Financing Issues

[Anthony Bonanni]

Real estate investor here with a few properties in my portfolio-all with a partner. Our properties are all single family homes or condos.

Our usual process is 20% down and 30 year am schedules. However, upon closing on our last property we got a call from the bank saying we "were at our cap" and would no longer be able to get debt from the bank even though we still were willing to do the usual 20-25% down. Coming up with the 20-25% down payment will not problem be a problem going forward as we only do deals in which we can put that much equity in at the beginning.

We are meticulous in our projections and all of our deals fall within our goals for both cap rate and cash on cash return. As we are still relatively young, we are just looking for guidance on how other investors overcame the hurdle of financing. Especially in instances in which investors were always looking for 20%-25% down. We say as long as a lender/bank gives us the "ok" to keep doing deals at rates determined by them we can scale quickly.

Some ideas that people have mentioned are trying to get commercial financing or doing something similar to those lines. Just looking to see if anyone has gone through a similar chain of events. I know this is probably the most difficult thing all REIs deal with. Any advice will be greatly appreciated. Thanks in advance. 

[Jesse Valencia]

Anthony,

Sorry to hear that your bank has put a limit on the number of mortgages you can obtain with them.  I would agree with @Steve Babiak and look for another bank.  If you go to a local or regional commercial bank, they can bundle your homes and put a commercial loan secured by your properties which will then free you up to go out and purchase more houses with regular mortgage loans.  Please note the following:

- If you go with a commercial portfolio loan, you might want to develop an LLC to hold the properties. You can apply under the LLC and let the banker know that the properties are owned personally but that you want to hold them under this LLC. The bank already has to go through title and escrow to do there loan; they can actually transfer the ownership to the LLC during this process.

- Commercial rates and terms are not as attractive has residential mortgage financing.  Commercial rates are higher and terms are usually amortized over 25 years but have fixed rate periods between five years to 10 years.

- Only put up houses as collateral that you think you will hold for a long period of time.  It can get costly if you put a loan on your bundled properties and then decide that you have to sell one.  The bank would have to determine the value of the remaining properties, before releasing any property, which is usually done with obtaining updated appraisals.  You might be able to get around this by asking the banker what the banks process is when you need to sell a property or set pre-established release prices at the start of the loan.

Hope this helps,

Jesse