All Forum Posts by: Robert Sepulveda

@Benjamin Cowles the owner financing is essentially a private loan. A seller will have you sign a purchase agreement with a cash down payment for a portion of their equity and a note for the balloon payment. That note is a private mortgage. But I didn't see any mention before of the three year timeline, so you're right, there wouldn't be an issue with timing either way if it's three years down the road.

Yes, there are portfolio loans and private money that will primarily consider the strength of the cash flow on each property, once you have a stabilized two year rental history. They will all still consider your credit score and stated income, then the rental income and net profit per unit. Those will put you in the 6% to 8% range of rates vs 5% to 6% for conventional investment property loans. So you just have to calculate for that contingency in your analysis.

@Bill Henley I'd like to offer a counter point. Your investment properties cost you a pretty penny in tax accounting due to schedule E deducting your property related deductions. Interest income is always your largest write-off. 

Hypothetically, an average $200k property may have about $750 per month in interest or $9000 interest deduction on you schedule to offset your income. Most will carry about a 20% cashflow monthly, so lets say $300 per month or $3600 per year (per unit). Though you're pocketing more than that, your interest deduction puts you at a negative tax liability. With all the other deductions (property tax, insurance, etc) you have thousands in negative income to offset profits elsewhere.

Paying off the mortgage gets rid of that est. $9000 deduction and you go from a negative tax liability to a tax liability of about 80 to 90% of your annual rental revenue.

Paying off your primary residence makes perfect sense, but if you're in the business of real estate, use the tax laws to your benefit, and park your money where you'd get an equal amount of additional revenue, while you maintain your biggest tax deduction to offset your new additional income.

As far as what to do with parking that nest egg, all your suggestions are great if you have a passion for it and will follow through to mitigate each of their respective risks. Pick your poison and run with it. But I just suggest keeping a reasonable amount of debt and using the velocity of money to multiply your windfall into more, much faster with the help of that tax relief.

Sorry if long winded. Hope that makes sense (2 cents)

@Benjamin Cowles, you're asking for two different scenarios

1. Owner Finance: You're right, it's a function of your overall debt to income ratio and a 12 month mortgage history, since it is essentially a private mortgage. You may get a few lenders who'll let you do it with a 6 month history but it may be difficult to find. After that, it is a loan to value qualification. How much debt vs the value of your property that will usually stay at 95% or less as long as you're not taking cash out.
2. Lease option: you don't own the property, so it wouldn't be considered a refinance at all. You'll have to exercise your option to purchase, then enter escrow and get qualified to buy the property. Expect a 5% downpayment requirement for conventional loans (there are some exceptions for 3% and 1% down programs- check with your lender) and then all the qualifying conditions mentioned above. So if you're looking to get into a creative deal that allows you to refinance out the seller, owner finance would be better. However, if you are looking to buy and live in the property or use the property while you save for a downpayment, then this could work for you.

Hope that helps

@Nick L. Check out this thread that's on the same subject:

https://www.biggerpockets.com/forums/49/topics/422...

@Account Closed you'd definitely want to use conventional investment property loans (fannie/freddie) when you can. You'll get the best market rates available that are fixed for the duration of the loan. If you are interested in shorter term fixed rates that could save you money, you still want to stick with conventional loans and just pick a 5 or 7 year ARM.

But Portfolio loans are great to keep you out of hard money's expensive rates if you can't qualify for conventional loans. If you're self employed and have difficulty documenting income, it can help you qualify where you otherwise wouldn't. If you have too many properties ( a good problem) you can qualify with a portfolio loan. Or if you have credit deficiencies or alternative income you'd like to consider, then a Portfolio loan will give you reasonable rates with flexible underwriting. Some programs are geared toward solving a specific problem an investor may have.

If conventional loans on investment property are 4.75% for a 30 year fixed, and 4% for a 7 year ARM, then a portfolio loan would typically start at about 1% higher and go up from there (just an example). But just remember to match the term to your investment strategy.

Agree with @Dane Ohlen. I've done them multiple times. Though Texas does have rules on cash out loans for properties, the rule is that you may not take out more than 80% of the value of your home. This is a reduction in most programs, so many lenders simply choose not to do ANY cash out refinances in TX. You CAN cash out on an all cash deal.

I've posted before on "delayed financing" that you can search in these forums that would be more detailed. But, you can recoup the cash you paid for a property within 6 months of the purchase, based on the closing statement of your purchase.

You'll likely have to stay away from the smaller region TX banks and go with lenders outside of Texas actually.

There are corporate hard money lenders out of northern and southern California that aggregate investor money for properties in all areas of California as long as the deal makes sense and the value is there.

They are typically offering around 10%, up to 75% ltv stated loans. There are some fix and flip loans available that have better terms but qualifying in central valley is a little more difficult so terms vary. I'd be happy to help more if you have more specifics to go over, but that's the gist of what's available.

@Jef A. also, the new home must be an upgrade from your existing home to be considered  your new primary residence. If you are not moving to be closer to work and can document it, then you need to either be buying 20% or more square footage or more bedrooms for children you show on your tax returns.

It has to make sense for an underwriter because they are tasked with searching out people who continually say they're buying a "primary residence" to get better downpayments and interest rates.

You'll be designating your current home as your second home so your new primary residence must be a step up.

@Nathan Waters If he's just lending to your LLC directly and not holding a trust deed on the property, he probably doesn't need to establish an LLC. Though I can't give legal advice, and you both should consult an attorney, I don't believe there's much of a liability if he's just lending your company money to receive a return against a promissory note.

However, if he's recording a 1st or 2nd Trust Deed (or equivalent) to secure his loan as a mortgage, then I would establish an LLC. In the worst case, if you violate any permitting laws or defraud contractors and he has to foreclose, then the liabilities on the property could be his. Therefore he'd want the barrier to the personal liability the LLC affords. It would shield his other personal holdings from a worst case scenario.

Of course, non of it is a worry if your rehab goes off smoothly. There's just the two distinctions on the most common means of lending.

@James Masotti the advise from @Chris Mason is correct. If you go with a direct lender who doesn't insert overlays on a typical conventional loan program (fannie/freddie) you should get a a portion of that as income. I know that Bridgeview bank and Wells Fargo will do for the nationally chartered lenders that will cover your part of town.