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
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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. 

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  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Daria B. The risk in this is the unknown in 5 years. As stated in previous posts the interest rate will most likely go up and any defaults and my personal residence is on the line.
    1Reply
  • BJ LaVelle
    Investor · Minneapolis, MN · Member since 2017 · 13 posts · 2 votes
    9y

    we've had many clients do a bridge loan. sometimes the interest rates are higher than other forms of financing. They typically don't like to go more than 75%-80% LTV on the home you are using the equity in. Fairly common way of doing it so you can tie up a property fairly quickly. Believe everytime you do it you need to do an appraisal. Most lenders are open to this, but we have found that some don't like to do them. Smaller community/regional banks tend to do this more than the big banks.

    0Reply
  • Account Closed
    Investor · Scottsdale, AZ · Member since 2016 · 1k+ posts · 885 votes
    9y

    @Devin Haertling I haven't read through all of the posts but a couple of questions maybe you've already answered:

    If someone gets hurt on one of your properties and sues you for all that you have, are all of the properties, including your own house at risk? They seem to be tied together.

    What is your exit strategy?

    Since rates never go up ;-) Just look at the rates in the 1980's at 18% and real estate never goes down :-0 Just look at the 2008 fiasco, what is your plan when one or both of those happen?

    I'd meet with an attorney to find out what my risks and liabilities are.

    I'd meet with an umbrella coverage insurance rep to figure out how to minimize and cover the risk.

    I'd meet with a C.P.A. to figure what my tax consequences will be.

    I'd also meet with a commercial loan officer to see if you can break the investment properties away into their own LLC with new fixed rate financing for the long term.

    Seems you have a good Plan A for acquiring, now it is time to look at protecting you and you assets.

    0Reply
  • Steven W.
    Program Manager / Investor · Charlotte, NC · Member since 2016 · 77 posts · 39 votes
    9y

    I would be very interested in this financing option. I have a lot of "dead equity" in my properties and would like to be able to turn that into more cash flowing properties. Do you know if your bank will do financing in North Carolina? 

    Or if anybody knows of a similar bank or credit union that is local I will buy you dinner and a beer :)

    0Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    We currently do not have an LLC but that is something we are considering but really that discussion is outside the realm of this post. We do have liability coverage on each house for 1 million with an additional umbrella policy for another million No exit strategy. This is a long term hold plan until I guess forever. My uncle started buying rentals in our town 20 years ago. He still owns the same properties today. There have been cap ex expenditures sure but they are now paid off and he still has a vacancy rate close to 0. It might be an option for commercial financing in the future. Something I hadn't thought of. I do expect the rates to go up and I know it's possible it's over 6%. I have been thinking if that happens I will need to look into other options for financing. I touch base with my loan officer ever 6 months and so far the rate has stayed at 4.5%. I am making double payments on one property so it will pay off in 7 years so if rates go up I will have a property that I can payoff the remaining balance on and then use the rental income to cover the higher expense on my other properties. As mentioned in other posts the only risk if there is a market crash is if the bank will no longer renew my loan which is a major risk. Since my plan is a long term hold a loss in value of my current properties will only affect my ability to acquire new properties. The other caveat to this is that with the housing bubble pop of 2008-09 it really didn't affect home prices in our small town. On average we have about 1 foreclosure a year and that didn't change with the housing bubble pop. On the flip side of that there isn't much appreciation with any house you buy in our small town unless you do a full gut rehab. And there aren't many of those because the profit margins are still so thin. Most houses that get rehabbed in our town are those that are bought by the primary owner and then they live in them for the long term.
    0Reply
  • Stephen E.
    Rental Property Investor · Havelock, NC · Member since 2017 · 74 posts · 19 votes
    9y

    @Steven Bishop

    Thank you for you response.

    I think you named a little better on think of it as a collateral based loan with a secondary lien. The other half is sounds closer to a commercial style of loan than a residential. Would i be correct in assuming that?

