Financing for developing a RE Investment Company

Goals, Business Plans & Entities
17yFollow

Financing for developing a RE Investment Company

Josh Gesler
Real Estate Investor · Walla Walla, WA · Member since 2009 · 14 posts · 10 votes

First of all, this is an amazing forum. I've been on other real estate forums, but I just discovered this one recently and it is far more helpful. Anyways, on to my post.

I've got a hypothetical situation for you. Oddly enough, it happens to practically mirror my own situation but don't let that get in the way. :-)

Let's say there is this guy. Let's also say that he is in his late twenties, smart, good looking, and tech savy. (Sorry ladies, he's married.) He has been researching real estate investing for over five years but has never "taken the plunge." Recently the economy got all wobbly and creates an amazing environment for investing in real estate. It seems that there are many places in the country where you can buy property for far less than it's worth, rent it out, and make a decent profit. In fact, you don't even have to hunt anymore. There are lists upon lists of property like this. Seeing that now is the time to strike, our hypothetical guy, let's call him J, decides to take action.

Now J isn't the kind of guy to dabble in things. When he decides to do something, he pushes ahead full force and does it two steps above what the "average guy" is doing. J doesn't want to just buy a couple of properties and add to his income. He wants to replace his income and then continue to build an "empire" or sorts. The master plan is to acquire properties as quickly as possible. His initial goal is to replace his income plus enough to afford his own health insurance. Let's say that's around 60K. It is now possible, if not easy, to buy property with "no money down" that will more than pay for it's self. This is doing it the right way, not over leveraging yourself into a hole if something bad happens. Seeing that he can buy properties that provide $100/month per door positive cash flow after a 30 year mortgage and using the 50% rule for expenses, he figures he needs 50 doors. (60,000 / 12 = 5000 / 100 = 50 I told you he was smart.) This is obviously WAY over the 4 property limit used by most lenders. Even if they raise it in the next couple of weeks, we are still going to be a little short. While developing his business plan he can see that he is going to be stopped cold before he even gets started. Obviously some other form of financing is going to be required. Other options would be to buy apartments, self-storage, lemonade stands, etc. These are considered commercial real estate and again some other financing will be needed.

The plan is to setup a corporation or LLC (still talking to the accountant about which) and have it own the properties in sub-LLCs. This should allow for the option of business lines of credit and commercial loans. There are a couple of things to complicate the situation. J's income to debt ratio is a bit higher than 50%. A LOT higher. Hypothetically speaking, let's say this is because of a divorce a couple of years ago that left his finances a bit upside down. Credit score is ok, but the rest doesn't look too good.

So here is where I need your help. Err, I mean J, our hypothetical guy, needs your help. I can develop a business plan that shows how this whole thing will make money. The problem is that normal mortgages aren't going to work. So what would you suggest? Commercial loans? Private money? Checking coin returns on payphones until I collect enough quarters? Remember I'm trying to do this with no money down. This isn't a problem from a cash-flow standpoint or even an equity standpoint, the problem is with then lenders wanting skin in the game. I don't have any skin to spare at the moment. There has to be a way around this. There are some brilliant minds here. J is counting on you!!!

Thanks,

Josh Gesler

0Reply
15 views

6 Replies

Jump to latestLatest
  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    17y

    A few things:

    - First, you say:

    "It is now possible, if not easy, to buy property with "no money down" that will more than pay for it's self. This is doing it the right way, not over leveraging yourself into a hole if something bad happens."

    If you are purchasing with "no money down," then by-definition you are 100% leveraged on the property. No that this is necessarily bad, but you can't have both "no money down" and unleveraged at the same time.

    - You very likely won't be able to get business credit for your company if you don't have at least 2 years of income tax returns for the company. Additionally, unless you have a good bit of REI experience (you don't), lenders aren't going to just hand you a line of credit to "give it a try."

    - You're unlikely to get a commercial loan until you've proven that you know how to do whatever it is your going to need the loan for. Again, without experience, you're in a bit of a bind.

