How do you finance your buy and holds?

Question

Hi everyone,

I am very interested to hear how different people finance their buy and hold investments using investors.  How do you structure your deals when you are using OPM?  Do you use equity and debt partners or just one or the other?

I can see more easily how financing flips using investors works since the holding time is so much shorter but how do people structure long term deals?

Also, do you pitch a buy and hold a lot differently to your investors than you do a flip?  Have you found that it is harder to find investors who will finance longer term deals compared to short?

Thanks so much BP!

Jon Holdman · Answer

This is all about rate and term, so let me arrange it that way.  These are approximate rates today.

30 year fixed, about 4-5%:  Conventional loans.  You get these from lenders who want to be able to sell to Fannie Mae and Freddi Mac.  Max 10, and 5-10 are tougher than the first 4.

15-20 year fixed, about 4-5%: Portfolio loans.  You get these from lenders who will hold onto their notes.  Much smaller pool of lender, but they are out there.  Usually local banks or credit unions

8-12%, 15 year fixed perhaps longer.  Not-too-savvy private lenders.  I.E., someone you personally know.  If its advertised, its not private.  See below for hard money.  By not-to-savvy I mean they're willing to commit to you at a fixed rate for a long term.  They're stuck with you if rates rise.  But you can pay off at any time if money gets looser.

8-12%, 15 year amortization (maybe longer, maybe IO), 3-5 year balloon.  More savvy private lenders.  These folks remember that OO bank rates were 15% in the early 80's and don't want to be stuck in a real estate loan if banks are paying 10% on CDs.

12-15%, 4-6 points, 6-24 months, IO.  Hard money lenders.  A way to acquire a property, but you better have an exit plan to refi if you're going to hold it.

Callum K. · Answer

I guess I went about it the old fashion way and after my third home it started getting easier.  Put the 20% down and make sure your rental income is producing enough for the banks to calculate the rental income minus the financing (75% of rental income - mortgage = added income).  Because I purchased $150k+ properties, my properties generate much more than double my financing costs.  This has allowed my income to increase more and more each year and has given the bank piece of mind that my debt to income ratio's are in check.  The problem is that it takes time and you can't just go buy a home, finance it and move on to the next one.  Most banks I dealt with want to see the home season a for a year or so and have enough on the tax return to give them piece of mind.  After my fourth home the cash producing from the properties helped increase my reserves (which seems to be the biggest problem with trying to buy 5-10 homes) and the cashflow outside of the reserves now fund the down payment for future homes.  It took about 4 years to get here, but all I really did was save the down payment from the first two homes and then converted my primary residence to a rental and downsized because the cashflow was too lucrative.  The cashflow from those three homes allowed me to pick up several more after that.

My problem now is that finding good deals is no longer a slam dunk.

Good luck!

Ian M. · Answer

Nick K. - no problem on the questions. i still have tons myself and will forever.  the only way i learn.

The loan I am talking about is a commercial one (for a residential property), but you may be able to do it on a residential property as well, depending on the lender.  I doubt very seriously if you would be able to do it on a conforming loan (Fannie/Freddie/FHA backed) - typically in your own name, amortized over 30 years.  this one is in an entity name over 20 years.  Also, correct on the 80% LTV (20% down).  the lender will allow a private holdback on the downpayment. this went away for a while during the lending squeeze, but in some places (like my area i guess) may be beginning to make a comeback.  My relationship is with the mortgage broker, not the institution per se, but its also dependent on my personal info (FICO, income, strength of job, etc..) which is why they would be able to do it.  even though the loan is in my entity name, its personally backed.  Im not a big enough player to get non recourse loans (backed entirely by the property) yet, but that's the goal at some point - even though they are typically higher rates. Though i understand they are doing this for self directed IRA's.  if you have a good business plan, that's certainly a good start.  But if you are just starting with that bank, i would guess it would likely need to be a smaller deal and one that you could cover expenses if something went sideways at least until you built up some credibility with them (based on FICO, income, etc..).  that's what this institution looked at for me.  particularly in this lending environment (though my broker tells me its getting better).