    1Reply
  • Devin Haertling
    OP
    Investor · Nashville, IL · Member since 2016 · 79 posts · 51 votes
    9y
    Peter Bowen Great to hear your story. I am hoping as these properties pay off I will be able to take my personal property out of the equation as you have.
    0Reply
  • Tim Magsby
    Antioch, TN · Member since 2017 · 16 posts · 1 vote
    9y

    This sounds like an ingenious way to finance.  The only downside it seems is that if you should happen to default on a property (Heaven forbid!) the bank can come after the primary residence. Given the numbers that you are producing monthly plus the good tenant track record that seems like a slim chance of happening!  Great Job for you guys and thanks for sharing! 

    0Reply
  • Samir Montenegro
    Investor · Boca Raton, FL · Member since 2016 · 29 posts · 7 votes
    9y

    I have never thought about this financial move/strategy. Thanks @Devin Haertling for sharing such valuable information !!

    0Reply
  • Steven Bishop
    Rental Property Investor · Chesterfield, VA · Member since 2015 · 28 posts · 9 votes
    9y
    Stephen E. Yes that sounds right! My loans are commercial mortgages and in this case, the down payment on the new property is provided via a 2nd lien on the first property. This has been such a great discussion!
    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Daria B.  the risk is that the property is Too highly leveraged. Property 1 has a first mortgage on it. When it appreciates in the rising market you get another debt against it to purchase the next property. Property 1 now has nearly 100% financing. Property 2 has 75% financing. If the market falls both properties are underwater. The other posters said then the bank may not refinance their 5 year loans. Now you can't get a new loan and if rents fall too you couldn't make the payments if they did give you a loan. My area won't support it the houses are selling for too much to collect enough rent to pay that much of a debt. The op has found a niche market and it works for him. Kudos on that!  RR

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Devin Haertling your primary loan the one for 20 years at 4 1/2% with the arm after 5 years is a commercial loan already. My commercial loans are 5% amortized over 25 years but the rate increase comes at 10 years. The difference is mine don't have the bridge loan attached. At the end of 10 years I will "own" or have equity in a bigger portion of the house. (Less money to refi). That's because I started off with a 25% down payment and assuming I never borrowed any more against the equity. At least o think that's how it works. RR

    0Reply
  • Steven Bishop
    Rental Property Investor · Chesterfield, VA · Member since 2015 · 28 posts · 9 votes
    9y

    @Ralph R. You absolutely have to be careful doing this. Generally, the banks won't allow you to use more than 80% LTV of the property with the "excess" equity. When buying property #2, you do want also be careful and hopefully buy below market so that you still actually have equity in the new property. Of course, that's not always possible, so you could wind up having 100% LTV financing on the second property.

    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    9y

    @Steven Bishop that's what I know Steven. I try to manage equity in my properties just like anything else. It would have worked in my market 5 years ago maybe but today housing is raising faster than rents in my market. I can't make 100% financing work even if I wanted to. As I get older I am trying to manage my leverage to a lower percentage. Less COC return and less growth but safer investments. As you approach retirement you care less and less about whether it's your own money coming back to you and more about how much and how steady it comes in. I remember dad talking about bridge financing 40 years ago. I didn't understand it then nor did I understand it until today. I do know he didn't like it. What the OP has done is great tho. He has found a rental market that will support low down payment loans and a way to buy them. Now if he manages his risk he should do very well. RR

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Jennifer Jacobs:

    Jd Martin

    "Banks make money by loaning money.
    ...
    Hint: Keep the name of the bank to yourself :)  It's like sharing your fishing hole. "

    Do you feel that these two statements contradict one another?

    If I was the bank and someone brought me more clients I'd treat them the way Mr Drysdale treated Jed Clampett.

     Only if you own the bank! Otherwise, what value is there for me to share this information, short of the bank giving me a finder's fee? What this guy has found is not that common. All it takes is one or two knuckleheads to get similar treatment and screw it up for the bank management to pull the plug altogether. 

