Structuring and financing your first deal

12 Replies

Hi all,

I am a new investor looking to find a first deal on which to cut my teeth.  I have recently come across a fourplex located near a large hospital that employs a significant number of people in a good area that seems like it might be a good first deal.

Since I am not living in the building, FHA/203K loans are out. Hard money is also out as I would need to hang on to this for longer than a couple months.

I do not currently have enough capital to put 20% down with a conventional mortgage, so I found a partner that does have the money. We agreed that he would put down the down payment and provide the financial reserves, while I provided the leg work and split 50/50.  

However, I have found out that with a conventional mortgage loan you cannot have someone else put down the down payment (gifting the money) unless they are related to you or a spouse/fiance.  

Is my only option left to syndicate from multiple people and buy the property in cash?

Thanks in advance for any input.

Dan

Dan 

First thing is you can use hard money and refinance after seasoning to pay off hard money loan, provided cash flow will support the deal.

Second, if your partners with the one putting capital down that is not a gift it's an owner contribution on your books, provided you have an entity and operating agreement and should not be an issue.

Hope that opens up some options for you.

Jeff V

Dan, I agree with Jeff on this.  This deal is perfect for a hard money loan assuming the deal will appraise for what it needs to so that you can not only pay the hard money lender off, but also get back some of the capital you put into the deal.  Most hard money loan terms are between 6-12 months and even extend beyond that.  Our borrowers do this all of the time.  I do not actively lend in TX, but I'm sure you can find some good lenders on BP who would fund this deal.  Let me know if I can assist futher 

@Dan Knight a couple of things here.  I see there are some good comments above but I wanted to add a couple of things:

  • There are other options besides "hard money". There are lenders here in Texas that do 20 year ARM loans with lower closing costs. They are generally quicker than a conventional, conforming lender with closing time but we still don't want to be in there loan too long so refinancing out should still be a choice after closing.
  • If you still want to use conventional money to purchase (meaning Fannie/Freddie money) then you need to keep in mind a few things:
    • Minimum downpayment on a 4-plex is 25% with Fannie/Freddie (20% is possible with a duplex but not 3-4 unit)
    • If you have a business bank account then you are not required to "source" funds.  Essentially, if you have a registered business, a bank will allow you to open a business account.  Then your partner can deposit the funds into your business account and it won't matter that you got the funds from him/her.
    • The property will have to be "move in ready".  Meaning, no work is needed to be performed.  If you were planning on rehabbing it cosmetically (no foundation, roof, woodrot, etc. stuff) then you can buy with conventional loan and rehab after.  The rehab would have to come out of your own pocket though.

*WHEW* I hope that wasn't too much information. I would still suggest finding one of those 20 year ARM loans. In theory, if the ARV would move enough you could use FAR less out of pocket than with the conventional loan. Then just refinance after.

Feel free to tag me with any additional questions.  Nice to see a fellow Texan.  Thanks!

@Jeff V.  @Chris Gallo  Thank you both for the input. I'll definitely re-evaluate the hard money loan and see if the numbers still make sense.

@Andrew Postell thanks for the input as well - very helpful. So, when you say the property has the be "move in ready" does that mean I cannot rehab the place (upgrading floors, cabinets, countertops, etc.) with a conventional loan?

There are already tenants living in the place, but as each one of their leases came up, I would plan to move them out, rehab the place, up the rent, and then fill it again to increase cash flow.

Another note, and I think this might be what @Chris Gallo was talking about as well - if I create an LLC with a partner and create a business bank account, he can put money in that account just as easily as I could, and that money can be used for the down payment on the property regardless of where the funds came from?

@Dan Knight there is a conventional renovation loan that can be used for investment properties but it is only for Single Family Homes.  If you wanted to use conventional money to purchase, your renovation money would have to come out of your own pocket.

And you are 100% correct on the usage of the business account.  That's exactly why all investors should have a business bank account.

Feel free to ask anything else.  Thanks!

@Dean Hamilton in general, the "portfolio" loans from the small banks here don't necessarily require a down payment. Meaning, that if the home appraises at $100k, and you can purchase and renovate at $75k or $80k, then the bank will lend you the full amount. Their thought is "we will lend to X of the ARV" and if you can keep all the costs at X or below you can be fully funded. Hope that makes sense.

@Andrew Postell

Hey Andrew, I've been going back over this convo and some other notes and it seems based on what I want to do a portfolio loan would be my best bet.  I know you are up in Fort Worth, but wanted to ask if through your dealings if you might know of any good local credit unions/portfolio lenders in Austin that fit the mold of what we were talking about above.

I've compiled a list of my own, but wanted to see if you might have any recommendations.

Thanks!

Originally posted by @Andrew Postell :

@Dean Hamilton in general, the "portfolio" loans from the small banks here don't necessarily require a down payment. Meaning, that if the home appraises at $100k, and you can purchase and renovate at $75k or $80k, then the bank will lend you the full amount. Their thought is "we will lend to X of the ARV" and if you can keep all the costs at X or below you can be fully funded. Hope that makes sense.

Wait appraises as in after the repairs? Or before the repairs 

@Dan Knight most of my contacts are up here but there might be 2 that may lend down there.  Most of what I work with are community banks so they are out but maybe these other 2 might be good. 

@Ian Jackson and I am speaking about ARV or After Repair Value.