What are your MOST CREATIVE WAYS of getting BANK FINANCING?

What are your MOST CREATIVE WAYS of getting BANK FINANCING?

Shiloh LundahlPro Member
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes

As many of us have come to find out in real estate investing, our ability to grow a real estate portfolio is highly dependent upon our ability to leverage our money. Or, in other words, use others people’s money to make our money go further. We can either do this through private money loans or institutional loans through banks and such. 

Because of the financial meltdown that came about largely due to bad lending practices, banks have more strict lending guidelines which is both good and bad.  It’s good in that now people have to prove that they have an ability to repay a loan they get. This helps the market not become as overinflated because there are fewer people who can qualify for a loan and thus there is less competition and lower prices. It can be bad because bankers look less at the individual borrower and their individual circumstances and they look more at the results of the algorithms that the computer gives them that decide whether or not to lend to someone. Whereas this may help lessen discrimination because it makes lending more objective rather than subjective, it also makes it difficult for investors to get the best types of loans over time because the algorithms are not created in favor of investors.

So how does an investor grow a portfolio if the algorithms are created against them? Simple, figure out the algorithms, and give the machine what it wants. 

This post and this question is for anyone who has had to get creative with getting financing for properties. What secrets or less common practices have you used in order to get loans for your properties? 

* One important thing I want to add here is that I don’t encourage mortgage fraud or lying on mortgage applications. So please don’t post anything that is illegal or that would get someone thrown in jail. Just post things that you have found that get around the the barriers of bank lending.

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Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
6y

Obviously my delayed finance process has been popularized for good reason (fannie mae cash-out refi with no seasoning)

Also, recently I bought a 24 unit apartment and wanted to bring outside investors in as a JV but I didn't want them to have to take on guarantor liability. Since I have been in banking for a long time I knew that most banks only require owners of 20% or more to guarantee the debt. So I just tweaked the ownership a bit and instead of 5 partners at 20% each we had 3 partners at 18% each. We all agreed and I was able to get them on board with no liability. 

Great thread @Shiloh Lundahl 

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  • Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    6y
    Originally posted by @Jeff C.:
    Originally posted by @Alvin Uy:

    Here's another idea that I have been using as additional income to offset my DTI... while also able to write-off some of my other expenses....

    In my primary home, I have a dedicated office space where I run my other businesses. I have been "renting" out the room to my businesses. The rent amount is equivalent to my mortgages. Also, some of my utilities (phone lines, internet , cellphone bills, etc... even my car payments) are also directly paid by my business... and All are a huge biz write-offs. This significantly reduces my DTI... while also, showing a bigger cashflow. Win-win

    Pretty sure you can't do it like this. The home office deduction can either be calculated as the percentage of the home that is EXCLUSIVELY used for business (associated expenses would be multiplied by this percentage), or a simplified option which is $5/sqft with a maximum of 300 sqft.

    At any rate, this does nothing for you DTI. The rent that the business pays reduces your business income by the same amount monthly that you're picking up personally.. and that reduced business income then finds its way back onto your tax return. Neither the D nor the I in DTI has changed.

    Wait, I take that back.. rental income from your primary residence generally can't be used to qualify for a mortgage, so this method actually makes your DTI worse. You'll show reduced business income, offset with an increased personal income which can not be used to qualify.

    I'll need to speak to my CPA about income from primary residence not qualifying as income. Thanks for bringing it to my attention. It makes me wonder how this affects how lenders see AirBnB / STR income.

  • Real Estate Broker · Bakersfield, CA · Member since 2018 · 269 posts · 597 votes
    6y
    Originally posted by @Alvin Uy:
    Originally posted by @Jeff C.:
    Originally posted by @Alvin Uy:

    Here's another idea that I have been using as additional income to offset my DTI... while also able to write-off some of my other expenses....

