strong market. I think I may just have to use more of my own money than some other people have done.

 WE have a couple Lines of credit.  you might check with credit unions, and you might find a couple of banks willing to give you personal lines of credit. 

Add a few of them together and you might have at least enough for a down payment or a little of a rehab budget.

Start out with the approved unsecured line of credit of 15k and make payments on time. You can probably get an increase to 20k or 30k in 24 months with a good repayment history.  Real estate financing starts with a ripple effect for many unless you have a massive saving amount or family and/or friends backing you financially.  It could me some time to build up my unsecured lines of credit to over 40k.  Of course, it must be noted that a steady, good income reflected on W2 helps and most times required.

@Michael Biggs   the other one I like is the car industries..  0% financing for well qualified buyers.

in the commercial banking world well qualified has fico score way down the list.

that is one thing that newer investors who run around with their 800 fico don't understand.

a fico won't pay you back when your deal turtles and that is what a commercial banker is looking for

Character ( at least as it relates to the bank how well do they know you and trust you) and this takes years in many instances to get with the bank..

Capacity how deep is your balance sheet and how long is your track record... one flip aint going to do it.

Credit  fico  cash on hand  how do you handle your business affairs..

its kind of in that order at least from the commercial banks I have been fortunate enough to get credit facilities from.. and only one would give me a TRUE unsecured LOC. I would say net worth has to be at least 10 to 20 times the amount you want in a unsecured LOC.. but again its trust does your banker trust you to make the right decisions and if things go bad does your banker know you will do what it takes to pay them back even in a loss scenario which happens to the best of us..

@Taft Love

Hey Taft, I applied for a unsecured personal loan through Sofi.com and they approved me for the max loan of $100k. It was easy to apply and I called up to verify that I was allowed to use the money for purchasing a rental property and the person I spoke to said it was fine. The rate was 9%. I ended up being able to get a conventional loan to purchase the property so I didn't actually take out the loan from Sofi. I have been investing for about five years and I have W-2 income so I think that helped out a lot. 

Originally posted by @Taft Love :

A week or so ago, I posted about my financial situation and asked a slew of questions. I thought it might make sense to follow up after visiting the bank.

In the last post, I mentioned that Episode 239 gave me the idea of using an unsecured line of credit (or multiple lines) to get started in real estate investing. I went to a couple of local banks in Eastern Washington this week, but was disappointed by the conversations I had (though not detered!).

The largest line of credit for which I qualified, according to the bank was $15k, which is about 20% of one of the two credit cards I have. While I didn't expect to qualify for $75k I requested (anchor the negotiation to a big number....right?), I thought half of that was reasonable. Apparently income is far less important than liquidity and stability. Working for startups and living around the world for the past couple of years makes me appear risky, it seems.

This seems to confirm my suspicion that there are four ways to get started:
1) traditional finanacing (20% down)
2) hard money (10-20% down and expensive)
3) cash (if you have it)
4) owner financing (if you get really lucky)

This leads to my question. Are there options that I'm missing? Are there creative (and realistic) options that I'm not considering as I think about how to get going?

-Taft

 If you have a credit card with a $75K limit, why are you not exploring options to take a cash advance against it with an access check on a promo offer for 0% interest for 18 months?  Of course, it needs to be at a $0 balance when you do this, and you can't touch it while you are paying on the promo balance.  But definitely something to consider.  Surely an 18 month term would give you enough wiggle room to squeak out a project, or two, and build some seed money from it.

@Timothy Tooker I'll definitely head to Umpqua as soon as I get back to Spokane. Thanks for the info!

@Mat O'Grady I'm actually waiting to hear back from SoFi right now. I have a healthy W2, but the thing that's been messing with me is the fact that I work fro startups and live in corporate apartments. I haven't had a "steady" job or address in years. It's because I've worked for companies that got acquired, but without context it looks like I keep getting fired :-). Hopefully SoFi will come through!

@Cara Lonsdale I looked at the terms for cash advances and it looks like the limit is $25k and it's 24%, so it would be incredibly expensive. I'll look around at other cards and see if there are any good introductory offers that I could use. Thanks!

Cash advance no good. I did something about 2 years ago that I wasn’t sure was worth it at the time but now feels like paying off. I payed a company to give me a seasoned business entity for purpose of business credit. I payed them $3k for this. That’s a lot for sure and I’m not sure I recommend it. They negotiated all the credit limits up and I got 4 cards with about 120k limits. Getting cash off cards was a bit of a pain at first basically used a merchant account and charged myself (not really allowed). This costs almost 3% in fees. This money allowed me to do a private lending venture at 12% interest so I made money on that but not much after considering the 3k and fees. For the last year plus I keep getting convenience checks offers. Most are 1 year with 2-3% fees. My M&T card is the best, 1.99% no interest for 18 months. I am on my second round of pulling 28k (costs $500 fees) off the card and paying it back in a year. I haven’t even mentioned the only reason this whole thing is worth it. This is business credit not personal credit. I can pull as much from a card and has no affect on my personal credit. I have 4 cards I could do this on as they all send offers non stop. I only do it in 1. Of course you must be really strong to not get in trouble with this. I have an earmarked bank account all revenue from those investments goes right to it.

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