What do you think of this loan? Is it a good deal?

25 Replies

I need all the opinions I can get on this one before I make a decision. I purchased a SFH 2 months ago for $150,000. After going back and forth with Quicken Loans for "delayed financing" I just got a call from the agent and he offered me the following for my SFH which is registered under an LLC.

15 year loan

$138,700 is the loan.

$6,700 closing costs (which is factored into the loan) for a total of $145,400.

Interest on the loan is %4.875

Upfront costs are only $500 appraisal fee.

$3,000 in escrow for taxes and home insurance.

Monthly payment will be $1,375 which includes taxes and insurance figured in.

The monthly rent is $1,650 so that will leave me a cash flow of $275.

To remind everybody this is a SFH that I purchased 2 months ago and should be appraised at around $210,000. The house is in an LLC.

What do you think? Does it sound good? Should I go for it? Is there anything I should ask? Am I missing anything?

No.  Cash Flow too low with financing. It's a dog.   Can you get a 30 year loan instead?  Take $165 out for PM and it's an ugly dog.

Originally posted by @Joe Villeneuve :

No.  Cash Flow too low with financing. It's a dog.   Can you get a 30 year loan instead?  Take $165 out for PM and it's an ugly dog.

 Thanks for the input. He will only offer a 15 year loan... I currently manage on my own but yes you are absolutely right if a few years from now I want to put in a PM it will leave very little. But, this is currently the best offer that I have received.

Originally posted by @Yoni Ramras :
Originally posted by @Joe Villeneuve:

No.  Cash Flow too low with financing. It's a dog.   Can you get a 30 year loan instead?  Take $165 out for PM and it's an ugly dog.

 Thanks for the input. He will only offer a 15 year loan... I currently manage on my own but yes you are absolutely right if a few years from now I want to put in a PM it will leave very little. But, this is currently the best offer that I have received.

 Always analyze with a PM...even if you think you want to do it now.

Keep looking.  Not having a loan is better than having a bad one.  Not having one means you can always add a "good" one when it is available.  A bad one means you're stuck with it for the length of the loan.

@Yoni Ramras How many other lenders have you called? Since you're in an LLC you're not going to get the good ol' 30 year fixed rate mortgage but I would have thought someone would have offered a 20 or 25 amortization schedule instead of 15. That said, I've never looked at a commercial loan that small before so it's something I haven't dealt with. Since you do have it in an LLC have you talked to regional banks in the area? I don't think there's much wrong with the rate, you'll be stuck with stuff in an escrow account, etc. but it's the amortization table that's going to kill you.

That said, you'll never get *actual* cash-flow on $275 per month.  That will get eaten up with vacancy, break/fix repairs, eventual cap-ex, etc.  It's the nature of the beast.  But if you can ride it out you should have something viable at the end of 15 years.  Alternatively, if it's really worth $210K you could always sell it for $210K.  You'll eat some realtor fees and closing costs but you should still clear, what, $40K?

Originally posted by @Andrew Johnson :

@Yoni Ramras How many other lenders have you called? Since you're in an LLC you're not going to get the good ol' 30 year fixed rate mortgage but I would have thought someone would have offered a 20 or 25 amortization schedule instead of 15. That said, I've never looked at a commercial loan that small before so it's something I haven't dealt with. Since you do have it in an LLC have you talked to regional banks in the area? I don't think there's much wrong with the rate, you'll be stuck with stuff in an escrow account, etc. but it's the amortization table that's going to kill you.

That said, you'll never get *actual* cash-flow on $275 per month.  That will get eaten up with vacancy, break/fix repairs, eventual cap-ex, etc.  It's the nature of the beast.  But if you can ride it out you should have something viable at the end of 15 years.  Alternatively, if it's really worth $210K you could always sell it for $210K.  You'll eat some realtor fees and closing costs but you should still clear, what, $40K?

You are right about the LLC problem...Quicken is just incompentent and doesnt realize they cant do the loan yet. Hes going to end up going 3 weeks in, pay for the appraisal then the loan is going to get denied towards the end.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

At a quick glance this is what I am seeing:

You’re putting in $5,100
Your gross rent is $1,650
If you take out 10% for Property Manager and also remove 5% for Vacancy (2 months every 3 years) then you’re left with about $27.50 per month, which sounds really ugly but when you look at COC you’re actually getting 6.5% which is pretty typical to what I have seen in this market with 30year loans.