    In my primary home, I have a dedicated office space where I run my other businesses. I have been "renting" out the room to my businesses. The rent amount is equivalent to my mortgages. Also, some of my utilities (phone lines, internet , cellphone bills, etc... even my car payments) are also directly paid by my business... and All are a huge biz write-offs. This significantly reduces my DTI... while also, showing a bigger cashflow. Win-win

    Pretty sure you can't do it like this. The home office deduction can either be calculated as the percentage of the home that is EXCLUSIVELY used for business (associated expenses would be multiplied by this percentage), or a simplified option which is $5/sqft with a maximum of 300 sqft.

    At any rate, this does nothing for you DTI. The rent that the business pays reduces your business income by the same amount monthly that you're picking up personally.. and that reduced business income then finds its way back onto your tax return. Neither the D nor the I in DTI has changed.

    Wait, I take that back.. rental income from your primary residence generally can't be used to qualify for a mortgage, so this method actually makes your DTI worse. You'll show reduced business income, offset with an increased personal income which can not be used to qualify.

    I'll need to speak to my CPA about income from primary residence not qualifying as income. Thanks for bringing it to my attention. It makes me wonder how this affects how lenders see AirBnB / STR income.

    Is your CPA also a loan officer? Because if he isn't, he probably isn't the best person to ask about how income is calculated for the purpose of qualifying for a mortgage. See the linked section from FannieMae on rental income and scroll to "ineligible Properties".

    B3-3.1-08: Rental Income (10/02/2019)

  • Real Estate Broker · Bakersfield, CA · Member since 2018 · 269 posts · 597 votes
    6y
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    6y
    Originally posted by @Shiloh Lundahl:

    @Alexander Felice, @JD Martin, @Jay Hinrichs what are some of the creative ways you have qualified for bank financing?

     I think most of my bank financing has been boring, just regular balance sheet stuff. Probably the most creative thing I've done when it comes to financing was floating a rehab on a high-limit credit card on one property so that I would maintain high levels cash on hand during a purchase application for another. Since the credit reporting is usually 1-2 months from the time of incurring the bill, it gave me some freeboard to get the loan closed without having to slow the rehab down.

    Skyline Properties
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  • Erick FigueroaPro Member
    Investor · Houston, TX · Member since 2018 · 5 posts · 1 vote
    6y

    @Shiloh Lundahl, thanks for the great response.  This is a really good thread and great topic.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    6y

    @JD Martin speaking of credit cards, another tip can be to have the credit card in your spouse’s name so that it doesn’t show up on your credit when you apply for the loan.

  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 17k+ votes
    6y
    Originally posted by @Shiloh Lundahl:

    @JD Martin speaking of credit cards, another tip can be to have the credit card in your spouse’s name so that it doesn’t show up on your credit when you apply for the loan.

     Yes, done that too. Thanks for reminding me!

    Skyline Properties
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  • Lender · Los Angeles, CA · Member since 2018 · 31 posts · 16 votes
    6y

    @Shiloh Lundahl

    When using “proposed rents” on a vacant property underwriters go off of the appraisers rental value or the lease value, whichever is lower.

    When using rental income from a property you already own, underwriters look at your taxes to see what you actually collected.

    Inflating your lease, or making It more complicated won’t change how much the appraiser says it’s worth, and it won’t change what your tenants actually pay.

    Has that ever actually worked?

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    6y

    @Jarod Dudley Yes. It has worked 3 times in the past few months and it is about to work one more time on a 14-property portfolio loan before the end of the year. 

    Many of my properties are not on my taxes last year because I purchased them this year, or several that are on my taxes were purchased some time during the year last year so it would be difficult to get an accurate full year income from each and every property. 

    The banks that I use see my investing module, they see that it is sound, and then they will lend to me a certain amount and see how I do with that. If I do well with it, they continue to lend me more. I show them verifiable personal financial statements and I keep their reserve limits in the bank and they eventually lend me more money after a big fight with the underwriters. But the fight is expected because my financials are complicated.

  • Lender · Los Angeles, CA · Member since 2018 · 31 posts · 16 votes
    6y

    @Shiloh Lundahl

    “Yes. It has worked 3 times in the past few months and it is about to work one more time on a 14-property portfolio loan before the end of the year.

    Many of my properties are not on my taxes last year because I purchased them this year, or several that are on my taxes were purchased some time during the year last year so it would be difficult to get an accurate full year income from each and every property.

