LOC, lines of credit, purchasing property,

20 Replies

I am working with a company that is getting LOC on my behalf. I want to use the LOC to purchase my first investment property to flip. Anyone have experience with this process? I know that this process is going to ruin my credit score in the short run and I am worried about needing to go to a hard money lender later.

@Shayna Queen

LOC doesn't ruin your credit. But it may prevent you from borrowing more due to the increased debt to equity ratio.

It's really simple. You get a loc, use the cash to buy property. The LOC is based on your ability to pay, backed by the asset. So, once you tap it out, you will be limited to borrow more if you need extra cash.

@Christopher Phillips thank you for your response. I thought it might be a good idea to work with a hard money lender and use the LOC for the down payment they require and to front the rehab. I’ve been looking for any strategy that may work for a new investor that has little captial.

@Shayna Queen

The hard money folks will require that you put up some of your own money. they don't check your credit. What they will lend you will be based on the deal financials and their relationship with you. So, you can tap some of the LOC for the cash you need on your end and the hard money for the rest. Then you'll have the LOC for any potential overruns. Just plan things out so that you aren't extending yourself.

@Shayna Queen Christopher's experience is much different than mine. Every hard money lender I've used has pulled my credit, because I am the Guarantor of the loan. And a maxed line of credit will absolutely lower your credit score. My credit score fluctuates over 100 points depending on how much credit I am utilizing at the time. Using a large LOC will be ok for flipping, but be careful if you are planning to refinance out of it. Because the LOC is not backed by an asset, it will affect your DTI and make it more difficult to get a mortgage.
@Jason D. thank you! Your experience is what I thought my experience would be like. But as I mentioned before I have little capital to work with. For my first flip I am trying to get my foot in the door. And hoping I can find a lender willing to work with me.
@Jason D. awesome thank you! I am definitely looking to get rid of the property a quickly as possible. With HML will I need to liquidate and have money in my business account or will they accepted the LOC and cash? It probably depends on the HML right?
@Shayna Queen depends on the lender. My first HML I took out a personal loan for the down payment, and that was acceptable for them. The second one (which I'm in the process of now) wanted cash in the bank for 2 months, so a line of credit wouldn't work.
@Jason D. yea I thought about a personal loan for the down payment as well. I will need to find a lender that will accept the money however I have it. Thank you! Hopefully I will have a success story to share soon!

@Shayna Queen I would urge you to be very, very cautious about getting into a flip using hard money and a LOC. Flipping can be a very cash intensive sport, and it is easy as a newbie to go over budget. I did a flip with a fellow investor last year in Berwyn, which is a market I am very active in as a real estate agent and buy and hold investor. Neither of us had flipped before, but we both owned multiple properties and had a lot of good sub contractors we had used. We ended up taking 14 months in total to complete the project instead of 6 months like we projected. We also ran over our $75,000 budget to the tune of $126,000 for rehab!

We used cash to complete our flip, and after 14 months of work GC'ing the project and listing the home for sale as the listing agent, I made a whopping $2,270... If we had used hard money we would have lost thousands. 

@John Warren your point is a very good one, and very common, but I'd counter that by saying that if you had used a hard money lender, their analysis of your deal may have led you to realize it wasnt a good deal to begin with. I use hard my hard money lenders as part of my evaluation team. Obviously, they dont want to lose money, and wont lend on a bad deal, so I do my analysis, get my numbers, and then compare it to theirs after they do their analysis. If our number are off, we'll discuss it and sometimes their right, and the deal isnt as good as I thought. There's always risk involved, and unforeseen circumstances, but using your lender as a resource can help mitigate that risk.

@Jason D. I am glad you have had good experiences with hard money lenders. Most of the lenders I spoke to early on in my investing career wanted me to have either fairly high liquidity or substantial net worth. I never found much value in them and have done better with traditional bank financing. Like I said earlier, using a hard money loan at 12% interest with several points is a risky endeavor. If the borrower is a seasoned house flipper, this may be an excellent risk to take. I was just sharing my personal experience, and I am glad I haven't need a hard money lender thus far. 

@Shayna Queen I just used a LOC for my first flip. Well I thought I was going to flip it. I got to the party late going passed my budgeted time frame and ended up listing in late July. Two months later when my builders risk policy was on the verge of expiring I knew I could not afford to hold it much longer. I was about to start incurring $500 a month addiontal for a vacant dwelling policy. I decided to lease it instead and ended up hitting a home run with a 3 year lease. I took the lease back to my bank and they converted me into a permanent loan. Now I have a house with cash flow for the next three years and an open line of credit to go find me another one. I don’t think there is anything wrong with using a line of credit as long as you have a couple of escape plans. With flips you are obviously adding value so I was able to covert the loan with no money in the game just bc of the value I added to the property which translated to being my 15% down payment. I bought the house at $136k, had $65k in rehab and holding costs and it appraised for $245k. I was paying almost $800 a month in interest on the LOC. Holding costs are serious and as a first time investor (I am a real estate agent with a contractor as a father so I had an abundance of knowledge and had spreadsheets and thought I overly prepared) I don’t think you ever get it exactly right on the first time. Point being, use money anyway you can but just make sure you have various exit strategies. That’s my two cents anyways. Hope it helps!
@Jason D. I haven’t heard many people say that they use them as part of their team/analysis. That’s awesome and I’ve always had that in mind if I was going to flip. What is the charge for them to look over a deal usually?
@Russell Lavoie they look at it as part of their underwriting. They wont lend on a losing deal so they will go over the scope of work, do an appraisal of as-is and after repair value, etc... I use that to my advantage.

@Shayna Queen I regularly advocate HML with an LOC to new borrowers and get them setup with both the large LOC ($150k+) and HML BUT you must be super smart about this. Your strategy is not for the faint hearted and can lead to a painful experience very quickly. Here are some tips:

1. Have secondary exit strategies lined up before taking on any debt, just like @Alicia Yoder advocated. That means if you are flipping, make sure that you use a lender that can also refi the property in a pinch...you have to check on the rental refinance loan terms to make sure your DSCR is manageable for the lender; do the math as if you have already taken out the HML and LOC. Some sophisticated lenders are now using the debt service ratio instead of DSCR after 2008. Look those up before and do the math before getting involved. PS. Some lenders will want to see bank statements showing skin in the game. You will have to properly time out receiving money in your bank with how your LOC lender reports to credit bureaus. Otherwise, you may have money in the bank but too high a DTI for your lender.

2. Make sure the LOC you are receiving is large enough for your future flips. If you are just starting to climb the real estate investment ladder, the tendency is to go after the smaller deals first with hopes of building up confidence and your bankroll for your third or fourth project...so keep that third or fourth project in mind right now and get a larger than needed LOC.

3. Discipline yourself on the rehab. Go after a property that has minimal rehab. That will help you to avoid some of the pitfalls mentioned above. Plus lenders love to see these projects and will be more willing to fund. Here comes the discipline part...these projects are hard to find. Just keep looking and be disciplined. Especially with a large LOC, you will be tempted to go after a project with a large or even normal rehab amount...but stay disciplined.