All Forum Posts by: Michael Kinsella

@Luke Treacy

What type of lender did you work through? Bank, HML?

@Luke Treacy

@Kyle Swarts

LTV = Loan-to-Value

(Loan Amount/Value of Property)

For example,

650k Loan Amount

1mm Property Value

65% LTV

HML = Hard-Money Lender

A non-traditional lender that possesses advantages (less stringent requirements, faster), and disadvantages (higher cost of capital) than a traditional lender, such as a bank.

Someone will chime in shortly I'm sure with regards to the traditional refinancing process, and perhaps someone with experience in refinancing sub 100k properties.

Regarding the advantages of each strategy,

With a fix and flip, you may be able to benefit from the large influx of capital when it sells (assuming things go right). However, you will not be building your 'passive' income portfolio.

With a buy fix and hold, you will not experience the large immediate influx of capital that a sale provides, but you can hold the property over the long-term for its cash-flow.

@Kyle Swarts

Hi Kyle,

You are going to find that it varies - if you go the conventional route, then the seasoning requirements are going to be more strict.

If you go the alternative route, e.g. HML, then there are lenders with no seasoning requirements (be aware that their LTV's might be restricted in this case, and the rates/pts. will be higher than if you go the traditional route).

One thing that I would warn you about is the difficulty in refinancing low-value properties. You may be able to find a lender that is willing to do the take-out, but at the ARV you are likely looking at (sub-100k), those lenders become much, much more difficult to find.

I think that you are very smart in the way you are going about this by inquiring about a take-out lender before you move forward with purchasing the property for rehab.

Perhaps someone else can chime in with regards to refinancing seasoning requirements when going the traditional financing route.

Hope this helps,

Michael

Robert,

Your complaint certainly does not fall on deaf ears. There is unequivocally a wide spectrum in regards to quality of underwriters.

Certainly with a more automated process you would get rid of redundancy, which would mitigate some of the frustration. Unfortunately, from what I've heard with regards to companies that try to automate much of the process, is that they fail to capture the nuance of a particular situation, which often requires human understanding.

The best solution to me would be a company that seamlessly integrates automation and excellent customer service (a component often missing in tech-heavy companies). That way, you don't have to deal with issues like redundancy, and yet you are still getting the benefit of someone who can understand the details of your unique situation.

Thanks for sharing your experience,

Michael

@Michael Ricklick

Hi Michael,

Unfortunately, your experience is more or less par for the course. Many lenders will, as you aptly describe, 'hem and haw' regarding rates and terms. One of the primary reasons for this is that they want to 'get you in the door'.

@Stacy Eisenberg has a good suggestion above in speaking with a broker who works with investors. Another option is to talk to some local investors about whom they have had good lending experiences with. Speaking with someone who has actually closed a loan with a specific lender will be just about the most valuable information you can collect.

Additionally, I encourage you to consider looking at the lowest cost of capital as opposed to the lowest interest rate. The difference between cost of capital and interest rate is that cost of capital is more inclusive.

Your total cost of capital is going to include things like;

- Origination pts.

- Processing fees

- Underwriting fees

- Cost of appraisal (is it passed through, or is there a surcharge)

etc.

Getting a handle on this number will be more telling with regards to which loan is truly the lowest cost.

It sounds like you are already on the right track in inquiring about their fees. This is a good starting point, and will help you make a more informed decision.

Hope this helps,

Michael

@Wayne Gaudette

Hi Wayne,

The short answer is that it may make sense. The cool thing in this scenario is that you have options.

It looks like there are a three ways you can access the liquidity you need to do this first flip project.

1. Access liquidity through a HELOC

2. Pull cash-out of your free and clear condo

3. Use other funds outside of the two aforementioned assets to fund the deal

One thing that you might want to pin down in this case is the total project costs. If you are looking to purchase a flip in the 150k-250k range as mentioned, what is your construction budget? Getting a good idea of the total project costs will help inform which route you decide to go, as you will discover how much liquidity you need to unlock. Finding a good example of a project may help eliminate some options, or at the very least will make it more clear which option makes sense to pursue at this time.

Hope this helps,

Michael

@Richard Cumberbatch

Hi Richard,

I'll preface this answer by saying that my experience is in the alternative space with HML and private lenders, so this will likely not apply if you choose to pursue more traditional financing.

With that said, here is one way that you might be able to do it...

You mentioned that you would like to use your US properties to obtain a LoC, and it sounds like there are a total of 4 properties you own in the US; 3 parcels of land and a free and clear house.

Unfortunately, the land, given its value, is not going to be very attractive to lenders.