    - Now, even if you could get a commercial loan or a business LOC, without the company having a credit history, you'll have to personally secure that credit line. With a high DTI, you're unlikely to qualify for any reasonable amount of credit.

    - If your goal is to replace your income, that means you're likely to be leaving your job to do this. Which likely means your income will be going away. In today's credit market, there's little chance you'll qualify for a conventional loan without verifiable income, so even getting traditional mortgages against 4 properties is going to be tough without a co-signer.

    - Without any money to put down, you're unlikely to get traditional financing, hard money or rehab money in today's credit climate. Each of these lenders are going to want to see some "skin in the game" or at very least, some experience.

    - Get your credit in order. Get your DTI down. Without decent credit (620+), even most rehab and hard-money lenders won't touch you. If you can find a *killer* deal, you can probably attract cash, but given that you're inexperienced, it will be harder without decent credit.

    - Buying apartments means you'll need fewer loans, but unless you are really prepared, you probably don't want to make that leap without cash or experience. Plus, these days, you're VERY unlikely to get commercial financing without at least 20-40% down payment.

    So, what options does that leave you with:

    - First, you'll likely need to find some cash (either your own or a partner's). Without it, your only real option is creative financing with sellers, which can be pretty tough these days when most sellers are upside-down on their mortgages (and hence why they're trying to sell).

    - Find credit partners (people with credit) who will put the property loans in their name, and give them a % of the profits (or a fixed amount) for their "partnership."

    - Find private money (hard money) or a rehab lender who can cover both your acquisition costs *and* your rehab costs. These loans will generally be short-term (6-18 months), but will give you the short-term cash you need to get the property either sold or cash-flowing. If the goal is to hold them as rentals, you'll need a way to refinance into a fixed loan in 6-18 months. See the part about credit partners above.

    My biggest recommendation is to not quit your day-job until you have a plan for all aspects of the business, including (and especially) the financing...

    Podcast Guest on Show The Truth About Real Estate Investing in 2024 (What Investors NEED to Know)
    0Reply
  • Josh Gesler
    OP
    Real Estate Investor · Walla Walla, WA · Member since 2009 · 14 posts · 10 votes
    17y

    Hello J Scott,

    Thanks for your reply. I really enjoy your blog and I appreciate you taking the time to respond to my post.

    When I was talking about over leveraging myself, I was referring to the ratio of equity to loan amount. The problem with a lot of the "no money down" ideas used by the gurus is that they don't leave any room at the end of the month if something goes wrong. Rents could drop, vacancy rises, etc. My logic is that there is no difference between putting 20% down or buying something at a 20% discount. You have the same amount of equity at the end of the deal. You just have more money left in your pocket.

    I'm not planning on quitting my job until after I replace my income. I would like to build my portfolio quickly but I can't go more than a couple of months without a paycheck. 50 properties in 90 days would be incredible, but not probable.

    The idea behind the commercial/business loans was based on the thinking that the business plan would pay for it's self. The old "start a business" model was simple.

    1. Present killer business model to bank.
    2. Get loan for starting your business.
    3. ...
    4. Profit !!!

    I guess it doesn't work that way anymore, eh?

    For now, I'll work on building relationships with the people who can make things happen as soon as I'm ready. I'll also work on making contacts with private investors and see where that leads.

    Thanks again for responding.

    Josh Gesler

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    Lenders certainly do not agree, for two reasons. One is that if you put 20% down you have your own money on the line. Not so with the 20% discount. In the first case, if you walk, you lose your investment. So, the bank figures you're much less likely to walk. The second is that there is an economic argument that nobody every buys anything at a discount. When a willing seller sells to a willing buyer, the price paid IS, by definition, the value. All other arguments about replacement cost, the price it last sold for, or the price for the house next door pale next to the fact it actually traded hands at a specific value.

