All Forum Posts by: Brady Morgan

@Ned Carey:

@Brady Morgan That was helpful. I have a clearer Idea of what you are doing. When you said  "New Construction" I was assuming, wrongly" that you meant buying a newly constructed home and perhaps thinking you were getting some kind of bargain that created equity. 

What you propose is certainly less risk than what I had envisioned. 

The primary risks at this point would be 

      1) to your lender, the risk of a margin call. 

      2) To you; underestimating the true cost of a project and cost overruns

      3) To you; legal risk of securities regulations if  So it sounds like im not missing anything on the risks, from your perspective at least. That is good to hear.

So it sounds like im not missing anything on the risks, from your perspective at least. That is good to hear.

Yes I do have experience. I studied RE development and investment for my MBA, I am the building inspector for the town where I live and I worked as a contractor before switching to only working on my own deals. I also have a friend/sub-contractor with 40 years experience in all areas of construction who works with me on most of my deals for low cost labor. Right now what I am looking at is buying homes that are nearing completion so I can inspect them as they are built, and then buying the finished 3bd 2ba home with unfinished basement and finishing the basement myself to rent it as a 6bd 3ba. So I guess I would call it buying new construction with a value add? the unfinished basements have plumbing in place for drains and egress windows. Basements are very common in this market. After dealing with my share of older rental properties, I have pretty much decided I only want new builds from now on. I can inspect them as they are built, its easier to put on market whether for sale or as a rental (who doesnt want to live in new construction at a good price?) and far less expenses during operation. As long as I have a good lending option such as a low interest LOC, it will still cashflow nicely until rates get better on other loan options.

Being the overly analytical type, I just keep looking for what else could go wrong after addressing all the obvious ones that pertain to any deal.

Quote from @Ned Carey:

@Brady Morgan First what are you calling "securities"?  The presumption of most reading this is you mean stocks and bonds and other assets you would buy from brokerage houses. The brokerage house can lend on margin for securities they hold. 

Perhaps you are talking about something different. But presuming you are talking about doing the above, this is a high risk strategy. You state that you have 20% - 25% equity position for safety, but you don't based on the information you gave.  Where is this equity coming from?  I am wondering if you are making some assumptions that just aren't true. 

Yes, that is what I meant by securities, not sure what else that term applies to honestly. Primarily, portfolios consisting of stocks, ETFs, and/or mutual funds.

There are a few ways to mitigate the risk with this sort of LOC. First off, the deals we are using the LOC for are solid, profitable deals even in the worst of circumstances. If I am all in on the property for 360k (purchase and some finishing construction as well as carry costs) and the home is valued at 450k or more (based on what im told by agents as well as my own analysis while staying conservative), that is 20%+ equity I believe, unless I am missing something. With that much "profit" available in the deal, if needed we could sell even in todays market, at below market and still profit. We are buying new construction in the most desired areas of the market, and buying the smaller properties in the neighborhood, not the big ones. In my experience that makes this a low risk deal as there are very few ways to lose money on it. The property will cash flow $500/mo or more after all expenses and cap ex reserves, as well as the payment on the SBLOC. So holding the property and even renting at below market to get it filled quicker with slightly less cash flow (maybe 100-200 less at most) is still a decent deal as a buy and hold. Again, ive done some research and only look at the areas that are most desirable to renters, which typically lines up well with the areas most desired by buyers. This market has a lot of large families and therefore 5-6 bedroom rentals are in demand and tough to find. So all in all, the investment seems solid to me, and this is not my first rodeo, as they say.

As for the risks associated with the SBLOC, I minimize those by only utilizing a portion of the LOC so that even if the market drops another, lets say 30%, the risk of margin call is slim. Also, I only advise my partners to use diversified portfolios for this, again to minimize downside risk in the market. These LOCs are typically interest only and adjustable rate, which of course is planned for, again with the equity and the cash flow of the investment, it shouldnt be a problem to at the very least break even, even in the worst of scenarios. Also, for the variable rate, that can sometimes be mitigated by caps in frequency and/or basis points. In the worst case, the property is offloaded as quickly as possible, pay off LOC and take whatever profit there is and go to the next investment. Not a bad outcome for worst case if you ask me. Another nice bonus of using this as a funding source is no closing costs, big help on the front end.

Obviously, if all goes relatively well, the plan would be to hold these properties as rentals and refi at some point down the road when rates on mortgages drops back down a bit, whenever that may be. But there are alternative exits that still profit a decent amount, in my opinion anyways.

So, this is what you would call a high risk strategy? What risks am I not seeing? That is what I am trying to figure out. I appreciate your thoughts on this, always nice to have another perspective. I have worked as a commercial loan officer in the past and obviously deal with lending as an investor, but as I have stated, this sort of LOC is a bit new to me.

Quote from @Scott Wolf:

Quote from @Brady Morgan:

Quote from @Brady Morgan:

Quote from @Scott Wolf:

Quote from @Brady Morgan:

Quote from @Andrew Postell:

@Brady Morgan yes, some of us use this technique for temporary money.  These are usually from personal connections we have made through the years and the investors usually want proof of experience to participate in any deals.

Can you recommend any lenders in particular for SBLOC product? Would be great to have more to compare with what I already have quotes from.

 Schwab had the best rates I heard of (vs. Wells, Citi & Chase), but moving all your money for current rates might not be something an investor wants to do.