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  • Levi T.Pro Member
    Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Devin Haertling:

    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.

    It's common, your leaning on the equity from other properties.

    The further you get into it, you will learn about appraisal systems, and you can use that to your advantage. If you want to get your long game, your PP to appraisal value needs to be below the LTV the bank tells you. The equity is everything, this type of product does not work if your paying market prices, and banks just don't offer it to anyone, so don't cut the hand off that feeds you by posting to much about it. Not something I would be advertising.

    0Reply
  • Challenor Jack
    Investor · Morton Grove, IL · Member since 2014 · 26 posts · 14 votes
    9y

    This is a great post.  I will surely look into this. 

    0Reply
  • Aaron Lovett
    Realtor · Smyrna, TN 37167 · Member since 2013 · 248 posts · 147 votes
    9y

    Your banker explained it well:  You started with a deal, the equity in your home.  You have found good properties.  You are also highly leveraged - those balloon notes are no joke.  But, as @Chris Martin said, it's a double edged sword.  Make no mistake that it's the bank that decides whether or not to refinance the loan when that final payment comes due.  Don't get caught off guard when the market changes.  The bank will look out for its own interests first.

    2Reply
  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    9y

    I think they are investing in Devin as much as his properties. If any "knucklehead" came into the my bank asking for these terms, I can assure you they would tell them to pound sand.... I Don't see the harm in sharing..

    This becomes really powerful when using it for multifamily with the ability to value add.....

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

    @Devin Haertling  Hmm..interesting.  Can you give me Kevin's number?  earlyrei  which is located at gmail.

    0Reply
  • Wade Sikkink
    Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
    9y

    Keep in mind that for this to work, you have to find good deals.  Just like any other time in buying real estate.  So far, the deals we've found cash flow nicely at 100% financing.  If they don't, then you have more risk as some above have pointed out.

    When we refinanced the apartment building, the lean against our personal residence was released and we put that building on a straight 15 year fixed mortgage.  No refinance or rate risk.  Our personal residence was only "in the mix" for 3 years.  We will own that building outright in 14 years or less.

    The second property used a lean against the apartment to secure the down payment requirement for 2nd property, but the loan was for 100% of the purchase price.  The 2nd property is on a 20 year loan with adjustments at 5 year points.  No risk of the bank not rolling over the loan.  It's a straight 20 year loan with 5 year adjustments.

    We're looking at another 8 units right now to do this again on.  These units will cash flow nicely at 100% financing and we would structure the loan exactly as above.

    Our situation is nice in that we don't need to pull any cash out of the REI business at this point, so we are plowing all the cash flow into paying down the mortgages.

    3Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Wade Sikkink  your process is the right way to balance risk and leverage.. I just cringe when I see these younger investors so happy with 5 year call commercial notes.. they simply don't know what they don't know.

    and we have to remember the banks are not the master of their own domain.. in crunch time the feds can come in and tell them to cut their exposure to real estate.. banks must comply.. folks that don't really know how the system works blame the banks but its the fed regulators pulling the strings behind the scenes.

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  • Linda Jordon
    Investor · Creedmoor, NC · Member since 2015 · 4 posts · 0 votes
    9y

    Thanks for sharing.  I am looking at a deal right now on 10 rentals and was wondering how I would structure the financing.  This is very  helpful.

    0Reply
  • Heidi Backer
    Saint Paul, MN · Member since 2016 · 23 posts · 24 votes
    9y

    How do I go about finding a bank that will provide this type of financing? We only have about 20k in cash for down payments and it has been very limiting to us, but we have well over 100k in equity on our primary residence. Do I just call banks and ask if they underwrite "bridge loans'?

    0Reply
  • Sarah Borduin
    Rental Property Investor · Butte, MT · Member since 2016 · 7 posts · 4 votes
    9y

    When bridging equity, is there interest charged?

    0Reply
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