Reserves required for financing
Tri-Cities Area, WA · Member since 2015 · 8 posts · 1 vote
Reserves required for financing
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Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y@Brian Webb For whatever it's worth (others may disagree) I'd max out conventional loans first. You get a 30-year fixed-rate and interest rates are still historically low. You don't have to worry about a 20 or 25 year amortization table. You don't have to worry about balloon payments (and refinancing) in 5-7 years. You don't have to worry about what interest rates will be in 5 or 7 years. You don't have to worry about sending annual financials to the bank. And I'm probably missing a couple of things. And it's not that any of these things are a BIG deal or a monumental hassle. I like my lender. There's never been an issue. I'm sure they'd be happy to loan me more money.
But would I rather be able to have a straight-up boring 30-year fixed-rate mortgage on my apartments? Absolutely.
13 Replies
- Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes8y
Fannie Mae is the biggest lender when it comes to rental property. You can finance up to 10 properties or have up to 10 financed properties before Fannie cuts you off. Unless you know how to get around the 10 financed property rule, in which I do, but that is for another time.
Here are the Fannie Mae reserve requirements. UPB means unpaid principal balance. There are no additional reserve requirements on a primary residence.
- Tri-Cities Area, WA · Member since 2015 · 8 posts · 1 vote8y
Thanks Matt! I guess you don't know what you don't know until you know it!
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes8y
@Brian Webb Maybe a good place to start would be to look at what you'd like to see a financial institution require for reserves. I've had some say that they want 9 months PITI rather than 6 months. But if you have the money (which I did at the time) it wasn't like I was asking what the minimum requirements were. If you're hoping that you'll find a bank that wants reserves of 1 month, you're probably wasting your time. If somehow 5 months vs. 6 months makes a difference then who knows, there could be a flexible loan committee that will look at credit score, net worth, W2 income, etc. I'm just not sure. I've only gone the local/regional bank route for commercial loans (which is where you'll end up if you're looking for a portfolio loan) but I'll posit that you terms will be better if you can stick to conventional.
- Tri-Cities Area, WA · Member since 2015 · 8 posts · 1 vote8y
@Kevin Romines Thanks for the information I will definitely tuck that away to reference as I am getting started an growing.
- 8yGeorge DespotopoulosBusiness MemberLender · New York, NY · Member since 2016 · 936 posts · 287 votes
Hey @Brian Webb welcome!
It really depends on the lender, 6 months seems standard for the traditional/conventional route. You may find others who only require 3 months.It is normal, they want to see that you can cover some payments if necessary. I've seen private lenders/hard money lenders charge up to 8 months on a 12 month loan term. Definitely different credit risk on those deals, but just to give you an idea.
MoFin Lending4.9152 Reviews - Tri-Cities Area, WA · Member since 2015 · 8 posts · 1 vote8y
@Andrew Johnson That is a good idea. I don't necessarily have an issue with the 6 month requirement, give or take a month, I just didn't realize that it was an actual requirement by the banks. I've always heard people recommend having a reserve to cover unexpected repairs, maintenance or vacancies, which I was planning to cover having a line of credit in the beginning while I build up my reserves, but maybe that's a risky strategy.
My thinking on finding a portfolio lender now, is so that when I reach the 4 loan limit I'll already have a good history & relationship with one or multiple institutions that can finance me beyond 4.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes8y
@Brian Webb For whatever it's worth (others may disagree) I'd max out conventional loans first. You get a 30-year fixed-rate and interest rates are still historically low. You don't have to worry about a 20 or 25 year amortization table. You don't have to worry about balloon payments (and refinancing) in 5-7 years. You don't have to worry about what interest rates will be in 5 or 7 years. You don't have to worry about sending annual financials to the bank. And I'm probably missing a couple of things. And it's not that any of these things are a BIG deal or a monumental hassle. I like my lender. There's never been an issue. I'm sure they'd be happy to loan me more money.
But would I rather be able to have a straight-up boring 30-year fixed-rate mortgage on my apartments? Absolutely.
- Lender · Winlock, WA · Member since 2013 · 1k+ posts · 1k+ votes8y
@Brian Webb I work with many investors and have came up with a game plan that works well for someone that is buying and building a portfolio of rentals. The game plan revolves around how to continue getting Fannie Mae loans once you have hit the 10 financed properties limit. I had a conversation with underwriting with my company and was given the actual Fannie Mae guideline on this and what is acceptable versus what wont work.
