Private Lending for buy and hold single family homes

[Craig Montesano]

Hi BP-

Looking for private funding for buy and hold single family homes.

There are a few good opportunities in my market but I am maxed out on conventional mortgages. I currently have 5 rentals that I purchased anywhere from $25K to $40K and they rent from $600 to $700 / month. The cashflow is there but not enough at this point to run out and buy another house.

Anybody have any suggestions / wisdom they can share.

Thanks

Craig

[Chris Martin]

Part 1:
Talk to a commercial lender. Better rates than hard money by far, and many times better than private money as well. The trick is getting DTI (or coverage ratio, depending on the bank) stay as controlled as possible. If your numbers are really strong, you will get current and future money. Your job is to make the numbers as strong as possible.

Using your numbers as an example: $25K acquisition, 20% down, $20K 'conventional' loan @6% means $120 per month P+I. Back of the napkin analysis for $600 rent is $300 net cash flow prior to debt service, using the 50% rule. The way one of our local commercial lenders calculates "acceptable" coverage for a loan portfolio is a coverage ratio over 1.25.

The coverage ratio (CR) is net cash flow prior to debt service / debt payments, so in your case, the CR of 300/120 or 2.5 is double the lender's minimum requirement.

Contrast that to a $100K house rented at $1,000/month. Same assumptions as above, the $80K loan payment of $480 consumes almost all of the $500 projected (back of the napkin using 50% rule) net cash flow prior to debt service. The CR in this case is $500/$480 or an unacceptable 1.04.

Part 1a:
You are conservatively making $180 per month per property, or $900. At the end of a year, use the $10K as down payment on a $15K loan with a commercial lender. Use a version of the presentation (see below) material geared towards the commercial lender. Don't want to wait a year? Borrow $10K through lendingClub.com. The borrowed $10K will have minimal impact on your CR.

Part 2:
To borrow part of @David Beard's post, from 12/19/12 on this topic: http://www.biggerpockets.com/forums/49/topics/80312-single-family-rentals-at-24-32-cap-rates

Put together a presentation describing your strategy, process, and your profitable portfolio, all pointing toward the safety of their investment. Doesn't hurt to illustrate the low returns available in CDs, bonds, and annuities, and the volatility and low 15 year average return in equities (< 5%). You will probably need to get an appraisal, and look to borrow 65-70% of the appraised amount for a 5-10 year period, fully secured.