Is anyone trying this type of financing

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Is anyone trying this type of financing

Devin Haertling
Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
I have been on BP for a little while now and I have not come across anyone financing the way I have or maybe I just haven't recognized it. To start I bought my current home I live in for 110k. I'm a DIYer and fixed it up myself for 25k. It appraised at 160k. At this point I was not interested in rental property. Fast-forward about two years and a house on my street became available. I contacted my lender for my loan on my current residence. Mind you this is a private small bank. I asked him what kind of financing we could do on this house. He told me I could bridge the equity on my personal residence to use as a down payment on rental property. I was hesitant at first but we jumped in. Since then we have bought 6 SFR ranging in price from 40k-55k over three years. Each deal is 4.5% amortized over 20 years with a balloon payment due at 5 years that will roll over into a new 5 year rate and so on until it's paid off. Since we started that rate has stayed steady at 4.5%. The bank has also let me roll the closing costs into the loan as well so I have bought 6 houses with only about 500-1000 out of pocket for simple repairs and the such. My 6 houses currently cash flow 3900 per month. I self manage and I am in a town of 3200 people. The rental market is crazy here for such a small town. My vacancy rate over 3 years is almost 0. I have only had turnover in 2 of the 6 houses. I think this is because most of the other landlords don't fix things when they break and are just bad land lords. It seems with every house I have I get 2-3 qualified applicants within 2-3 days. My banker says he can continue to do these deals and even expand into 4 unit multi families as long as the equity is there. Is anyone else out there doing this kind of financing? I know there are risks with this but I want feedback if I should continue to pursue this method or is there something I'm missing. I would love any comments you all would like to leave.
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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y

Whenever you are working non-conforming loans (ie conforming to freddie/fannie buyback rules) you can just about do anything; if you find local banks willing to hold the notes in-house you have a whole lot of flexibility. That is a good rate for what you are doing so the bank must have a lot of confidence in what you've done so far, and you must have good financials. 

Every private bank (and I'd really say every bank, but anyway) exists for one reason: to make money. Banks make money by loaning money. Real estate is a good game for banks because it's backed by (theoretically) hard assets that are unlikely to become worthless, unlike a car, business venture, etc. Small banks that are well-capitalized and uninterested in running lists of mortgages in and out can do this kind of thing if they are so inclined, so it really looks like you've found a nice slot! 

Hint: Keep the name of the bank to yourself :)  It's like sharing your fishing hole. 

Podcast Guest on Show #243
Skyline Properties
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  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y

    @Devin Haertling Congratulations and thanks for sharing.

    After reading your post this seems akin to just pulling out equity from your home and then paying that back monthly. Or, not this example, but a HELOC that allows you to tap into that equity in a "charge-card" type manner.

    How are you paying this back?

    "He told me I could bridge the equity on my personal residence to use as a down payment on rental property." 

    Very good business to be able to roll the closing in and only pay out minimum to garner the cash flow.

    Daria

    1Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Daria B. I asked my banker that exact question and he stated it was not a HELOC. Each property has its own mortgage and I pay back each property with monthly payments. I asked him how to explain it to others and he stated " we are bridging equity". So according to him the more properties I buy and start to pay off the more purchasing power I have. One property I bought appraised at 20k more than purchase so he told me I could immediately buy another one.
    4Reply
  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y

    @Devin Haertling Are you pulling equity out of your house that is being paid back?I understand it's not a HELOC.

    1Reply
  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    9y

    We've done something similar.  3 1/2 years ago we used equity in our personal residence for a down payment on a small apartment building.  Using cash flow from the building we renovated a significant portion of it.  Last fall we refinanced it and it appraised about $150k above what we bought it for, plus we'd paid down the mortgage some in that time.  At that point, our personal residence was released by the bank since we had more than 25% equity in the apartment.

    We bought a SFR a couple weeks ago and the bank used equity in the apartment against the down payment on the house. They didn't actually put a second mortgage against the apartment, they loaned us 100% of the purchase price for the SFR (which was below appraisal) and just put a lien against the apartment until we pay down the house enough to get to 20% equity. We have enough equity in the apartment to do this several more times if we can find deals (I too am investing in a relatively small community, so deals are fewer and further between).

    Sounds very similar to what you're doing.  We have a very high rental demand in our market as well, so this strategy is good for getting into properties sooner than you might otherwise and get those tenants paying your mortgage down.  My plan is to never make a down payment on a property again and just do this to acquire more properties.