In a nutshell, here is the answer. Fannie Mae views a LLC differently than a SUB S or a C Corp as far as holding and financing properties. If you own more than 25% of an LLC and even if you went and got commercial / portfolio financing on the properties in the name of the LLC , they would still count in Fannie Mae's 10 financed property rule.
However if you hold them in an SUB S or a C Corp and you get commercial or portfolio financing in the name of the company, even if you have to sign a personal guarantee on the loans, Fannie Mae will not count those properties in the 10 financed property rule. Why, because they are commercial and the loan is in the name of the company. An LLC tends to be a pass through entity, so its structured differently.
So with that said, I would plan to buy the properties and hold them in your personal name. When you get to property number 9 or 10, then think about moving the property that you have the lowest balance on, or the most equity to a SUB S or C Corp. Then go secure commercial or portfolio refinance on those 1 or 2. By doing this, you will open up 1-2 slots available for Fannie Mae purchases going forward. Rinse & repeat to as many properties as you could ever want to buy.
Fannie Mae has the best overall loan terms compared to all other loans, so that is the reason that you want to always buy using Fannie Mae.
You need someone on your team that knows the needs of investors and the challenges that they face. The more someone knows about how to structure a deal, the more options they can give you and the more headaches and money they will save you.
- Rental Property Investor · Barrington, IL · Member since 2017 · 208 posts · 310 votes8y
@Andrew Johnson and @Kevin Romines great info! It is good to hear all of these options and get the mind rolling.
Not trying to hijack this thread but I have a few questions that relate to the OP and (I think) belong in this thread.
1. I'm looking at apartment buildings. Ideally, something 25-100 units. These loans will be over $1MM and from my research and talking to banks/brokers qualify for a Freddie, which seem to be the best terms on commercial (4.5%, 30 year amort, 10 year balloon, non-recourse). Community banks can't seem to touch this. Any disagreement or other thoughts to consider?
2. I'm also considering purchasing several smaller sized apartments in the local area (say 6-10 buildings, 8-12 units each, 60 to 100 units total) and self managing with another GM partner who would handle the R&M/contractors. One seller owns 3 buildings, individually less than $1MM, collectively I would offer around $1.3MM for the three buildings. Any thoughts on how to best finance? Would a bank broker be able to package these together?
3. Continuing the same example from #2, the remaining buildings are owned by all different sellers, half go for over $500K, half under $500K, any thoughts on best way to finance? Would these be individual loans or some way to package together? In my head and the way I will operate it, this will be a separate business that I will run with a local partner. He would receive a cut of equity to manage the R&M operations of all of these buildings.
After typing all of this out I realized that I'm asking a lot of questions for one forum post...sorry! If you can help out with just one piece of info from the questions above, that would be great! Thanks in advance.
- Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes8y
@Scott Skinger I'll just be overly general and say that a lot of regional/local/community banks are going to be 5-7 year fixed w/ balloon and 20-25 year amortization timelines. They'll also differ on points, fees, interest rates, etc. and many (if not most) will be full-recourse. But, in these small(er) banks, they know their loan committee and it can be a very quick process even with high(er) dollar amounts. I can get funding in 30 days (you might have to pay a little more for the "quick" appraisal) if I need it. So there are some benefits especially if your seller wants to close quickly and you negotiated a better price with that expectation.
As for the other questions, there are people here who could answer them much better than I could. I don't know if Freddie does portfolio loans (i.e. for all three properties) in the say way that a local/community bank or credit union might be able to.
In your shoes, I think I'd stick with the one large building. It's one process, one appraisal, one property to handle post-acquisition, etc. But that's just me. That and when I see groups of homes or groups of properties that are packaged together, you get a mixed back. The seller wants you to take it all (the good with the bad) and prices it accordingly. It's not that way all of the time but it's just something to keep an eye out for.
- Rental Property Investor · Barrington, IL · Member since 2017 · 208 posts · 310 votes8y
@Andrew Johnson Thank you! I really appreciate the time and effort you put in to your answer, very helpful.
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