Isn't it really all about LTV??

[Edward Peugh]

BP,

I am a seasoned investor with a number of rental properties.I have used many forms of financing to include standard “conventional” financing, to more creative forms like Seller Financing, and Lease-Options.

As a result of the large number of transactions we see, we have invested most of our liquidity, to the point where I am looking for private investors for the first time.

I have spoke with a number of "Private Lenders" some have been interested (in fact we are closing one of these deals in about a week) but I have been surprised about one specific category of responses. Many leaders blindly looking to loan at the "20% down / 70% LTV" rule without really understanding the numbers.

I am curious about the take of the BP community, so please allow me to expand my point.

I will be purchasing a Buy-and-Hold in Charlotte, NC for ~$26,000 with very solid ARV of $65,000 (two comps sold in the last 90 days with 4 and 12 days on market).I was able to purchase this property for such a competitive price because of the significant legal work that was required to remove the legal "encumberment" on the property. I have been offering a first position note of $30,000 at 12% interest only for 24 months. All closing expenses will be paid outside of funding.

After I walk through these details I get the response something like "oh, you want 100% financing, aren't you going to have some skin in the game?". My response (with a little irritation) is normally something like "You mean other than my $30,000 in equity?, Yes, I want 100% financing at 50% LTV." I then go on to try and explain that I could simply "create" a larger down payment, by simply increasing the amount borrowed as shown below (See Alternative Scenario 1 & 2).

Preferred Scenario: Borrow $30,000 @ 12% Interest Only, 0% Down, 24 Months at 46% LTV

Borrower proceeds at closing: $4,000

Alternative Scenario 1: Borrow $34,000 @ 12% Interest Only, 10% Down, 24 Months at 52% LTV

Borrower proceeds at closing: $0

Alternative Scenario 2: Borrow $45,500 @ 12% Interest Only, 20% Down, 24 Months at 70% LTV

Borrower proceeds at closing: $10,400

At this point I get a response something like, “Well we would never be able to lend on a deal like that!”.

Sorry about the long winded post, But now to my question.  Isn’t the “preferred scenario” above the most secure investment for an investor?