At a purchase price of $150,000 and gross rent of $1,600 I think the property would work for most at a 30 year loan so I think it comes down to preference and comfort. I know many investors who will give up cash flow at a 15yr mortgage so that they get 15 years of free and clear properties while other investors are cash flowing $100/door.

You will always get more cash flow in a 30yr loan so I don’t think they can be compared to 15yr mortgages equally. Just think it’s two different strategies for different breed of investors and you need to identify which best suits you. Hope I provided some insight.

Happy Investing !

Gabe Amedee, Real Estate Agent in Florida (#3388321)
Originally posted by @Andrew Johnson :

@Yoni Ramras How many other lenders have you called? Since you're in an LLC you're not going to get the good ol' 30 year fixed rate mortgage but I would have thought someone would have offered a 20 or 25 amortization schedule instead of 15. That said, I've never looked at a commercial loan that small before so it's something I haven't dealt with. Since you do have it in an LLC have you talked to regional banks in the area? I don't think there's much wrong with the rate, you'll be stuck with stuff in an escrow account, etc. but it's the amortization table that's going to kill you.

That said, you'll never get *actual* cash-flow on $275 per month.  That will get eaten up with vacancy, break/fix repairs, eventual cap-ex, etc.  It's the nature of the beast.  But if you can ride it out you should have something viable at the end of 15 years.  Alternatively, if it's really worth $210K you could always sell it for $210K.  You'll eat some realtor fees and closing costs but you should still clear, what, $40K?

 I spoke with 4 lenders so far. Two of them said that I can't do delayed financing, One said he only does portfolio loans for llc's over 5 doors and Quicken Loans offered me the above. I haven't talked to regional banks in the area. Do you think this is an option? I don't really care about the cash flow I just don't want to have to bring money from "home". I want whatever cash flow there is to cover the expenses in the long run...

I could sell it and take home some cash but I don't need the money now. I prefer to cash out right now with financing and go buy another property. BRRR until I have a whole bunch of houses. I'm only currently at 6... I want the money later when I don't feel like working anymore :-)

Originally posted by @Russell Brazil :
Originally posted by @Andrew Johnson:

@Yoni Ramras How many other lenders have you called? Since you're in an LLC you're not going to get the good ol' 30 year fixed rate mortgage but I would have thought someone would have offered a 20 or 25 amortization schedule instead of 15. That said, I've never looked at a commercial loan that small before so it's something I haven't dealt with. Since you do have it in an LLC have you talked to regional banks in the area? I don't think there's much wrong with the rate, you'll be stuck with stuff in an escrow account, etc. but it's the amortization table that's going to kill you.

That said, you'll never get *actual* cash-flow on $275 per month.  That will get eaten up with vacancy, break/fix repairs, eventual cap-ex, etc.  It's the nature of the beast.  But if you can ride it out you should have something viable at the end of 15 years.  Alternatively, if it's really worth $210K you could always sell it for $210K.  You'll eat some realtor fees and closing costs but you should still clear, what, $40K?

You are right about the LLC problem...Quicken is just incompentent and doesnt realize they cant do the loan yet. Hes going to end up going 3 weeks in, pay for the appraisal then the loan is going to get denied towards the end.

 I really hope you are wrong but you may very well be right. Alot of lenders said they couldn't do it and all of a sudden Quicken said they could. 

Originally posted by @Gabe Amedee :

At a quick glance this is what I am seeing:

You’re putting in $5,100
Your gross rent is $1,650
If you take out 10% for Property Manager and also remove 5% for Vacancy (2 months every 3 years) then you're left with about $27.50 per month, which sounds really ugly but when you look at COC you're actually getting 6.5% which is pretty typical to what I have seen in this market with 30year loans.

At a purchase price of $150,000 and gross rent of $1,600 I think the property would work for most at a 30 year loan so I think it comes down to preference and comfort. I know many investors who will give up cash flow at a 15yr mortgage so that they get 15 years of free and clear properties while other investors are cash flowing $100/door.

You will always get more cash flow in a 30yr loan so I don’t think they can be compared to 15yr mortgages equally. Just think it’s two different strategies for different breed of investors and you need to identify which best suits you. Hope I provided some insight.

Happy Investing !

 Great! Thanks for the numbers breakdown. That's what I figured too. There will be nothing left but it will be enough to take care of everything needed in the next 15 years. I currently can't get a 30 year loan so it's not relevant anyway and I prefer a 15 to get it over with asap.

