All Forum Posts by: David Beard

Time to aggressively shop your loan. Commercial lending has become much more competitive.

As you describe it, with a 20 year maturity and a stated index and margin, it is in fact a 5/5 ARM, and not a balloon.

I agree that the LTV cap of 70% could be higher. The 20-year loan is better than a 20-year note that balloons in 5 years, which is what most banks want to do these days. At least the money is guaranteed to be available for 20 yrs, even if the rate spikes. The best loan would be a 20-30 yr ARM, 80-85% LTV, with an annual/life increase limit of 2%/6% (I've seen 2%/5% as well, but much less common). I'd wear out the phone trying to find that alternative, or a straight 15-year fixed, which might be a real toughie.

The 5-year FHLB borrowing rate (for banks) is currently about 2.1%. In the last decade, it has been as low as 1% and as high as 6%. However, it rose above 7.5% back in 2000. Predictions? That's the realm of crystal balls. Higher, I dare say. The rate just follows FHLB bond prices, which move roughly in tandem with treasurys since the FHLB is a GSE with an implicit guaranty.

If this experienced investor is willing to match your investment and split profits evenly, then that is a massive vote of confidence in the ethics of this individual. Many mentors in this situation want the novice to put up most or all of the money in exchange for splitting profits evenly.

The hours are reasonable if the properties and tenant class are nice, and he's training you and passing off his established system for doing things. I assume you're talking about 15 "units" when you say properties.

My advice since you're new to this:

• For a multi-member LLC, there are many issues to address such as member buyout, member death, member differences in work performed, etc. So use a real estate attorney who has lots of experience with setting up business entities. This is probably not an attorney at a title company office. The attorney will have a questionnaire to walk through issues. You should probably also get a good book on LLC creation, so that you can speak the language (NOLO). You can find a good attorney through referrals from your REIA group, other investors you know, real estate agents. You can also use your tax assessor's site and secretary of state's site to identify which attorneys are being used by other active LLC investors.
• Take steps to shield the identity of the members. In most states, this can be done through the use of attorneys and statutory representatives, so that members are not revealed in the public record. Also be sure to set up and use a P.O. Box, especially for your county tax assessor, which is public info. If a physical address is ever needed, you can use a UPS store or equivalent.
• Use liability insurance as the first line of lawsuit defense. Make sure that you each have umbrella insurance of at least $2mm.
• Recognize up front that partnerships often result in frustration and remorse due to inequities in work performed (that is not property recognized in the operating agreement), differences in opinion on how to grow the business (take distributions versus plow all profits back in), etc. Make sure you talk through these issues thoroughly in advance. The attorney has seen it all and should be able to give good guidance. It's money well spent.
• Of course, get a tax pro involved. At some point it may make sense for your LLC to elect S-corp treatment (rather than straight pass-through) and pay salaries, in order to bypass some self employment taxes.

Dan is spot on with his options. If you are in the unfortunate position of having virtually all of your total IRA assets in real estate, you will have to sell (at least some of) the real estate in order to raise the necessary cash to make the distribution. You cannot just transfer a portion of the property to yourself.

I'm sure he probably runs a syndication/fund that has bought bulk REOs from banks and servicers over the past 5 years, that would be my guess.

I'd be interested in how he manages them effectively at such scale, what profitability and performance metrics he monitors on an ongoing basis, what are his buying criteria, how does he evaluate lots of properties site unseen, etc.

The answer below pertains only to conventional financing (Fannie/Freddie 30-yr fixed). You say you have a partner. To get conventional financing, one or both of you will have to take out the loan in your personal name. You can later flip it into your LLC if you choose.

If you pay cash for the property and its rehab, you can potentially get a cash out refinance immediately after the completion of the rehab under Fannie's "Delayed Financing Exception", which is basically a specialized cash-out refi program. In short, you can get a refinance for the lesser of: (a) 70-75% of the new appraised value, and (b) the original purchase price plus all of your closing costs and prepaids/escrow setup for the new loan.

This works pretty well for light to moderate rehabs, but will not get 100% of your cash back (perhaps up to 85% depending on ARV and amount of rehab). If you're trying to get more cash than that, and your ARV will support it, you will have to wait the 6 mths for a standard cash-out loan.

Whichever way you go, make sure you can qualify for the end loan up front. If you don't have a couple of years of landlording experience showing up on Sch. E's (or the equivalent partnership form), then you will have to carry the new property's PITI in your debt ratio without credit for any rental income. If you have the experience, just make sure that you get the property leased up in order to get credit for the rental income.

However, if you want to get a local bank portfolio loan, you might find the requirements a little more relaxed, as far as the seasoning, you'd just have to call around to your loca banks or credit unions.

What is your plan to invest 20k (especially in N. Colorado, not a cheap area)?To Duncan's point, it is much more likely that you'll have to partner with yourself, or someone else, to get anything put together, and you need to be very very cognizant of the IRS rules.

@Trent Waggoner - Good luck with your investing journey. I live just east of Louisville in Shelby County.

Being a competent inspector and rehab estimator is a great starting edge for you, so wholesaling/flipping could be a terrific way to start to building capital.

Consider getting your real estate license as well to get access to MLS, be able to inspect properties on your own, save(or earn) commissions, network with realtors, and control your deals.