Me and my friend are 2 professionals from NYC looking to fund our first deal. We have money for the down payment and reserve, but we're wondering what type of loans we could get without starting an LLC. Would it just be private money? Any way to get conventional loans? I would especially like to hear from any portfolio lenders out there that would be willing to fund out of state.
Thanks in advance!!
@Alfred Dimartini any time someone asks "what loan should I choose" I would defer with the answer of "what loan are you prequalified for?" So theoretically, if you and your partner could be prequalified for a conventional loan, then you could certainly get a loan in both of your names. But if you cannot be prequalified for a conventional style loan then you would need to try a different loan type....which might require you to have an LLC. Likewise, the TYPE of deal you are doing will also determine the loan type. I know this is the BRRRR forum...but sometimes people post about different things here - so if you are BRRRR'ing a 1-4 unit property, then those are still considered "residential" properties. Generally speaking there are 2 main loan types for investors: "Conventional" and "Portfolio"
Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.
Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.
Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t’ have access to ALL portfolio loans out there.
*WHEW* I know that's a lot but feel free to ask anything additional. Thanks!
If you are looking to invest out of state and looking to connect with portfolio lenders, you should mention which market you are looking to invest in.
Portfolio lenders normally only lend in specific markets.
Ex. If you plan to invest in Florida, a portfolio lender who lends in FL would be able to help you but a Portfolio lender who lends in Ohio would not be able to help you.
Thanks @Andrew Postell for that lengthy and detailed reply. I'm fairly certain we could qualify for a conventional loan as he is a city worker halfway vested in his pension and I am an executive chef and also a small business owner. However our plan is to BRRRR out of state and we're hoping to roll the rehab cost into the loan which I believe can only be done when "owner occupied" through a conventional loan. We are also hoping to find a lender with a shorter seasoning period than 6 months. Any further advice you have would be appreciated.
@Alfred Dimartini that helps me know how to advise you for sure. So a few pointers here:
- Fannie Mae does have a renovation loan that you can roll in renovation costs. Not every lender offers it though. Likewise, it's kind of designed for properties that you already own or that are on the MLS. So not ideal for the BRRRR strategy but still has some advantages. But you can certainly purchase a single family home, use 15% down, and be in a 30 year fixed rate. No need to refinance out of this loan.
- BRRRR'ing - in general, most of us have to buy properties "off market" to really get the BRRRR method to work. What I mean is to find a property that will allow us to have "built in equity" we need to find a home that will be in a very challenged state and allow us to buy it at a deep discount. A home on the MLS means there's a listing agent usually driving the price up as high as possible. I don't to discourage you from using the Fannie loan mentioned above but you won't have as much equity in those deals as you may buying off market...and that might be totally fine!
- Seasoning - Now, seasoning gets complicated in a hurry. If you buy with cash....there is no seasoning with Fannie/Freddie. When you just need to refinance the existing loan (meaning not doing a cash out loan) then there is ALSO no seasoning with Fannie/Freddie...BUT (and this is a big one) there COULD BE seasoning from the lender. In the lending world banks/lenders are allowed to put more rules OVER the already existing Fannie/Freddie rules. These are called OVERLAYS. It might sound crazy that a bank would make it even harder to get a loan...but investment properties foreclose at a higher rate than primary homes...so maybe a bank wants to reduce their exposure to investment properties. Larger, national, publicly traded banks usually have the most overlays. And that's why we always talk about using a smaller, local lender....less, and sometimes NO overlays. So can you buy with a Hard Money loan and refinance right away? - Yes, you can 100% do this with no waiting. So how do you know which lenders have flexible rules? I've put together a list of questions for you to ask when you are interviewing lenders. Here's the list:
Questions for Lenders
- When do you start using rental income to help me qualify? (the answer needs to be immediately)
- When do you start using “After Repair Value” on my property?
- How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
- What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
- How many loans can I have with you?
- Can I change title to my LLC?
- Do you sell your mortgages?
- What is your loan minimum?
- Can you explain to me what your reserve requirements are?
*WHEW* Another round of a lot of info. I hope this wasn't too much and I realize that this needs some time to sink in but feel free to keep asking. Certainly willing to help in any way. Thanks!