However, you can pull cash out of the 200k AIV (as-is value) investment property, and then use that to set-up a LoC, for example at 3-4x that liquidity amount (some lenders might offer more leverage than this).

In practice, here's how that would look:

- Pull cash out of the 200k AIV property (say at 65% LTV, which is a conservative estimate)

130k cash out

- Use cash out to generate LoC at 3-4x multiple

130k cash out * 3 to 4 = 390k to 520k availability

Hope this helps,

Michael

@Jennifer Ryan

Hi Jennifer, I think that @Jerry Padilla provided some good insight above.

My 2 cents below...

What you will find regardless of which lender you work with is that operate on a sort of 'progressive disclosure' basis. That is, once you provide a set of documents, they will ask for another set of documents based on the documents that you just gave them. Sometimes, there will be additional documentation required due to some of the information that you previously provided, and sometimes it will just be a result of standard operating procedure.

I certainly admire you wanting to get your ducks in a row, that is an organized, laudable way of going about things, but regardless of which lender you choose to go with, they will pretty much all operate this way.

With that said, you can begin to think about some items that will be important from the lender's perspective, one of which @Jerry Padilla touched on above; if the property is in an LLC or personal name.

Hope this helps,

Michael

@Carlos Cuervo

Hi Carlos,

Below are some sample questions that a lender would typically look at when evaluating a deal/borrower. Please note that when you are working with a private lender, the process is inherently subjective, and so there can be significant variability in terms of what preliminary questions are asked/how the lender interprets specific answers.

Deal:

-  Where is the property located? All lenders are more likely to loan on properties in highly populated areas with good market velocity (properties sell quickly).

- What is the as-is value of the property? Some lenders have LTAIV (loan-to-as-is-value) restrictions.

- What is the total amount of debt/encumbrances on the property? Relatively few lenders are willing to take the 2nd position on a property, and typically like other debt/encumbrances to be cleared off before they lend.

- What is the purchase price of the property? Some lenders will lender on the lesser of as-is value and purchase price, so it is important to keep both numbers in mind.

- What is your construction budget? What is the scope of work? Lenders will want to see how much work you are doing on the property ($ amount), and also what you are doing to the property. Lenders are more comfortable if you have experience doing similar projects.

- What is the ARV (after-repair value)? This will often be used to dictate your total loan amount. For example, a lender might be limited to 65-70% of the after-repair value of the property per his/her individual appetite for risk.

- What is your exit from the loan? Sale or refinance. Are you going to be selling the property? In this case, the values of the surrounding properties that have sold recently become quite relevant. Are you going to be holding onto the property? In this case, the lender will want to be sure that you can procure long-term financing, so things like your credit score, and the DSCR of the property become more important.

Borrower (You):

- What liquidity do you have available? This will be used in part to cover the project costs that the lender won't cover. For example, if the lender covers 85% of the total project costs, you will be responsible for the remaining 15%. Additionally, you will need to pay interest on the loan, and having liquidity is a good indicator of whether or not you will be able to make payments, at least in the short-term. 

- What is your credit score? This lets the lender know your history of repayment, and if it is higher, then a lender becomes more certain that you will repay his/her loan.

- What experience do you have? Generally speaking, the closer your experience is to the project at-hand, the better. When you start to move away from the type of experience you have had, lenders become less certain that you will be able to pull a project off.

The above list is by no means exhaustive, but is a good starting point regarding the kinds of questions that a private lender would typically ask.

Hope this helps,

Michael

@Ondrej Brown

Hi Ondrej,

The best way to think of the pros and cons is probably to describe HML relative to other debt financing for a project, e.g. banks, or an individual private lender.

Here are some of the more salient comparison points;

Banks

- Likely to be your lowest cost of capital (int. rates, pts., fees) amongst competing debt capital sources.

- Slower than a HML, and can be much slower than an individual private lender.

- More documentation than a HML, and possibly much more documentation than a private lender.

- More strict lending guidelines, e.g. project type and credit score

HML

- Cost of capital can be quite a bit higher than a bank (int. rates, pts., fees), and is usually comparable with individual private lenders.

- Typically quite a bit faster than a bank (though this will depend largely on the specific HML + bank.

- Less documentation required.

- Less stringent lending guidelines generally speaking e.g. seasoning requirements

Individual Private Lender

- Cost of capital is usually on par with that of a HML, or possibly less.

- Typically faster than a HML + bank

- Less documentation than a HML + bank generally speaking

- High levels of subjectivity with regards to funding

- Constrained by capital; a private lender is typically not going to be lending a ton of money. You may have to find multiple private individual lenders if this is the route that you prefer to go.

Hope this helps,

Michael