    3Reply
  • Steven Bishop
    Rental Property Investor · Chesterfield, VA · Member since 2015 · 28 posts · 9 votes
    9y

    Yes, I'm doing something similar as well with a SFR I'm putting in a bid on. The bank takes a second deed of trust against property #1 to "cover" your downpayment and then loans you the full amount (or close to it) for the purchase of property #2. In theory, as long as their is sufficient equity and cash flow, you could continue to daisy-chain the properties this way.

    2Reply
  • Kirk Jess
    Phoenix, AZ · Member since 2017 · 6 posts · 4 votes
    9y

    Thank you for sharing that information. I would have assumed only a HELOC would be able to do that. Very interesting.

    0Reply
  • Wendell Early
    Wholesaler · Lawrenceville, GA · Member since 2016 · 6 posts · 1 vote
    9y

    "Daisy-chain"...would that be a way to refer to this type of financing or does it actually have a trade name?

    0Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    My lender only called it bridging financing. He did not give it a specific name.
    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    Whenever you are working non-conforming loans (ie conforming to freddie/fannie buyback rules) you can just about do anything; if you find local banks willing to hold the notes in-house you have a whole lot of flexibility. That is a good rate for what you are doing so the bank must have a lot of confidence in what you've done so far, and you must have good financials. 

    Every private bank (and I'd really say every bank, but anyway) exists for one reason: to make money. Banks make money by loaning money. Real estate is a good game for banks because it's backed by (theoretically) hard assets that are unlikely to become worthless, unlike a car, business venture, etc. Small banks that are well-capitalized and uninterested in running lists of mortgages in and out can do this kind of thing if they are so inclined, so it really looks like you've found a nice slot! 

    Hint: Keep the name of the bank to yourself :)  It's like sharing your fishing hole. 

    Podcast Guest on Show #243
    Skyline Properties
    View Page
    7Reply
  • Wendell Early
    Wholesaler · Lawrenceville, GA · Member since 2016 · 6 posts · 1 vote
    9y

    Okayyy....(been doing some research) this is not called "Daisy Chain" financing...that means a whole lot of other things...can this type of financing be referred to in some way?

    0Reply
  • Wendell Early
    Wholesaler · Lawrenceville, GA · Member since 2016 · 6 posts · 1 vote
    9y

    Bridging financing.  Thanks.

    1Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Or bridging equity. This is an in house loan and it's awesome when you get to this point because this is what I have to do to get an approval letter I shoot an email to my banker that looks like this. Hey Kevin I found a house for 55k that I'm going to put an offer on. Thanks He follows that up with an email back with an attached letter of approved funds. We do have to have an updated appraisal on our current home if it hasn't been done in the last 12-18 months. We sign all the loan papers at closing. He usually asks if we need any extra for repairs and then we roll all the closing costs into the loan. Typically closing costs are 400 and appraisals are 350. Typically we are all in at 1000-1500 at closing.
    1Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Daria B. We are not paying back equity to our own home. Each house has its own mortgage but if we would default on a payment on a rental they could come after our primary residence.
    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    For what it's worth, commercial banks do this kind of lending all the time, locally, across the country. The key, as you have found out, is the performance of the asset. And once you get a reputation of doing 'good deals', assuming you keep the banking relationship 'clean' and productive, the banks will extend you the benefit of the doubt. This whole concept is called, in laymen's terms, the 'banking relationship'. @JD Martin nailed it. Good post.

    Keep in mind one thing. If things go south, and your portfolio takes a hit... then your first priority (in the bank's eyes) is the bank. This kind of thing (assets becoming impaired) happened in 2008 time frame, and borrowers started to exercise 'strategic default'. That's a relationship killer;)  So remember that debt is a double edged sword. Treat it wisely.

    7Reply
  • Stephen E.
    Rental Property Investor · Havelock, NC · Member since 2017 · 74 posts · 19 votes
    9y

    I think this is an amazing concept and should be shared.  I am trying to think of this in a different way to see through the different areas that this covers, aka break it down from a fancy word into something simple.

    Let me understand this:

    Bridging Financing:

    Description:

    It is a equity based financing that use your primary residence to fund down payment and repair of a SFR or MFR. Each property holds an individual lien and second lien based upon the equity needed to fund the loan. When you increase the equity by 20% more than the original lien or second lien. The second lien is consider 'paid in full'.

    It is not a line of credit but a loan.

    Benefits:

    • Little to 'no' money down strategy
    • Uses equity to provide for potential growth
    • Increased ROI because limited out of pocket costs

    Limitations:

    • Equity required to use this type of loan structure
    • Requires a flexible lender

    Risks:

    Potential to Lose all properties that have 'bridged' equity between them.<?>

    Questions:

    Do you recycle the equity for each residence or only have a one residence carry equity of the lien burden? What issue or risks are associated with this type of loan structure and what type of planning should be done if you hit a catastrophe?  What actions does the lender have if there is a greater than 30% loss in equity to recover cost?