I found my mortgage broker through another investor (who's also one of my real estate agents).  i would suggest finding several brokers that are savvy with investors as opposed to personally owned properties.  try the local REIA in your farm area at the meetings or just go on their website if they have one.  it takes time, but it can be worth it.  also i would suggest trying a few brokers (or the local banks themselves) to get a better understanding of the typical terms in your investment area.  it could be vastly different from place to place.

Jon Holdman · Answer

Jason Merchey, a balloon loan is one where the payment is computed with a long(er) amortization period but the loan is due after a short period.  These are very common for commercial loans.  The might be described at 20 year, due in 5 or some such.  That means the payment is computed as if its a fully amortized loan for 20 years.  But after five years, you have to make one big payment and completely pay it off.  The usual plan would either be to sell the property or refinance before the balloon was due.

A "fully amortized" loan has the same payment for the life of the loan and you owe nothing at the end.  Sometimes the last payment may be slightly different than the others, but its just a rounding error.

Ian M. · Answer

@Nick K. you can also get private money (friend or family or close acquaintance NOT HML, they are not PM) financing for the down payment or part of the DP and finance the rest conventionally.  It would depend on the lender and would likely have to be a portfolio lender as Jon mentioned (local bank or credit union) in order to do it with less out of pocket, if not zero out of pocket. Some lenders are allowing this again and I am trying to do the same - putting 10% down of my own, then creating a 10% note financing through either the seller or my private lender, then paying 8-10% on the note with a 2 year balloon.  you can use the cash flow to pay this off for the next 2 years if you don't need the cash flow at the moment.  Once you have that paid off you can begin collecting more cash flow.  Alternatively, you can simply make those payments on the 8-10% private money note, then, if the numbers work, refi out of the private money note.  just be careful to make sure the bank will allow this (some dont) as you MUST disclose this.  Also, know that rates will likely go up over the next 2 years.  Lastly, make sure the numbers on the deal will support paying the notes.

Disclaimer: I am not an attorney or financial professional, therefore the above is NOT advice.  It is simply opinion and ideas, thoughts and conjecture.

Jason Merchey · Answer

Jon Holdman, when you write
8-12%, 15 year amortization (maybe longer, maybe IO), 3-5 year balloon. 
Do you mean balloon after 3-5 years?  I was under the impression that those come at the very end.

Mike H. · Answer

Dawn A. Peer to peer lending? I can 't even qualify on those sites.
They ding me for having too many credit pulls.  I think I posted their response on here somewhere but my credit score was either 780 something or 800+ based on their credit pull. But the site still rejected me to even post anything because of the number of pulls I had.

Well if you figure I get a pull on every purchase (3 or 4 a year) and then I refi those same ones 3 or 4 more pulls. And then I'm trying to find additional financing sources that require credit pulls to check, I'm easily over 10 every year.

So peer to peer lending is a no for some investors. :-)

And, yes, to your other question, Nick K, typically you can oly use private or hard money for shorter terms. I know that there are some people that can find private money lenders willing to lend long term. But, from what I've seen, those are even harder to find than regular hard/private money lenders. And the regular ones don't come easy either so you can imagine how tough the long term lenders would be. :-)

Dawn Anastasi · Answer

Don't forget one more category:

3 or 5 years, 7% and up, peer-to-peer lending.

Oliver Trojahn · Answer

I purchase them with 20% down using conventional financing.

Mike H. · Answer

When using private or hard money for buy and holds (which is all I do), the idea is that I will not be using their money for long. They typically require an shorter exit strategy in order to lend their money in the first place.

Not only that but I'm not sure you'd be able to make the numbers work if you're paying 10% interest on your buy and hold stuff. You probably need to assume that you will be able to get them out of buy and hold stuff within 6 mos to a year tops.

How do you finance your buy and holds?

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