Do you think the loan sounds good if this is my strategy? Can you think of any other options for me?

@Yoni Ramras   If you purchased the home for $150k only 2 months ago, the appraisal will come back at around $150k.  Or did you do a lot of work to it?  My experience has been you have to wait 6-12 months before you can get a new appraisal that won't use your purchase price.  Again, unless you've done something to force the appreciation.

I am not sure what your long term plans are, but this does not seem like a good long term buy and hold property.  Even if you are able to cash out on it, you really won't be making any money, especially when you factor in vacancy and repairs.

If you are set on this being an investment property and you are sure it is worth $210k, your best bet would be to unload it, take the cash and move on to something else that would be a better rental.

Some folks have missed the key piece that it's in an LLC. I think the closing costs may be a tad too high, but for loaning to an LLC, the best you'll get is 20-year amm in most cases. I would consider this a decent (not great) loan for an LLC.

I think you should potentially shop it around a little, but it's not bad what he's offering.  One last thing.  If you're goal is to pay it off quickly, go with that.  If you're goal is to get as much cash flow as possible up front, shop it around a little and find a 20-year amm somewhere.

Originally posted by @Justin B. :

Some folks have missed the key piece that it's in an LLC. I think the closing costs may be a tad too high, but for loaning to an LLC, the best you'll get is 20-year amm in most cases. I would consider this a decent (not great) loan for an LLC.

I think you should potentially shop it around a little, but it's not bad what he's offering.  One last thing.  If you're goal is to pay it off quickly, go with that.  If you're goal is to get as much cash flow as possible up front, shop it around a little and find a 20-year amm somewhere.

Thanks For the advice. I definitely think you are right and some aren't noticing that it's an LLC.

I have a question about that. Don't most investors have their properties in an LLC? I would think that most people here are Real Estate Investors and that everybody would be having the same problem as I am.

I would also think that there would be an across the board solution that Real Estate Investors do to refinance their deals for the BRRR strategy.

Just really weird that I’m getting so many different answers and nobody is really sure how to refinance the deal. 

Well, you can either hold the property in an entity (LLC), or as an individual/trust. That's pretty much it (although I'm sure someone will chime in with some weird way they're doing it :)).

LLC's don't get the same term individuals do. In MOST cases (again, MOST), entity's get about ~1% worse interest, 20-year amm at most, and a 5-7 year call. You also still have to do a personal guaranty, again in most cases.

As to whether or not you hold the property as an individual or in an entity, there are probably thousands of posts already with wildly differing viewpoints.  Some of it is opinion and others based on your situation.  There is no default answer, unfortunately.  Your best option is to explain your situation in great detail and even then, your responses will be split as to which way you should go.

One thing I will mention is that once you become a powerhouse with the number of units you have, you may have more leverage over the banks.  Even at 42 units now, I don't really see that benefit.  Maybe I can get a quarter or half point better on the rate than I could when I had less than 10, but that would be the extent of it.

Originally posted by @Justin B. :

Well, you can either hold the property in an entity (LLC), or as an individual/trust. That's pretty much it (although I'm sure someone will chime in with some weird way they're doing it :)).

LLC's don't get the same term individuals do. In MOST cases (again, MOST), entity's get about ~1% worse interest, 20-year amm at most, and a 5-7 year call. You also still have to do a personal guaranty, again in most cases.

As to whether or not you hold the property as an individual or in an entity, there are probably thousands of posts already with wildly differing viewpoints.  Some of it is opinion and others based on your situation.  There is no default answer, unfortunately.  Your best option is to explain your situation in great detail and even then, your responses will be split as to which way you should go.

One thing I will mention is that once you become a powerhouse with the number of units you have, you may have more leverage over the banks.  Even at 42 units now, I don't really see that benefit.  Maybe I can get a quarter or half point better on the rate than I could when I had less than 10, but that would be the extent of it.

Thanks! Really helpful. Are your 42 units all in separate LLC's? How do you have it set up? What was your strategy from the beginning? Where do you go for financing?

I have them split between 2 LLC's. With SFR's their is no reason to have each house be it's own LLC (athough some folks on here will disagree with me). I use a local bank for financing. I'd stay away from regional or national banks to be honest.

