Unsecured line of credit - follow up

[Taft Love]

A week or so ago, I posted about my financial situation and asked a slew of questions. I thought it might make sense to follow up after visiting the bank.

In the last post, I mentioned that Episode 239 gave me the idea of using an unsecured line of credit (or multiple lines) to get started in real estate investing. I went to a couple of local banks in Eastern Washington this week, but was disappointed by the conversations I had (though not detered!).

The largest line of credit for which I qualified, according to the bank was $15k, which is about 20% of one of the two credit cards I have. While I didn't expect to qualify for $75k I requested (anchor the negotiation to a big number....right?), I thought half of that was reasonable. Apparently income is far less important than liquidity and stability. Working for startups and living around the world for the past couple of years makes me appear risky, it seems.

This seems to confirm my suspicion that there are four ways to get started:
1) traditional finanacing (20% down)
2) hard money (10-20% down and expensive)
3) cash (if you have it)
4) owner financing (if you get really lucky)

This leads to my question. Are there options that I'm missing? Are there creative (and realistic) options that I'm not considering as I think about how to get going?

-Taft

[Jeff V.]

@Taft Love

I don't have all of your information as far as what you have to work with, so I'll just explain what we have done and are looking to do in the future.

My partner and I had some cash to start and decided to partner on a single deal and see how that worked out.

Our First Deal

We purchased a 2/1 on a double lot in town for 20k using his cash and I put up the 20k required for renovation.  We had no idea what we were getting into at the time.  On day 1 of renovation (Demo) our contractor called us to inform us that there was significant termite damage on the rear of the property where one corner was touching the ground.

Lesson number 1 - Termite inspection went on the checklist for future purchases.

So we agreed to have the property treated and complete demo to see the extent of the damage.  Upon completion of demo our contractor calls again...  He threw a bombshell in our lap that 90% of the structure was ate up with termites and basically the only thing holding the place together was the termites holding hands.  The renovation was going to cost around 40k instead of the estimated 20k.

Neither of us had 20k liquid to  tap into, so we started talking to banks to see what we could find.  We ended up finding a loan at a local portfolio lender that was a construction loan.  They would lend the 40k required on a draw type setup and roll into a permanent mortgage once the project was complete.  The numbers seemed to work out so we proceeded.

We ended up having to build temporary walls to hold up the roof structure, being that it was the only thing left that hadn't been reached by the termites...  and then re-building the entire house under neath.

Lesson number 2 - in hindsight we should have dozed the house and started fresh with a larger new house.

However we learned alot about the process, construction, changing direction when things go wrong, being flexible and rolling with the punches.

We ended up with a nice place that we paid almost 100% of the appraisal price for, but we only owe 40k and it cash flows well.  We didn't really make money but the education we got was priceless.

Before we rolled the construction loan into a permanent one we contacted a few more banks using referrals from some of the guys at the local REIA. One of them gave us a contact of their Loan officer which happens to be another investor. The loan officer asked us if we had any other collateral to put up and if so he could get us a Secured Commercial Line of Credit, which is what we really needed. Luckily my partner had a free and clear property and we ended up using that to secure the line of credit.

We have since used that Line of Credit to Buy, Renovate, Rent and Refinance 2 other properties that ended up being no money out of pocket and they are both cash flowing nicely.

You see, you will need to network with your peers in your area and find out how they are doing it, and emulate the same.  They may even share their contacts.

One issue we have been having is the hold time... Our LOC is only large enough to do 1 Purchase and Rehab per year and then we hold the property until we can refinance using the appraisal price instead of the Purchase/Renovation cost. This ties up our funds and doesn't allow for quicker growth.

We have been looking into using private funds for the purchase / rehab phase to allow for multiple deals a year.   We ran across a Lending Tree like site for private lenders where they evaluate your deal and bid for your business.  I have yet to use them but, it looks like it would be a good fit.  Here is the link.  http://cix.connectedinvestors.com/

I'm in no way affiliated with them other than being a member on their site for networking.

Going forward, we will be looking at doing 2 deals a year for a slow and steady growth rate until we get to 10 or 15 deals.  Then our first deal will be completely paid off and each consecutive one will start paying off each year thereafter.

Lots of information here, but mainly you will need to network and be flexible and see if what is being offered can be used to complete your goal.  Sometimes it's not exactly what your looking for or its what you need but just don't know it, as it was in our case.

Hope this helps,

Jeff V