Conventional Loans & Partners - "Rules" and how it works?

6 Replies

Hello All,

My partners and I have grown to 30 rental units in our local area and things are going very well, thanks in a large part to what we have learned here on BP. So far we have used almost all Portfolio Loans due to having a 3 way LLC or non-recourse loans for ones that we own in our SDIRAs and SOLO401Ks, so VERY little experience with Conventional 30 year loans.

We are wanting to switch to 30 year Conventional Loans for some we are going to be purchasing shortly to take advantage of historically low rates on top quality properties that we plan to hold for at least 20 years or most likely indefinitely.

We would likely be doing the deals where one of us brings 100% of the down payment and the other does all of the PM over the years, and split both cash flow and equity growth 50-50.

Some of my questions are;

    1. 1) Do we both need to 'be on the loan'? I am wondering this in relation to 'not wanting to use up our 10 loan limits'.
    2. 2) Does Title have to have both of us on it exactly the same way as the Loan does?
    3. 3)If down the road one of us wants to sell out to the others, can title just change and the remaining partner just keep paying on the loan?
    4. 4)If we get one/some of these deals before the end of the year (think November) and have it on our taxes would that 'short year' count as a 'tax year' for that property?
    5. 5) My understanding is that a common way for banks to do the projections when we dont yet have 2 years of taxes is to take (Rental Income * .75) - PITI = 'cash flow' that is added to your income for DTI purposes. Is that accurate?

    Thanks, Dan Dietz

    1. No, and I'd actually suggest not for exactly the reason you specify.

    2. You can be on title without being on the loan.

    3. Due on sale clause might get you there.

    5. Yup.

    Note that down payment "gifts" are not OK for investment properties and Fannie. Generally whoever is coming in with the down payment, they must be on the loan. If that doesn't work, you can get a little creative by making it a loan from non-borrowing partner to borrowing partner, provided it's secured by OTHER real estate as a (2nd, 3rd, etc) mortgage, and you're working with someone local, REI-friendly, and not a big bank.

    Thanks for the response @Chris Mason .

    I clarify what you mean about doing the down-payment as a loan on another property, you mean it can NOT be in ANY position (meaning second, third, etc...) on the property currently being purchased I assume?

    Am I also correct in thinking that said 'loan' could be on ANY piece of property that the non-contributing partner has an interest in - meaning own in their own name, and LLC they own, etc....?

    Thanks again, Dan Dietz

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    Originally posted by @Daniel Dietz :

    Thanks for the response @Chris Mason.

    I clarify what you mean about doing the down-payment as a loan on another property, you mean it can NOT be in ANY position (meaning second, third, etc...) on the property currently being purchased I assume?

    Am I also correct in thinking that said 'loan' could be on ANY piece of property that the non-contributing partner has an interest in - meaning own in their own name, and LLC they own, etc....?

    Thanks again, Dan Dietz

     Person A owns Property A. Person B owns Property B. Person B wants to buy Property C but doesn't have the down payment. Person A extends a private mortgage to Person B, secured by Property B. Person B can now use those funds for the down payment on Property C. Fully disclosed to underwriting, not hiding anything, no "seasoning" or any of that.

    Property B can have 2 or 3 or 6 mortgages, it doesn't matter. Most FNMA lenders will not do it, but it can be done. Yes, it does need to be notarized and recorded and all that. 

    This is almost always how I suggest partnerships be structured. Everyone's responsibilities are crystal clear... Person B owns the property and owes Person A a monthly payment (that's A's ROI). DTIs start to get screwed up when Persons A and B get a joint mortgage to purchase property C together.

    To those of you who are on the 'consumer side', the ones GETTING these loans, and only one partner is on the loan, how are you structuring the 'partnership'? A simple JV agreement? I am used to more complex LLC docs for my other properties which I REALLY like the 'clarity' of who does what, etc....

    What do you see as the downfalls of using a partnering structure when using conventional loans? Partnering where one person brings ALL of the down payment and the other (me/us) does ALL of the other work has been working REALLY well. Not sure if there are reasons/areas that it would not work as well with Conventional Loans as well as it does with Portfolio/Commercial Loans?

    Thanks, Dan Dietz

    @Chris Mason ,

    Thanks again for your clarifications. I read the '6 loan post', very interesting!

    Thinking of your explanation of Persons A & B and Property C above, could either of these ideas work?

    1) If I used my own cash on had to put say 25K down on a 100K property using a 75K Conventional Loan, AFTER purchase could I have Person A give me a Second Position private loan in essence 'exchanging out' my 25K down payment so I can 'recyle it into the next one'? If yes, how soon after closing?

    2) If I had Person A do a Second Position private loan on my personal home could that loan be 'moved over to' or 'ported' to the newly acquired investment property after closing? If yes, I am thinking that could be a repeatable method, just like the first.

    Hope that makes sense. Thanks, Dan Dietz