 Thanks Scott, ill check with Schwab. Investors are already on board with the options weve got, just shopping for the best option. Its easy to sell high yield deals.

Looks like the rates they advertise are a good bit higher than other options ive found. Will talk with them to verify, but im looking at rates currently from under 5% to about 5.5%.. seems even with their largest LOC its over 6% based on current sofr. I will admit they are better than some other big players, but can certainly find better rates out there.

 Where are you seeing those rates?

 Capital management firms and credit unions tend to have better rates. None of the major institutions have come close really. I believe it depends on the lenders funding source.

 Stone Creek has 4.9% and BCU has just over 5% if I remember right. There are others but those are some of the more recent ones I have talked to (in the last couple weeks) that had the best offers. Of course there are other factors such as fees, but so far I have found those to be relatively minimal.

Quote from @Brady Morgan:

Quote from @Scott Wolf:

Quote from @Brady Morgan:

Quote from @Andrew Postell:

@Brady Morgan yes, some of us use this technique for temporary money.  These are usually from personal connections we have made through the years and the investors usually want proof of experience to participate in any deals.

Can you recommend any lenders in particular for SBLOC product? Would be great to have more to compare with what I already have quotes from.

 Schwab had the best rates I heard of (vs. Wells, Citi & Chase), but moving all your money for current rates might not be something an investor wants to do.

 Thanks Scott, ill check with Schwab. Investors are already on board with the options weve got, just shopping for the best option. Its easy to sell high yield deals.

Looks like the rates they advertise are a good bit higher than other options ive found. Will talk with them to verify, but im looking at rates currently from under 5% to about 5.5%.. seems even with their largest LOC its over 6% based on current sofr. I will admit they are better than some other big players, but can certainly find better rates out there.

Quote from @Scott Wolf:

Quote from @Brady Morgan:

Quote from @Andrew Postell:

@Brady Morgan yes, some of us use this technique for temporary money.  These are usually from personal connections we have made through the years and the investors usually want proof of experience to participate in any deals.

Can you recommend any lenders in particular for SBLOC product? Would be great to have more to compare with what I already have quotes from.

 Schwab had the best rates I heard of (vs. Wells, Citi & Chase), but moving all your money for current rates might not be something an investor wants to do.

 Thanks Scott, ill check with Schwab. Investors are already on board with the options weve got, just shopping for the best option. Its easy to sell high yield deals.

Quote from @Andrew Postell:

@Brady Morgan yes, some of us use this technique for temporary money.  These are usually from personal connections we have made through the years and the investors usually want proof of experience to participate in any deals.

Can you recommend any lenders in particular for SBLOC product? Would be great to have more to compare with what I already have quotes from.

Quote from @Scott Wolf:

@Brady Morgan these funds have margin requirements.  Most institutions have a 70% limit.  So if this $330k puts them close to the limit, and the market makes a downturn, there will be a margin call.

Absolutely right. Very important to make sure you have room left for a dip in the market. Fortunately, the investors I partner with have plenty of room in their lines of credit to support multiple deals and still have a sizeable buffer before they max out the credit. This is something I make sure to discuss with anyone I partner with so that the last thing we face down the road is a margin call. Great tip, thanks Scott!

Quote from @Ned Carey:

@Brady Morgan since  you are buying new construction what makes you think you are getting 25% equity. Is that because you are going to be putting down 25% or you think you are buying at a 25% discount. 

Borrowing against securities is a high risk proposition. Why is a "Partner" with the securities going to lend to you at a discount? If they are taking the risk of borrowing they would want to charge you a premium for the risk they are taking. 

I wont go into all the specifics of my strategy, but basically I am buying a 450k+ home for 25-30k out of pocket and my partner puts in 330k from the SBLOC. Because I am partnering with them instead of simply using them as a private lender, they are getting equity in the deal and splitting the profits with me rather than charging a premium on the interest payment.

Im not really worried about the strategy, it is solid with low risk. I am more concerned about missing something on the lending side. Wanna make sure I am asking all the necessary questions when talking to these lenders about these products that I am not as experienced with. So far the concerns I have discovered would be things like control of collateral, maintenance requirements/margin calls, and various fees that may be charged on quarterly or annual basis. Anything else? Has anyone had bad experiences with using this type of lending? Also, recommendations on lenders with this type of product would be great, I am still shopping around.

Hello,

Does anyone have experience with using Securities Based Lending for funding deals? Specifically, I am looking at partnering with an individual who owns securities (stock and mutual funds) having them take out a line of credit against their portfolio (SBLOC) at a low interest rate, and using that to purchase properties rather than using a mortgage. Considering the rates I am being quoted, I am a little surprised more investors arent talking about this. Has anyone run into problems with this sort of lending? I know these lines of credit are typically variable rate and interest only but when I am buying deals with 20-25% equity that are new construction and cashflow around $500/mo with this loan option, I feel like I have hedged against those risks fairly well. There are sometimes fees associated as well but they seem minimal and scale well since one line of credit can purchase multiple assets.

Interested if anyone else is using this lending strategy and what your experiences/recommendations are. Thanks!

Hello BP! Does anyone have experience with Multifamily development using modular building techniques? Panels or volumetric? Im looking at building properties in eastern Idaho or western Wyoming targeting the lower income and workforce housing markets with new, affordable (little a) apartment options. I like the speed of modular and the potential cost savings as we progress through similar projects. It would be great to see what experiences others have had in recent years or even this year with underwriting, financing, and GCing these sort of projects.