    The banks that I use see my investing module, they see that it is sound, and then they will lend to me a certain amount and see how I do with that. If I do well with it, they continue to lend me more. I show them verifiable personal financial statements and I keep their reserve limits in the bank and they eventually lend me more money after a big fight with the underwriters. But the fight is expected because my financials are complicated.”

    ——————————————————————

    Congratulations! Its very surprising because that’s not how lenders typically verify a rent roll.

    For properties that are owned less than a year most lenders use market rents which are determined when the property is appraised. Otherwise people could write leases for $1,000,000 per month!!

    it sounds like you must have a unique situation, but for anyone buying or Refinancing 1-4 units with Fannie/Freddie/FHA/or hard money- this would not fly.

  • Shiloh LundahlPro Member
    OP
    Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
    6y

    @Jarod Dudley These are commercial portfolio loans. I don’t believe they follow Fannie or Freddie guidelines.

  • Rental Property Investor · Los Angeles, CA · Member since 2017 · 33 posts · 14 votes
    6y

    I haven't done any "Creative financing", just barely learning about it as my husband and I don't think we'll qualify for a traditional bank loan for our 2nd property. We refinanced our triplex in October 2019 and have cash for a down payment, but I'm sure our DTI is maxed out. Our CPA and lender advised us to wait until we file our taxes (2 years running my business + can include rental income) to boost our personal income. We're thinking about getting a hard money loan to purchase a property and then refinance but wouldn't refinancing also need to look at our personal income @Alvin Uy and at our DTI in order to secure the financing with the bank? And say we only qualify for a small loan (leaving massive equity on the deal) bc of our DTI, what if it's not enough to pay the hard money lender back fully?

    Another thought we had was to invest out of state because I've seen some properties that our refi money can more than cover the purchase of the property and repairs.

    Thanks for the awesome thread!

  • Rental Property Investor · Los Angeles · Member since 2019 · 284 posts · 184 votes
    6y
    Originally posted by @Wei Cho:

    I haven't done any "Creative financing", just barely learning about it as my husband and I don't think we'll qualify for a traditional bank loan for our 2nd property. We refinanced our triplex in October 2019 and have cash for a down payment, but I'm sure our DTI is maxed out. Our CPA and lender advised us to wait until we file our taxes (2 years running my business + can include rental income) to boost our personal income. We're thinking about getting a hard money loan to purchase a property and then refinance but wouldn't refinancing also need to look at our personal income @Alvin Uy and at our DTI in order to secure the financing with the bank? And say we only qualify for a small loan (leaving massive equity on the deal) bc of our DTI, what if it's not enough to pay the hard money lender back fully?

    Another thought we had was to invest out of state because I've seen some properties that our refi money can more than cover the purchase of the property and repairs.

    Thanks for the awesome thread!

    Yes, I believe conventional lenders will likely look at your DTI again when you try to refinance out of hard money loan. Note: since Hard Money lenders usually want property under LLCs... your new property is not seen under your personal name so your DTI wont be affected. However, you will need to quitclaim new properties title to your personal name before you can even refinance it out of Hard Money Loan into a conventional lender... at which point the property being refinance will then affect your DTI unless its fully rented and covers mortgage (Depending on the lender, they may require proof of rental agreement or tax return showing rental income verification.)

    Please note: Please use Hard Money wisely. I only use Hard Money when buying distressed properties that don't otherwise qualify for traditional loans.... or if I know the property I buy has enough spread or have a big enough discount at purchase. Also, Hard Money lenders ( HML) may not take you on if you do not have enough experience. If they do, your rates may be on the high side 10-12% plus points. HML may also require 20-30% down payment depending on BPO. So not sure if HML is your best option in such case.


    If you have equity in your triplex, try looking into HELOCs instead. East West Bank lends HELOCs on "non-owner occupied" and do not look at DTI.. its also not "full doc" application... but only lend up to 60%LTV. Rates are slightly higher... Prime+2pts... but its a good option which does not necessarily tie down your DTI..

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