Need help going from Hard Money Loan to Long Term Loan

[Steven W.]

Good morning all,

I currently have a triplex under a hard money loan because it did not meet the qualifications of a conventional mortgage and I needed to close quickly. I'm performing renovation on the property now, but want to start looking into my next step, which is refinancing the property into a long-term mortgage with a lower interest rate. I was required to put the hard money loan in a LLC name, and would like to keep it there if possible:

Below is some basic information on the property:

Purchase Price:     $255K

Loan Amount:       $281K (15% down + estimated renovation cost)

Loan Duration:      1 Yr

Loan Interest:        9.5% interest only

Appraisal ARV: $457K

I've contacted 20+ lenders, including commercial lenders which all have high upfront points and 8%+ interest rates. This is kind of ridiculous for a buy and hold property. There have to be some better options out there.

Thanks for your help!

[Kevin Romines]

@Steven W. So let me get this straight. You want a loan to an entity where one of the partners doesn't have the best of credit and you want rates comparable to a Fannie Freddie loan? Not saying it doesn't exist, but with those perimeters you will be looking a for a while to find just that lender that can fit that box?

My suggestion is that you call all the local community banks that will do commercial or portfolio loans and work a blanket deal with them based on the portfolio that you have and will continue to build. They may cap you out at some point which would put you back on the hunt again, but typically they will go 20 or so before they cap you out?

As far as being capped by Fannie Mae to 10 loans. Well that's true for most people, unless you know how to get around that? I do, and with the solution, Fannie Mae will gladly continue to give you many loans past the point where you have more than 10 financed properties. Now before I tell you the method to do this, it still requires you to have a good relationship with a commercial or portfolio lender. So you going to want to put the time in calling and visiting the community banks in your area, but I have them in my area that will give terms close to Fannie Freddie on 5 or 7 year balloons or calls so they can adjust the rates at that time. It's about the best your going to get on those deals. And yes, other investors factor that into their costs of doing business.

Now, on to the solution to the 10 financed property rule with Fannie Mae. Fannie Mae considers LLCs somewhat like you holding property on a personal basis, my guess is because they tend to be pass through entities. However, Fannie looks at Sub S Corps, and other corps such as a C Corp differently. That means that if you move some of the properties that you currently have a Fannie loan or any conventional loan on, over to the Sub S and go get a commercial or portfolio loan on it, even if you are required to sign as the guarantor, it will not count in the 10 financed property rule. Thereby opening up more slots for you to buy your next property or refinance the property using a Fannie loan. Giving you the best terms available. 

As @Chris Mason mentioned earlier, another alternative is you and your wife can both finance 10 properties in your own names. A 3rd alternative is that there are no limits on the numbers of financed properties, if you are buying an owner occupied home. So if you want to get another rental, just go buy another owner occupied home and make the last owner occupied home a rental.

So the best way to build the portfolio is to use the Sub S method in conjunction with buying them via Fannie Mae loans. So buy them in your personal name, then age out the oldest that you have financed or the ones with the smallest balances to the Sub S and get commercial / portfolio financing on them at the best terms you can find. Rinse, repeat to as many homes as you could ever want to finance. 

See the actual guidelines below:

See below from the reference guide for FNMA multiple financed properties in MyKey. If they own 25% or more of the LLC or partnership then it would count.

Type of Property Ownership to include in Financed Property Count:

 Joint ownership of residential real estate. (This is considered to be the same as total ownership of an individual property).

Note: Other properties owned or financed jointly by the borrower and co-borrower are only counted once.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner

of the corporation; however, the financing is in the name of the borrower.

 Obligation on a mortgage debt for a residential property (regardless of whether or not the borrower is an owner of the property).

 Ownership of property that is held in the name of a limited liability company (LLC) or partnership where the borrower(s) have

an individual or combined ownership in the LLC or partnership of 25% or more, regardless of the entity (or borrower) that is the

obligor on the mortgage.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined

ownership in the LLC or partnership of less than 25% and the financing is in the name of the borrower.

 Ownership of a manufactured home and the land on which it is situated that is titled as real property

Type of Property Ownership NOT to include in Financed Property Count:

 Ownership of commercial real estate.

 Ownership of a multifamily property consisting of more than four dwelling units.

 Joint or total ownership of a property that is held in the name of a corporation or S-corporation, even if the borrower is the owner of the corporation and the financing is in the name of the corporation or S-corporation.

 Ownership in a timeshare.

 Ownership of a vacant (residential) lot.

 Ownership of a property that is held in the name of an LLC or partnership where the borrower(s) have an individual or combined ownership in the LLC or partnership of less than 25% and the financing is in the name of the LLC or partnership.

 Ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).