Originally posted by @Justin B. :

I have them split between 2 LLC's. With SFR's their is no reason to have each house be it's own LLC (athough some folks on here will disagree with me). I use a local bank for financing. I'd stay away from regional or national banks to be honest.

I’m starting to understand to stay away from the regional/national banks. Thanks for the tip. 

I think I’m going to go around to the local banks and see what they can offer. It’s the only route I haven’t gone yet. 

All the literature I've read in my journey said to have a separate LLC for each SFR for liability reasons and also for tax reasons. Aren't you worried about the liability having them all in the same LLC?

Yep, like I said, many different views. Mine is you don't need an LLC for every house. I do have a limit of ownership ($ of property owned) before I create a new LLC to help limit the liability somewhat. I do the bookkeeping and taxes for 2 LLC's now and I could not even imagine doing it for 20 of them.

If I was just buying a house or 2, I probably wouldn't even use an LLC (not worth getting into why here).

You need to do more shopping. I once called 20+ lenders to finally get the right loan for my LLC. It was a 25 year amort 3 year ballon @ 5.5%

@Yoni Ramras I might be the contrary opinion here, but this looks good to me. The shorter loan term is killing your cash flow, BUT you will have the property paid off in 15 years. Then your cash flow is great or you can refinance and pull all the cash out for another deal.

Here is what else I like:

You purchased it for $150,000 and loan is $138,700 so you only have $11,300 into the property which is only 7.5% down payment - I am doing 25% down with traditional lenders! You are getting a gross cash on cash return of almost 30% which is pretty good. The money you save on a down payment can be put aside for any CAPEX or repairs. For example, you can hold $7000 in an emergency fund, that would cover most major things. No need to set aside CAPEX if you have a fund.

You are getting instant equity of $60K with it being worth $210,000. That is nice protection in case you need to sell it down the road. You can walk away after all selling fees with a nice profit, but I would not sell it right now. Why pay taxes on short term gains? You can hold and even fold it into a larger property later through and exchange, thus delaying taxes.

I would do this deal in a heart beat assuming the location of the property is good.

Originally posted by @Yoni Ramras :
 Don’t most investors have their properties in an LLC? I would think that most people here are Real Estate Investors and that everybody would be having the same problem as I am. 

 Not little houses with debt or that will be needing a loan, no.  I put commercial property in LLCs and houses with no debt and no plans for new debt.  

You are seeing why.  In the name of 'asset protection' you can't get a good loan on it to save your life.  The lawyers always forget to mention that little aspect.

Originally posted by @Joe Splitrock :

@Yoni Ramras I might be the contrary opinion here, but this looks good to me. The shorter loan term is killing your cash flow, BUT you will have the property paid off in 15 years. Then your cash flow is great or you can refinance and pull all the cash out for another deal.

Here is what else I like:

You purchased it for $150,000 and loan is $138,700 so you only have $11,300 into the property which is only 7.5% down payment - I am doing 25% down with traditional lenders! You are getting a gross cash on cash return of almost 30% which is pretty good. The money you save on a down payment can be put aside for any CAPEX or repairs. For example, you can hold $7000 in an emergency fund, that would cover most major things. No need to set aside CAPEX if you have a fund.

You are getting instant equity of $60K with it being worth $210,000. That is nice protection in case you need to sell it down the road. You can walk away after all selling fees with a nice profit, but I would not sell it right now. Why pay taxes on short term gains? You can hold and even fold it into a larger property later through and exchange, thus delaying taxes.

I would do this deal in a heart beat assuming the location of the property is good.

 Im with Joe here. Of course cash flow is going to be inhibited with the shorter term loan.  It's all a trade off though.  Less cash flow, but you are paying that thing off so quickly, and building much more equity with each payment.

So many people think that their strategy for investing is the best and only one.  When in reality we all have different goals and needs.  If someone is trying to replace their income, then cash flow is much more important.  But if someone is trying to increase their equity quicker, then maybe a shorter loan is going to be better...and this carries over to what assets people want to buy.  Buying in NYC, DC or San Fran might not be great for a guy making $40k a year and is just trying to increase his monthly income, so a mid western market might be better.  But those markets might not be for someone making $300k a year, because getting an extra $300 a month is not going to move the needle for them.

Russell Brazil, Real Estate Agent in Maryland (#648402), Virginia (#0225219736), District of Columbia (#SP98375353), and Massachusetts (#9​0​5​2​3​4​6)
(301) 893-4635

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