Tell me your thoughts on this Local Bank financing for rentals

[Oliver Trojahn]

I wanted to run these numbers by everyone on this forum to see if this local bank might be the way to go in lieu of conventional financing for our next purchase. There are both pro's and con's to what they can offer(We are looking at 60k max houses for rentals:

They hold all their loans in their own portfolio and 50% of their business is rental properties locally.

Rates are 6.5% 5/1 ARM (ARM ouch!), 20% down, 500 dollars closing costs.

Can include capital improvements in loan amount.(e.g. new roof).

Can Loan directly to our LLC with personal guarantees (this personal guarantee does not show up on personal credit report until you default). After a few properties and five years in we could refinance with them and include all properties in one loan (portfolio loan).

My partner and I are barely able to get a conventional loan. However, I think we just qualified (he bought car which is tilting our debt to income ratio a little and our first rental is shown as a complete liability as we do not have 1 year tax return).

What is everyone's thoughts on this local loan program? I almost think the fact they will loan to the LLC is a deal maker almost, also the low closing costs are attractive. I am excited to see what everyone thinks.

Thanks.

[Scott Hubbard]

Originally posted by Oliver T.:

I wanted to run these numbers by everyone on this forum to see if this local bank might be the way to go in lieu of conventional financing for our next purchase. There are both pro's and con's to what they can offer(We are looking at 60k max houses for rentals:

They hold all their loans in their own portfolio and 50% of their business is rental properties locally.

Rates are 6.5% 5/1 ARM (ARM ouch!), 20% down, 500 dollars closing costs.

Can include capital improvements in loan amount.(e.g. new roof).

Can Loan directly to our LLC with personal guarantees (this personal guarantee does not show up on personal credit report until you default). After a few properties and five years in we could refinance with them and include all properties in one loan (portfolio loan).

My partner and I are barely able to get a conventional loan. However, I think we just qualified (he bought car which is tilting our debt to income ratio a little and our first rental is shown as a complete liability as we do not have 1 year tax return).

What is everyone's thoughts on this local loan program? I almost think the fact they will loan to the LLC is a deal maker almost, also the low closing costs are attractive. I am excited to see what everyone thinks.

Thanks.

Retail 5/1 ARMs are around 4.25 %, so your paying a risk premium of two points roughly. This is not too bad as non-occ will generally run two points higher no matter the loan terms.

The terms quoted above seem to me to be broad strokes... Is there a pre-payment penalty or can you refi after a year? Is there an interest rate cap? Is the index rate based on LIBOR?

With an ARM, your probably going to need to refi and waiting five years may not be your best option, so you should plug the costs to refi in your strategy unless your strategy is to sell.