Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
If one wishes to carry back paper on an asset they own free and clear and later pledge the loan receivables as collateral for a new loan who would they normally contact to loan this money? What sorts of terms are generally offered by these lenders and how do they price the money?
I have read that the hypothecation lender would be lending in an unsecured position as well. Is there any way that said lender could protect their position so that they aren't wiped out in a bankruptcy?
I am thinking that this scenario would be a good way to give lenders security for a line of credit without completely sapping the ROE if one wishes to take a passive role in the underlying asset instead of managing the project. Is there anything incorrect with this line of thinking?
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
14y
@Kevin and Brian
This discussion was preliminary and I too want to nail down some costs, credit limit, and a rate. I have a meeting scheduled this Friday and I bringing in my bank statements from another bank.
I am with one of the big five right now and you should have seen my business banker's face when I asked about getting a BLOC using my cash flow as collateral. After looking through her brochure's, she said they do not have that type of loan program.
Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
14y
Economics always teaches that there is no such thing as a free lunch."
Hypothecate according to Investopedia means to pledge as asset as collateral thus the borrower gives the lender right to liquidate the asset in the event of a default. Investors who purchase on margin give the brokerage firm the right to liquidate those pledge securities in the event of a margin call.
Astute lenders, always aware of the chance of a bankruptcy would place covenants on loans to secure their interests in adverse event. Pawn brokers take possession of the pledge asset.
Lenders also limit their exposure by using LTV restrictions.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
But I want the free lunch Kevin!
I am trying to figure out a way to have a mortgage on a property instead of having it free in clear with renters so that I can simply collect debt payments on some of my portfolio. I would like to be able to borrow against the asset though so I would need a lender to take the payments as collateral instead of securing their interest with a 1st position DOT. Ideally this collateral would be used to secure a line of credit with as few covenants as are feasible.
Lender · Fort Pierce, FL · Member since 2009 · 825 posts · 486 votes
14y
Bryan, it sounds like you want to have your cake and eat it too.
If this were possible --- and I am not saying it is or is not possible --- my guess is that a lender would say that the monthly rent payments that you collect could stop anytime and thus making a loan with that stream of payments is extremely risky. I'd guess that you could get 6 months worth of rent payments in a loan secured by that stream.
For example, if you collect $1,000 per month in rent, you could get a $6,000 loan.
It sounds like you want to extract the "dead" equity and reinvest it for higher return. Would a HELOC work better?
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
14y
I have been talking to a local bank about leveraging cash flow flow without using the property as collateral. Basically, it would take a PG and a UCC-1 against the entity (that holds title and collects the rents) specifically naming the income as collateral in lieu of the property.
They require multiple streams of income with a minimum of twelve months tracking. Many of my properties are leveraged, but there is decent cash flow to leverage further. This is also called factoring.
In your case, it may be difficult to leverage this type of arrangement with just single property. But its worth a try.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
I'm curious too....let us know what you find out Scott.
I'm having lunch with a VP at one of my small regional lenders this Friday. I'll ask her about using these cash flow from the mortgage as security for a new mortgage and see what she says.
Rehabber · Tucson, AZ · Member since 2008 · 1k+ posts · 802 votes
14y
@Kevin and Brian
This discussion was preliminary and I too want to nail down some costs, credit limit, and a rate. I have a meeting scheduled this Friday and I bringing in my bank statements from another bank.
I am with one of the big five right now and you should have seen my business banker's face when I asked about getting a BLOC using my cash flow as collateral. After looking through her brochure's, she said they do not have that type of loan program.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
14y
That is because big banks no longer have bankers. They have order takers that try to fit something in the prescribed boxes that align with what is best for THEM.
We now have three local lenders that will basically lend to us for anything that is reasonable. I love calling them up and working with them. The big banks flat-out suck to work with.