Alternative Financing Options

[Sarah Callahan]

Hey guys!

My name is Sarah and my husband and I own a small business in Upstate NY. This past year our interest was piqued about real estate and have been trying to learn as much as possible before our first buy. At the moment we have some money set aside for a down payment but are having trouble finding financing options. We have only owned this business for 1.5 years, and though successful, you can imagine that the banks are not exactly eager to finance our real estate ventures quite yet. :P We've been searching for owner financing and haven't given up on that possibility but also realize that they are few and far between. Does anyone have any similar experience/ideas on other ways we could get financing? Thanks so much! 

-Sarah 

[Andrew Postell]

@Sarah Callahan there are lots of options for you to still be a successful investor.  There are 3 "main" types of loans that investors use to finance properties - hard money, portfolio, and conventional.  Yes, there are others but those are 3 of the main ones.  Conventional loans do allow a business to be operational for 1 year.  They will analyze tax returns to determine if the business is looking ok so in theory you would need at least 1 year of tax returns filed.  And just because your taxable income is low doesn't mean that you can't qualify.  Conventional lenders can add back in depreciation, business milage, etc. to help you qualify. The confusing part of conventional loans is that lenders can have "overlays".  Overlays are the little extra rules that lenders put on conventional loans.  Conventional loans are governed by Fannie Mae and Freddie Mac (if you recognize those names).  In theory it's not the bank's money....it's Fannie/Freddie money...so they have to do what they are told by Fannie and Freddie.  HOWEVER, a bank can be MORE restrictive if they want to be and Fannie and Freddie are ok with this.  So if Fannie says "we lend on 660 credit" the bank can say "we only lend on 700 credit" and that is acceptable.  So you first need to find a bank with no "overlays".  Because what if that bank is disqualifying you because they need 2 years of tax returns when the guideline only says to use 1 year?  What I am describing happens all the time.  So find a lender with no overlays first.  BUT THERE ARE OTHER OPTIONS.

Conventional loans are designed for permanent financing.  Meaning if you are buying and holding the property....likely to rent.  So another option to conventional lending is "portfolio" lending.  Portfolio lending is the bank's own money.  So they call the shots...and not Fannie/Freddie.  So a portfolio loan could ignore your income entirely.  And in fact there are portfolio loans that do just that!  Portfolio loans differ greatly from bank to bank so it is important when you find a portfolio loan to learn the terms.  The loan may only amortize over 15 years, or be an adjustable interest rate, or have a balloon payment.  These may seem like bad terms at first but if you are going to have income in 2 years and refinance out of the portfolio loan in 2 years to a conventional loan who cares if the loan adjusts in 7 years?  Just be aware of all the information and you will make a good decision.  BUT THERE ARE OTHER OPTIONS.

Let's say you and your husband were just looking to flip properties. Hard Money Loans are out there for you to examine.  Hard Money loans are loan types that are TEMPORARY financing.  Meaning for just a few months. So you can buy a property with hard money, renovate, and flip it. And Hard Money loans care about the deal on the property and not your taxable income. Well, they care about your assets too but we're just limiting this to income for now.  Hard Money loans will charge a higher interest rate...maybe even 15%...but if you are clearing $20,000 on a flip who cares that you paid someone 15% for 1 month?  

There are other options but hopefully these descriptions will help some.  Feel free to Private Message me with any specific questions.  Thanks!