How to take investors' money

Question

Hi all,

I've only completed one deal at this point but have built a network through other business pursuits, and suddenly multiple people are trying to give me money. Given the hotness of my local market and the trust I've built with them, I could probably raise 100k-200k of private money with minimal effort.

Unfortunately, after speaking with 15+ regional and nations banks, I recently discovered the difficulty of combining private money with bank loanss. Here are some of the limitations I'm facing:

1. Since I already own one property, I can't get another conventional (owner-occupied) loan. That leaves investment loans, with a minimum of 25% down. Not a huge problem, but:

2. Banks require that investment loan down payments come entirely from my own savings--not from gifts or unsecured loans. This preempts the ability to use investor's money toward down payments.

What gives? Is it possible to combine private money with bank loans? My near-term goal is to purchase a 4-plex, and my longer term goal is to own at least 10 units.

Thanks,

Nick

Chris Mason · Answer

Hi Brent and Nick,

Yup, that first paragraph is correct Brent. That was the easiest convenient example of it. But borrowed funds secured by other real estate can always be used for down payments (or in the example of that link the entire purchase price) with no seasoning. HELOCs and cash out refinances on other props can be used for down payments - so can private mortgages. DTI still must work, of course.

Or, yes, you can "season" it, and be sneaky if you wish. :)

Andrew Postell · Answer

@Nick Lund sorry, I guess I misunderstood your first post.  If you are buying your primary home, you can certainly put 5% down with a conventional loan.  The 3% down option for Fannie Mae is only for Single Family Homes.  The 3% down for Freddie Mac is for multi-family homes but you cannot have an ownership interest in another property.  Both of those loan types have income restrictions but in some instances you can qualify if the property is in a certain census tract.  With either, you must occupy as your primary home to qualify.

For Fannie/Freddie loans on investment properties the minimum down that they require is 15% on a Single Family Home.  The loan description you provided (and that was in that post) is not a Fannie/Freddie loan.  That is a"portfolio" loan (sometimes called a commercial loan).  Portfolio loans come from the bank's own portfolio of money - thus the name.  Not only may they not have seasoning requirements but they also may not have a 15% down requirement either.  Since each portfolio loan is governed by the bank itself, each portfolio loan will be slightly different...or very different!  There are some "community" banks that can't lend outside of their geographical region per their charter.  Some banks will require you to have an account with them.  The only way to know all the portfolio loan options is to call each and every bank out there.  But a mortgage broker might be a good option or just networking with some people in that area.  Both of those would help point you in the right direction of which lenders have the terms you need for your specific portfolio scenario.

Hope this helps!

Andrew Postell · Answer

@Nick Lund this is a common problem for many investors and I know just the process for you to take here.  I do want to address one item first:

1. Conforming, conventional loans, Fannie Mae or Freddie Mac (if you recognize those names), only require 15% down.  HOWEVER, banks can place extra rules on top of Fannie/Freddie loans.  These extra rules are called overlays.  The larger the bank, the more overlays they will have.  That's why investors state to use smaller to mid-sized banks.  They are more investor friendly because they have less overlays.

2.  For your main topic of discussion, there is a method of taking "private" money.  You could take the money first, let it season in your account for 3 months, then use it to buy a home. The other strategy would be that if you have enough money to buy the home with cash, then your private investors grant you a mortgage to buy the home.  Then the bank would refinance the mortgage so you can get their money back.

I would say that I am hoping you are buying homes well below market value.  That's what most investors preach.  And the reason is that if you buy a home at 85% of Fair Market Value, then you refinance with 15% equity, you don't have any money to bring to closing when you refinance out of the loan.  Hard money lenders usually lend a maximum of 75% of the ARV.  And then your conventional lender comes in and refinances that loan.  So the 2nd strategy above is that you are replacing a higher interest rate HML with your private investors.

I hope this information helps but feel free to ask more questions if you need. Thanks!

Chris Mason · Answer

Yeah, it's totally possible. The overwhelming majority of lenders do not know how. Relevant link.

Nick Lund · Answer

@Andrew Postell that helps a ton. I wasn't even aware of the portfolio loan concept. Now that I know what to ask for, I'll start contacting a bunch of banks again. Thanks again--extremely helpful.

Nick Lund · Answer

Thank you all for the great advice here. I suppose I overlooked the "seasoning" strategy as a viable option. I'll also start exploring the concept of bridge financing, such as hard money loans.

@Andrew Postell it's interesting that you mention 15% being the minimum conforming amount. I'm currently closing on a 5% conforming conventional loan in the state of WA, and I've been informed that through a so-called "HomeReady" program that as little as 3% can be put down. Although we're dealing with federal agencies (Fannie Mae), I'm getting the sense that underwriting norms differ significantly across the US, if that's possible. For example, this post https://www.biggerpockets.com/forums/223/topics/28... on the 2nd page of replies states that the OP was able to combine owner financing with bank financing, with no mention of a 3 month seasoning period.

"Bank:$550k

Am: 20yr

Rate: 4.85%

Balloon: 5

Owner: $110k

Am; 10yr

Rate: 2%

Balloon: 3 year"

I guess it's possible that the owner financing is secured to some other real estate he owns. I'm PMing that OP, and if he replies, I'll update this thread.

Brent Coombs · Answer

Chris, I didn't look too deeply into that whole other link, but from its opening post, the key seemed to be that the OP raised all the cash required to get the deal done, from private Investors, before going to the Bank for a "Delayed Financing" Loan (ie. After it was already deeded to the OP), right?

Quote: "I asked four friends if they would be interested in lending me money at 10% interest.  Between them I raised $250k for the purchase. I provided each of them a promissory note and a deed of trust against my primary residence (not the property I bought). Apparently this is a key element that @Chris Mason explained to me ahead of time".

Whereas, the OP on this thread seems to be suggesting that the same sort of dollars (say $200k) would only represent 25% (or less?) of the purchase price, so the Banks would have to come into the equation before any closing. If the link addressed that point later on (differently than in the next paragraph), could you please summarize it again for this thread? Thanks in advance.

[I'm guessing it's just: Raise the rest through a Hard Money Lender; and be sure it's a "deal"?]

I keep reading that Banks "don't ask" or "don't care" about where your deposit came from if it's been in your account for 3 months or more, but to me, that makes zero sense! Are Banks really that idiotic? [Or, is it that they are discretely/secretly just looking for any excuse to lend you money money money, so by default, it becomes: "don't ask, don't tell"?) Cheers...

Nghi Le · Answer

@Nick Lund

You've gotten pretty solid advice here.  Either season the money for 3 months (so the banks won't know where it came from), or get into a deal using entirely either the private money or with the private lender providing some (or all) of the down payment and then refinance it out later.  This would probably be used in conjunction with a hard money lender.

Andy W. · Answer

I'm pretty sure if you get the investors money deposited into your account, you have to "season" it for 3 months, or let it sit for 3 months before they let you use it.

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