    I will update this post as I gather clearer information.

    2Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    9y

    This is an awesome post and I definitely think it needs more attention.

    2Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    9y

    @Stephen E. that would not be my description, your "...equity based financing that use your primary residence to fund down payment and repair of a SFR or MFR ..." since 1) bridge lines aren't necessarily tied to a primary residence and 2) the funds can be used for other business purposes.

    In my posts, I use a term "collateralized line" that does, effectively, the same thing. Throw some properties into a 'pool' and use the equity in the pool for draws for other deals (buying other property, business ventures, etc.) In the end, each tranche (pool of property) stands on its own, with a deed of trust (or mortgage depending on the state), payment terms/schedule (e.g. 5 yr call, 20 yr amortization), maybe a release clause or other ability to substitute collateral into and out of the pool.

    Some banks call their bridged financing as less than 1 year (short term loan). The bank I use doesn't call their loans "bridge" loans even if they are used that way. Hence I call it what it is. A collateralized line. To differentiate, it doesn't operate like a builder's line with draws and releases, with terms generally short term (less than a year) in nature.

    Commercial lenders, too, tend to have a slightly higher rate and terms not as good as federally subsidized loans that you get from GSEs, like Fannie Mae.

    Hope that helps.

    1Reply
  • Jonathan Johnson
    Rental Property Investor · Charleston, WV · Member since 2013 · 262 posts · 109 votes
    9y

    This post is awesome. I'm going to look into this.

    1Reply
  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y

    @Devin Haertling 

    I think I got it. With all the other contributors, thanks, and @Steven Bishop explanation, you are using the equity in the acquiring property. With this, does your primary property have to be paid if the lender is taking a lien against the equity you are using for the down payment? Or, do they, or are willing to be in 2nd lien position if you have a 1st in place? That does sound like an awesome deal!

    0Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Daria B. My current residence that started it all has 90k due on the note and it appraised at 160k. The loan on my current residence and all the rentals are through the same lender and loan officer. They are a first lien holder against my residence.
    1Reply
  • Daria B.
    Rental Property Investor · Gainesville, FL · Member since 2015 · 1k+ posts · 432 votes
    9y
    Originally posted by @Devin Haertling:

    Daria B.
    My current residence that started it all has 90k due on the note and it appraised at 160k. The loan on my current residence and all the rentals are through the same lender and loan officer. They are a first lien holder against my residence.

     That is an awesome arrangement. You were fortunate - congrats and thanks for sharing this story. It is another structure that I can say I now know about and could present to my local bank.

    0Reply
  • Elijah F.
    Investor · Kaneohe, HI · Member since 2015 · 91 posts · 36 votes
    9y

    so when you bridge the equity from one residence to another, is the loan on the first property increased by the amount of the equity? is a second lien placed on the first property accounting for this equity bridge? i am aware of bridge loans and this sounds completely different.

    sounds like the lender is holding these loans in their portfolio which gives them leeway on how they construct these non-conforming loans. 

    good on you for making this creative financing work for you. 

    2Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Elijah Frost There is no increase on the loan that is being used for the equity. With each property there is another lien placed against the property.
    0Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    This is the exact email correspondence with my loan officer. Kevin, I have had several people and some other real estate investors ask how I have been able to buy the rentals without any money out of pocket. I tell them I am using the equity in my house but then they have further questions that I cannot answer. I end up telling them I dont know, I have a great banker and he makes things happen!! But really how would I explain to someone what kind of loan I am getting? Its not a HELOC and its not a refi, right? So how would I explain it to another investor? Thanks Devin Good Morning Devin, Thank you for the compliment. You can tell them that we bridge equity from other properties to buy the new ones. Also, you are buying them all on a deal and have some equity to start. If they have further questions I would be happy to discuss it with you or them. Thanks again, Kevin
    5Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    The ways I see myself getting burned on this situation is if for some reason the rental market dried up and I couldn't rent any of my units. But this could also happen with any other financing I could do. The real wild card is the interest rate it renews at after 5 years. So far that number has stayed steady at 4.5% since I started doing this. If my property or rental properties dropped In value I would lose my borrowing ability but my current rentals would still be cash flowing. So a downturn in the market would only affect my ability to buy more properties. I am also paying biweekly on all my properties so they will payoff in 17.6 years approx. I know this hurts my cash flow to a degree but my strategy is to buy and hold for the long term so it makes sense for me. Also the faster I pay down the current loans the faster I can acquire new properties. My goal is to get into multifamily within the next 10 years and hopefully have 20 doors within the next 5-10 years. I'm just taking it slow and steady.
    5Reply
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