Building my real estate portfolio

[Mic Nguyen]

Im having a problem getting a loan to expand my current portfolio. I currently own 5 single family homes under my name and 1 single family home under my real estate corporation. I have 4 of them financed in my personal name. The problems I'm having is that some banks only allow 4 financed properties and they other problem is that I dont have that much income to show. My credit score is 802 and my 1040 income is 39k. I understand that this number is low but it is because of write offs. All of my rentals have positive cash flow before the depreciation is taken out and my corporation always shows a gain but very little after all my write offs. What can I do to get an investment loan so I can pick up some more properties? Thanks

[David Beard]

Same old thing. The areas that experienced the largest property value drops (and thus have the greatest deals now) are the areas where the local banks have been burned the worst, and these banks are under pressure from their regulators and their own Boards, and have either completely withdrawn from investment property lending, or are severely limiting it.

You would also be well-served to cultivate some private lenders, and disintermediate the banks out of the picture, as they're just a PITA. Offer to pay your potential lender 8-10% for 5-10 year fixed-rate money, 65% LTV 1st position on appraised value, rehabbed and tenanted, using a 3rd party loan servicer, pre-executed assignment of rents and pre-signed QCD that can be executed in event of 30-day delinquency (sidesteps foreclosure step for your lender), and use an experienced real estate attorney. If you have some experience under your belt, and can lay out a track record of success. Start with people in your circle of influence, one lender per property.

Some of the models that are being used successfully by investors:

1) Sell your rental property to a turn-key passive investor at a reasonable markup, where the investor then bears the risk of performance. Of course, to maintain your reputation for future business, you need to do everything reasonably possible to make sure this is a successful investment, such as performing a quality rehab, placing a good tenant, and staying in stable neighborhoods that are attractive to good tenants.
2) Sell your rental property to a passive investor at a reasonable markup, where you then lease it back from them at a somewhat below market rate. For that reduced rent, you guarantee them the rent for 5 years, and cover maint. costs. Capital expenditures are evenly split (this seems like it could be problematic to make these determinations).
3) Obtain a straight 5-10 year loan from a private investor, and you keep all the profit and risks above the borrowing costs.
4) Obtain a 5-10 year loan from a private investor at a lower rate, and you and the investor split the equity (net sales proceeds minus note balance) when the property is sold in the 5-7 year time frame.
5) A lot of the big turnkey companies are combining (1) and (3) by selling the rental to an investor and matching the investor with a private lender that they’ve cultivated.

Obviously, option 3 is the only that that is just like dealing with a bank.