There have been entire books written on financing options for real estate investments. I am definitely not going to try and give an accurate summary of all of them. However, I am going to talk about the financing option that I use myself as a real estate investor. I also underwrite these loans on a daily basis.
On Bigger Pockets, I see discussions on a daily basis regarding Hard Money Lenders and something about government-guaranteed mortgages (i.e. FHA, HUD, FNMA, USDA). However, there is a third-option that is rarely mentioned, an investor loan from a community bank.
Loans from Community Banks generally have higher interest-rate than government guaranteed mortgages. However, they also have significantly lower rates than hard money lenders. See the table below.
Community Banks have significantly more flexibility than their large bank competitors, because decisions are made right there in the bank. This flexibility also expedites the loan-process. I have seen customers get a $400K loan within 24-hours. This is why:
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This customer has a great relationship with their loan officer. The customer keeps their financial statements up-to-date at the bank, and let’s them know about any big capital spending plans and future real estate acquisitions.
It says a lot when you have deposits at the bank. Community banks might not have the technology that larger banks have. However, if you maintain a small business account this helps your loan officer get the loan approved.
When you agree to pay a higher-rate, you are saying to the bank that you do not treat your lending relationship like a commodity and value the timely service the bank provides. Note, if your community bank doesn’t close fast, I would not recommend them.
I know the rate discussion will cause a lot of controversy from investors, because at the end of the day, a higher rate means less money for you. However, let me provide you with two real life examples, where rate was secondary, and why:
Example 1: The Flip
Earlier I mentioned that a customer got a $450K loan within 24 hours. This was a foreclosure deal and he needed the money within 24 hours. The home’s last appraisal was for $650K. He lived in the house for a year, and then sold it for $650K.
Example 2: The Multifamily Deal
My friend was looking to buy a duplex for $85K. The last appraisal was for $146K. He was pledging another property so this amount was fully-leveraged. His monthly profit was $400. A community bank offered him 6% and big national bank offered him 4%. The community bank would have closed the same week. However, he went with the large bank and they took 4 months to close. The worst part is that instead of closing in April and getting all of the college kids he closed in August and it took him an extra month to get the property rented. My friend therefore lost out on 5 months of revenue and profit. The difference in the two payment structures was $93.89. He was lucky he still kept the property under contract and the seller didn’t go with someone else that could close quickly.
In summary, a loan with a community bank is a good choice for many real estate investors. However, like all types of banks there are good community banks and bad community banks. I would encourage everyone to call three or four community bankers, let them know your goals and plans, and get their feedback.
Have you worked with a community bank? What have your experiences been like? Share your thoughts or comments below!
Photo: 401(K) 2012