    The outline for starting a business with a bank loan is valid. A decade ago, a good business plan, preferably technology based, would have gotten you more money than you could spend. The dot com crash put a lot of nails in that coffin. The current lending environment pretty much nailed it shut.

    If you're graduating from dental school, and have a solid location, you just might get a loan to start your practice. Even then, you're probably better off joining an existing practice that to start from scratch. If you've been a dentist for 10 years, have a solid client base, have some of your own money, and want to start a new office, you can get a loan. My dentist just move to an incredible nice new office, and I'm sure they were able to get funding to do it.

    If you have zero track record, have never done a deal, have no money, have a ton of debt, and bad credit, you're not getting a loan.

    You need to find other approaches to acquire property. Subject to, land contracts, or lease purchase may be options. Trouble is its hard to find good rentals, period, and when you're limited to creative deals, its just that much harder. You'll go from looking at 100 houses to find a good deal to looking at 500 or 1000.

    Hard money/refi is another option. Trouble is you're just not going to get that refi with your credit and debt situation.

    You need some cash, even with creative financing. Can you get another job? Could be that job would be a real estate job like birddogging, wholesaling, or fix and flipping. But sounds like you need some more income to try to improve your debt and credit situation.

    0Reply
  • Jeffrey K.
    Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
    17y

    "It is now possible, if not easy, to buy property with "no money down" that will more than pay for it's self."

    Throw that idea out. I don't know who gave you that informations, but it is false. It is very hard to get a loan in your situation, and next to impossible to do it with no money down unless you have the seller carry back financing or take on a partner. Gone are the days of 100% traditional loans. When people assume 100% financing on this forum they are using it to evaluate the opportunity. Maybe this is where this confusion came from? I know Jon uses 100% when he breaks down the 50% rule for new investors, but he will tell you that you are not going to find 100% financing from a bank anymore.

    0Reply
  • Jason Bentley
    Real Estate Investor · Memphis, TN · Member since 2009 · 31 posts · 10 votes
    17y

    These forums are awesome for those of us still in the formative years of our businesses. My partners and I (A.K.A. my brother and wife) are in a similar situation as "J" in that our start up capital has been limited. Between the three of us we've completed a total of three deals. I have good credit, my brother's is outstanding. Thanks to his low DTI ratio, we were offered a 10,000 line of credit (read: credit card) to our newly formed LLC soon after it was created. By the way, there is a course out there that covers this type of funding. I think the author's last name is Kish.

    Anyway, we both allot our extra paycheck money to our business operations and marketing so that we can do a few deals to make the cash needed to buy and hold for wealth and cashflow. Using a conservative approach, we pay off our credit card bill every month.

    In the beginning it is hard to be patient because we all know the possibilities and potential to make a financial killing, especially in this market. Private money and/or financing to do deals doesn't come easy when just starting out but my partners and I have learned that these formative months and years in our young investment careers have forced us to think, be creative, and persevere in order to get where we want to go.

    I guess I'm writing this because I can definitely relate to J and sometimes it helps to know others are out there experiencing the same thing. But more than that, we have a great community here on bigger pockets with skilled members who graciously share their info. I'm grateful for that and hope that J, my partners, and I can do enough business to eventually earn the credentials and skill to allow those members to start sharing some of their private financing funds as well ; ]

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    17y

    I believe this is correct. It is possible to get into a deal with very little down using hard money and then doing a refi. That's a pricey route, adding about 10% of your purchase plus rehab cost into your permanent loan.

    Mike says he is able to get commercial financing at 100%. It seems like he can do that because he has a long track record as a successful landlord AND has a excellent relationship with his banker. I'm pretty confident that if I were bank in the area where I grew up, where my family has long standing relationships with the main local bankers I could probably manage to do that, too.

    The key is a track record and relationships. Walk into a bank with no track record and no relationship and get a loan? Maybe, if you have good credit and income. Take those away and no chance.

    All that said, finding an "owner financed" deal (subject to, land contract, lease option or straight out owner financing) might be possible. I bought my first house with owner financing.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free