How to Get a Bank Line of Credit to Invest in Notes

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I am a bank credit officer and the biggest request I get from investors isn’t to buy notes…it’s getting lines of credit for their note and/or real estate business.

If you are a BiggerPockets reader you know there are tons of great note deals out there.  However, your absolute profit is limited to your personal and/or company’s capital.

Getting a line of credit for your note and real estate business can offer you a competitive advantage for these reasons:

  1. Positive carry – interest cost on the line of credit is lower than the interest earned on your notes
  2. Timing – buy notes faster because you have a line of credit already approved
  3. Bulk purchase – you can negotiate a steep-discount if you buy a portfolio of notes

Learn more about investing in Notes on BiggerPockets here

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Two Tips for Getting a Line of Credit Approved

Now that we’ve gone over the competitive advantage you can have by having a line of credit, how do you get a line of credit for your note business?

Let me start by saying that this is not easy.  You probably know from dealing with banks that getting a simple loan isn’t easy.  Getting a line of credit for your note business is even harder.  However, I believe it’s worth it due to the competitive advantages it offers your businesses as outlined above.

There are two primary things you need to outline to your banker to negotiate a line of credit:

  1. Cash-flow – hopefully you can cash-flow the line of credit in multiple ways (existing notes, salary, rent, etc), and not completely dependent on the notes you are buying to pay the monthly payments.
  2. Collateral – carefully outline all of the lendable equity that is in your business and/or personal financial statement.  Equity in investment accounts, existing cash, real estate, and equipment is preferred.

Now that you have outlined the above, explain your history in the note business and respective success stories.  You will be utilizing the line of credit to buy notes and REO, therefore the bank will then have three sources of repayment: Existing cash-flow, existing collateral, cash-flow on the purchased notes and possibly even collateral from the purchased notes.

Hopefully these steps will increase your profitability in the note business.

Photo Credit: nikcname

About Author

Jimmy Moncrief is a bank underwriter and real estate investor. He blogs at RealEstateFinanceHQ.com where he talks about all things real estate. He also is the creater of free evernote templates for BiggerPockets members to learn how to better organize and automate their real estate investing.

6 Comments

  1. Thank you for the information Jimmy. I’m still learning about notes, but that is my long term goal. Right now I’m learning about them and trying to get things structured so when I’m ready to make the move, I’m not scrambling to put everything into place. Dave Van Horn has had some good information on notes as well. Appreciate your insight!

  2. I don’t know any commercial lender (non-HML) that will underwrite a loan for notes or any real estate for that matter without a personal guarantee, perfect credit, tax returns, etc. Do you?

  3. Jimmy, if you plan on reinvesting right away, wouldnt it make more sense to just do an cash out refi than Heloc? The rate would be less and/or fixed. The only advantage to the HELOC is if you dont have a plan for spending the money right away.

  4. Of course one would have to do the math on any specific situation, but I think it would be easier and possibly a better idea to simply sell the note for profit and buy a new one instead of leveraging the equity in the note. One reason is due to locking up all of your liquidity by leveraging all of your business and personal assets. Once your assets are locked-up you are locked-in for the long haul. Moreover, one can make numerous profitable transactions with bank notes within a very short period of time and generate incredible ROI. One of the best attributes of notes is there flexibility and marketability and leveraging your notes would strip away those characteristics. If you like your note and intend on keeping it for the long haul but need capital, consider owner financing and sell a few payments of the note instead of the note in its entirety.

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