Rental Property Investor · Seattle, WA · Member since 2018 · 25 posts · 7 votes
My business partner and I have begun to seek out larger sums of capital to invest with. We have recently started looking at the possibility of (small) business loans to help fund our down-payments. We have been told this can technically work as long as the money is “seasoned” in our accounts. Is there a drawback to this?
A couple of the issues we have read about online is that a business loan will typically require operating experience of 1-3 years along with the ability to show a history of cashflow and means to cover payments.
Since we have only just started investing together, our LLC only owns one property and we have only a couple months of operating experience.
Are there alternative business loans that we may qualify for with less experience?
Am I able to bring my property that has cash-flowed for over a year now underneath our former LLC to help us with the operating experience and revenues we need to qualify?
Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes
7y
A fast way to start business lines of credit for a start-up business is through business credit cards. The credit lines are started with your personal credit but, credit reporting is only to the business. Thus, nothing is reflected on your personal credit report. You can use cash advanced from these business lines in any manner you wish with no hits on your personal credit
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@James Nosack, starting at square one, what's your strategy here? Are you planning to BRRRR or flip these properties? If so, short-term financing through debt might make sense.
If not, I would suggest that you reconsider your approach. What you're basically planning to do is finance 100% of the properties, that is very risky and leaves little room for error. That's the drawback. You need to find such smoking deals so they can support all that debt.
Let us know what kind of deals you're trying to do and the community can offer some suggestions.
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
@James Nosack As Jaysen mentioned above, banks generally don't like the downpayment funds to be borrowed. If the funds are seasoned, it might not come up. But the business credit would probably use your personal credit to start, so there may be a bunch of inquiries that could raise some red flags. My 2 cents...
Appreciate the feedback. We plan to BRRRR with most properties and flip if it makes sense in between. I here your point of being mindful to not put ourselves in a situation where we are over-leveraged - but here is our thinking, let me know your thoughts.
Where we felt this may be advantageous are deals that cash-flow enough where we are able to pay off both loans (business loan used as down payment & property loan), all expenses, and fund our emergency/safety buckets (Capex, vacancy, maintenance, ect.)
We are both young and are finding it difficult to argue with acquiring a property without money out of pocket in this way if the rental income can support both loans without applying too much stress to our bottom line.
From what we have seen, taking on BOTH a business loan for the down payment + a conventional mortgage or commercial loan would result in equal or lower (interest) payments then any hard money that we have come across.
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y
@James Nosack, I think your approach makes sense and is a good one. Just make sure to be diligent and conservative with your numbers. As long as your ARV and reno estimates are solid, I think you're on the right path.
When you have a potential deal, post your analysis and the community will be happy to double-check and poke holes.
Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes
7y
A fast way to start business lines of credit for a start-up business is through business credit cards. The credit lines are started with your personal credit but, credit reporting is only to the business. Thus, nothing is reflected on your personal credit report. You can use cash advanced from these business lines in any manner you wish with no hits on your personal credit
Appreciate the feedback. We plan to BRRRR with most properties and flip if it makes sense in between. I here your point of being mindful to not put ourselves in a situation where we are over-leveraged - but here is our thinking, let me know your thoughts.
Where we felt this may be advantageous are deals that cash-flow enough where we are able to pay off both loans (business loan used as down payment & property loan), all expenses, and fund our emergency/safety buckets (Capex, vacancy, maintenance, ect.)
We are both young and are finding it difficult to argue with acquiring a property without money out of pocket in this way if the rental income can support both loans without applying too much stress to our bottom line.
From what we have seen, taking on BOTH a business loan for the down payment + a conventional mortgage or commercial loan would result in equal or lower (interest) payments then any hard money that we have come across.
Thanks
Speaking on a conventional loan generally you have to be the 100% owner or pre-dominant owner to use those funds to qualify and even when you're allowed to the underwriter will want to see you have 6 months of expense reserves based on the last year of expenses. If you're newer like you mentioned you wouldnt be able to use self employment or partnership income anyway (min 1-2 years worth of tax returns of financials needed).
Local commercial lenders will want you to be able to debt service both loans the borrowed down payment + the subject property's commercial loan as well. Most will probably not lend more than 75-80% for the equity (down payment) or for the subject property (the main mortgage note on the property you're buying).
If you're debt coverage is not good enough to meet 1.25X or more they may lower the loan to value or LTV down even further to 60-70% LTV where by you'll need 30-40% down payment to make sure it cashflows properly.
Property Manager · Baton Rouge, LA · Member since 2014 · 2k+ posts · 195 votes
7y
Sarah, there are service providers who have relationships with major banks around the country that can start your business credit with high credit line business credit cards which are not connected to your personal credit line. You need good personal credit to get started (700 + credit score) but, little more then a LLC, corporation, partnership or other business entity. Some even do business start ups.
Rental Property Investor · Seattle, WA · Member since 2018 · 25 posts · 7 votes
7y
@Tom S. To this point I have only confirmed that it is technically possible with the lender I work with. It is something I will consider moving forward. In order to use the (personal loan) funds they must season for 2+ months in an account, so it is something I would have to begin with the understanding I have to sit on it before finding a deal down the road.
As far as justifying this strategy - To me, this sort of financing would be an opportunity to walk into a place with rehab and equity potential at 0 money down. I would not consider this for any sort of deal that I was not adding value to because I would not consider banking on appreciation alone to increase my equity and offset how leveraged I would be.
I also would not use this personal loan strategy without setting aside a portion of the personal loan money to be used to cover payments on itself as a safety factor. Say I borrowed $30k in a personal loan over 84 months - set aside $5k and used $25k (after seasoning) for the down payment. Sort of like budgeting construction interest into your construction budget.
Assuming the property is well rented and turns a profit even after factors (Capex, vacancy, maintenance, ect) the tenants would be paying down both my personal loan & bank loan. If I added equity to the property from a rehab, on the tail end I walked into a deal that turns a profit, for zero down.
I currently am buying two properties with my own cash for down payments - both are being renovated. After running numbers on both of these, I believe my strategy would have worked well had I tried to implement it for these deals. One is a duplex I will convert to a fourplex, the other is a condo renovation that I purchased at a great price. Both will have great cashflow and will have enormous added equity.
@Jaysen Medhurst I will be sure to post deal specifics of both, my current properties that I believe this would have worked for - and also any future properties that I implement this strategy on. (Assuming it is not shot down before I get to that point for unforeseen reasons).
Rental Property Investor · Seattle, WA · Member since 2018 · 25 posts · 7 votes
7y
@Hip Rodriguez Yes in essence this would be 100% financing. The theory is that if the funds drawn via personal loan have been seasoned in your bank account for 2+ months, then the lender may view the funds as your own.
I absolutely would not go this route without clarifying and confirming with any particular lender. Also, yes - I do think that it could potentially be difficult to find lenders open to this. I am not interested in getting my hand caught in the cookie jar. Just thinking outside of the box, while remaining in-legal bounds!