Tell me your thoughts on this Local Bank financing for rentals

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Tell me your thoughts on this Local Bank financing for rentals

Oliver Trojahn
Kansas City, MO · Member since 2008 · 143 posts · 41 votes

I wanted to run these numbers by everyone on this forum to see if this local bank might be the way to go in lieu of conventional financing for our next purchase. There are both pro's and con's to what they can offer(We are looking at 60k max houses for rentals:

They hold all their loans in their own portfolio and 50% of their business is rental properties locally.

Rates are 6.5% 5/1 ARM (ARM ouch!), 20% down, 500 dollars closing costs.

Can include capital improvements in loan amount.(e.g. new roof).

Can Loan directly to our LLC with personal guarantees (this personal guarantee does not show up on personal credit report until you default). After a few properties and five years in we could refinance with them and include all properties in one loan (portfolio loan).

My partner and I are barely able to get a conventional loan. However, I think we just qualified (he bought car which is tilting our debt to income ratio a little and our first rental is shown as a complete liability as we do not have 1 year tax return).

What is everyone's thoughts on this local loan program? I almost think the fact they will loan to the LLC is a deal maker almost, also the low closing costs are attractive. I am excited to see what everyone thinks.

Thanks.

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Scott Hubbard
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
15y
Originally posted by Oliver T.:
I wanted to run these numbers by everyone on this forum to see if this local bank might be the way to go in lieu of conventional financing for our next purchase. There are both pro's and con's to what they can offer(We are looking at 60k max houses for rentals:

They hold all their loans in their own portfolio and 50% of their business is rental properties locally.

Rates are 6.5% 5/1 ARM (ARM ouch!), 20% down, 500 dollars closing costs.

Can include capital improvements in loan amount.(e.g. new roof).

Can Loan directly to our LLC with personal guarantees (this personal guarantee does not show up on personal credit report until you default). After a few properties and five years in we could refinance with them and include all properties in one loan (portfolio loan).

My partner and I are barely able to get a conventional loan. However, I think we just qualified (he bought car which is tilting our debt to income ratio a little and our first rental is shown as a complete liability as we do not have 1 year tax return).

What is everyone's thoughts on this local loan program? I almost think the fact they will loan to the LLC is a deal maker almost, also the low closing costs are attractive. I am excited to see what everyone thinks.

Thanks.

Retail 5/1 ARMs are around 4.25 %, so your paying a risk premium of two points roughly. This is not too bad as non-occ will generally run two points higher no matter the loan terms.

The terms quoted above seem to me to be broad strokes... Is there a pre-payment penalty or can you refi after a year? Is there an interest rate cap? Is the index rate based on LIBOR?

With an ARM, your probably going to need to refi and waiting five years may not be your best option, so you should plug the costs to refi in your strategy unless your strategy is to sell.

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  • Scott Hubbard
    Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
    15y
    Originally posted by Oliver T.:
    I wanted to run these numbers by everyone on this forum to see if this local bank might be the way to go in lieu of conventional financing for our next purchase. There are both pro's and con's to what they can offer(We are looking at 60k max houses for rentals:

    They hold all their loans in their own portfolio and 50% of their business is rental properties locally.

    Rates are 6.5% 5/1 ARM (ARM ouch!), 20% down, 500 dollars closing costs.

    Can include capital improvements in loan amount.(e.g. new roof).

    Can Loan directly to our LLC with personal guarantees (this personal guarantee does not show up on personal credit report until you default). After a few properties and five years in we could refinance with them and include all properties in one loan (portfolio loan).

    My partner and I are barely able to get a conventional loan. However, I think we just qualified (he bought car which is tilting our debt to income ratio a little and our first rental is shown as a complete liability as we do not have 1 year tax return).

    What is everyone's thoughts on this local loan program? I almost think the fact they will loan to the LLC is a deal maker almost, also the low closing costs are attractive. I am excited to see what everyone thinks.

    Thanks.

    Retail 5/1 ARMs are around 4.25 %, so your paying a risk premium of two points roughly. This is not too bad as non-occ will generally run two points higher no matter the loan terms.

    The terms quoted above seem to me to be broad strokes... Is there a pre-payment penalty or can you refi after a year? Is there an interest rate cap? Is the index rate based on LIBOR?

    With an ARM, your probably going to need to refi and waiting five years may not be your best option, so you should plug the costs to refi in your strategy unless your strategy is to sell.

    2Reply
  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    15y

    I agree with Scott. Since the principal amounts you are borrowing are not that much in the first place, an extra point in rate isn't going to break the bank, especially when you have low closing costs like that.

    Your post makes it sound like there is a pre payment penalty to refi so any calculation should include those numbers in the final analysis.

    I would be wary somewhat of doing a blanket loan for a couple of reasons. For starters, some lenders require a min. value per property and min. overall value for the loan itself. On top of that, if you sell a property or two, then the whole loan can be recast which can cause some headaches as well.

    Is there a limit to the number of these they will do?

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    15y

    I'm not a fan on the ARM but sounds like a good bank to work with. If your buying the properties at a good discount it would make me more comfortable.

    This is what I have going with my local banks....

    Portfolio loan, 7.25% 30/15, If owned the property less than one year 70% loan to cost (purchase price plus repairs), if owned longer than one year 70% loan to appraisal.

    Bank requires a 6 month reserve for all properties owned, we pay appraisal and about $500 in fees. Appraisal is required no matter what and the minimum loan amount is 35K. NO limit on the number of loans.

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  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    15y

    ... oh yeah no pre payment penalties, the product I'm using is 30/15 (30 year amortization due in 15 years, balloon payment). I pay extra principle each month to get my balance to zero.

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  • Oliver Trojahn
    OP
    Kansas City, MO · Member since 2008 · 143 posts · 41 votes
    15y

    I can refinance with a 1% pre-payment penalty within five years. I need to discuss with them more on the max the rate can go up after the five years. I am also unsure if there is a limit on how many of these I can do.

    My strategy is to hold for 20 years at least. Which is one reason i do not like this ARM.

    0Reply
  • Chris Weiler
    Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
    14y

    The post is a little old but.... Frank, which bank are you using?

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    14y

    But the trick is you're not going to find many local banks doing portfolio loans for terms longer than 5 years. I haven't seen a 15 year term before. To be honest, I'm tickled pink when I find banks still doing anything with portfolio loans.

    The key to your post though was the one comment - you and your partner can barely qualify for a conventional loan. That suggests that your numbers aren't very good. 5-10 property financing is difficult but 1-4 is pretty reasonable these days.

    Saying that you both would "barely" qualify, to me, says you need to take this financing. The rate is a tad high but, given its a commercial loan, thats what you get. And it could also be that your rate is high because your personal numbers aren't very strong (obviously if you can "barely" qualify for a conventional loan).

    The fact that they'll let you roll the rehab into the loan amount and do 80% of that number is HUGE! Take that loan and run. But, if you can work on your credit numbers, I'd be looking to do a conventional loan in a year on as many as you can (up to 10 for each partner).

    You'll probably save $100 or month if not more with a conventional loan and, given you're going to hold anyway, eliminate the risk of any interest rate bumps.

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