All Forum Posts by: Rob Beeman

As with any project, it depends on the numbers. There will be standard costs on all acquisitions: closing fees, transfer fees, insurance costs, use of money costs, etc. You should be able to roughly calculate the costs prior to contracting the property and see if the numbers make sense. Even the use of your own cash comes at a cost, as you are tying up capital that can't be used elsewhere. The use of someone else's money (capital) is leverage, and will bare a cost, so just do the numbers to see if the deal matches the cost.....or not.  My opinion is it is wise to have multiple sources for capital and match the use of the capital (including the costs for it) to the project, just like you match the contractors talents/skills to the project (task).

A rehab lender may be an option for the short-term purchase & improvements, however you need an exit strategy out of the rehab loan once the improvements are made and either new leases in place or current leases used. The rehab lender is probably going to want to see that you have at least 30% of the deal in cash (20% down and another 10% to cover the other costs to close, including closing fees, lender fees, appraisal, insurance, etc.). The exit strategy out of the rehab loan is a key ingredient.

Assuming that it is going to take less than 12 months to improve, possible exit loan options are: Sprout Mortgage & Visio Mortgage. These two options are OK with using the ARV (after repaired value) as the "value" when doing the refinance loan if owned less than 12 months.

As for doing the improvements while it is occupied - might be possible, depending on the level of improvements (think about it, home remodeling is done all the time while the home owner lives in the property). But if the improvements will majorly disrupt the tenants ability to occupy the unit, then you may need to temporarily relocate them (not necessarily pay to have them placed in a motel, but perhaps supply free rent while they live with a relative during the improvement stage).  Just some feedback.

The local banks and local credit unions are the best options for rates/terms (make certain that you are communicating with the "commercial" lending department - even if the property is a single family rental, as it is titled by an LLC, making it a commercial transaction). However not all local banks or credit unions offer this product when titled in an LLC.

A few national lenders that finance single family and 2-4 unit when titled in an LLC that I am aware of are: Silver Hill Funding, Velocity Mortgage, Sprout Mortgage and Visio Mortgage (they are more expensive). Since you own the property free & clear, it would be a cash-out refinance (if you had existing liens to pay off it would be a rate & term refinance). Keep in mind that local banks & credit unions that offer this product may not have a minimum loan amount, but the national lenders usually do. Typically $100K is the min. loan amount, however I believe that Sprout and Visio go lower than that. Hope that helps.

@Ryan Clements Most HML's supply shorter term loans as they typically make their money on the points/fees, not just the interest. The more times they are able to "turn" the funds in a 12 month period, the more they earn.

Additionally most HML's supply interest only loans as it is a simplified loan, and they often issue them to an entity (LLC) as opposed to an individual. This helps to qualify the loan as a loan for business purposes, not a consumer loan (consumer financing is much more regulated and restrictive pertaining to rate/fees/terms.

As others have said, lower loan amounts are difficult to get financed by HML's. Many have a floor of $100K, while some will go as low as $50K. Lower than that is even more challenging to locate and may be found more commonly in a private lending source (example: personal self-directed IRA)

@Christina Meitzler My opinion is NOT to tap into a HELOC for investing, especially if current monthly cash flow VS income is tight. Either wait until you have the cash to cover the parts that may not be financed by a real estate investor lender, or search out a financial partner to provide the cash needed. Even if you grabbed a great deal on an investment property, if it puts you in financial dire straights - its not worth it.

@Michael Neiman If your plan is to purchase turnkey rentals with your LLC, local banks and credit unions are certainly a good option. However make sure that you are communicating with the commercial finance division (even if the property is a single family residential property) NOT the residential finance division. If the loan officer uses terms like DTI (debt to income) then they are a residential loan officer (commercial loan officers would use the term DSCR in place of DTI).

The reason for working with the commercial lending division is that you want to keep the property deeded in the LLC and have the loan issued to the LLC (with the members of the LLC being the guarantors). Normally this will mean that the loan should not appear on credit reports (as long as it doesn't go into default). The rate will be slightly higher as a commercial loan, but still livable. The down side to buying a turnkey property is that the typically any equity in the property is what has been created by the down payment that you made.

If your plan is to purchase a property that needs some improvements/updates, have the improvements completed, then gain a tenant - then you might want to consider a rehab lender that would extend financing for a portion of the purchase & improvements. The rehab lender would extend a short-term loan at a higher rate and fees, however you would be gaining equity in the property when you conduct the improvements, perhaps increasing the market rent - thus increasing the value. 

After improvements are completed and the tenant lease is in place you would refinance with the local bank or credit union for a long-term loan at a lower rate and perhaps be able to recapture some of (or all) your funds invested to date in the property during the refinance. This is called the BRRRR method (Buy, Renovate, Rent, Refinance, Repeat).

You guys have much to research and discuss prior to investing, and please remember that whichever option you feel is best for your personalities and risk levels, always buy in markets (geographical areas) that you are comfortable with and are OK visiting any time of the day or night. Good luck.

Assuming that it would be novice investor with the $20K, my suggestion would be to locate a seasoned real estate investor that would be agreeable to having a partner with $20K to invest into their next transaction (as long as you are comfortable with the transaction type, location and investor), and as long as you also get to work along with your money and learn from the opportunity. To me that makes sense - return on the $20K and learning from a mentor.

@Matt F. Matt, as mentioned, yes the BRRRR investing method can be used (and has been used for a very long time) on multi-family assets.

The approach is the same and formulas as well, however keep in mind that costs associated with multi-family are typically much higher. Starting with appraisals, third party inspections, insurance coverage, even the improvements (more baths, kitchens, water heaters, heating sources, etc.). 

Depending on the level of the improvements, building codes may dictate the use of higher cost items in a multi-family property (copper supply plumbing, cast iron exit plumbing, hard wired smoke detectors, arc-fault breakers, maybe even sprinklers or fire escape). Might be best to migrate to multi-family in baby steps with less than 4 unit assets first,,,,,,,,,,,,,,,just sayn'.

Only once did I buy a property without seeing the inside, and I was very lucky that it turned out to be in decent shape. Never did it before then, and haven't done it since. 

My opinion - ALWAYS look at the property. Always allow ample time to see everything possible. Always take a flash light, and always spend the most time in the basement (if it has one) as that is where often the issues, if any are derived from. Good luck!

Neal, not certain what interest rate you are seeking for the loans being extended on the free & clear properties, but my experience has been that the local credit unions are a good resource for lower interest, longer amortization loans on a commercial loan extended on an investment property owned by an LLC. You must work with the "commercial lending" department of credit union.

The rate will be a little higher than a residential loan owned in your personal name, but you gain the benefits of a commercial style loan (issued to the LLC - not typically appearing on personal credit, using the income of the property as covering the debt ratio, etc.).

Some of the credit unions that I have seen do these deals are: Philadelphia Federal Credit Union, Merc Sharpe & Dhome FCU, TruMark FCU and there are probably others that have a commercial lending division for residential, LLC owned investment property financing. Good luck!