Best financing options for buy and hold?

Question

Hello BP community! This is my first post but we have been going around and around on this so I figured the forums might be a good place to find an answer. I know there are tons of fix & flip hard money loans out there, but I'm wanting to get into buy and hold properties and need to learn more about options for financing them.

I'm currently a college student with the typical student's mediocre credit and income, my dad who is my partner when it comes to RE recently had a nightmare primary residence purchase which made his credit score drop as well as a job change so we're both trying to get our personal financial houses in order and doubt going conventional will work.

Our original plan as advised by the previous CPA was to use his Solo K retirement to fund down payments and combine that with long term hard money loans but the new CPA said using a Solo 401(k) to invest is a bad idea (something about the taxes being higher than potential income?) so now we're back to square one.

- Are there more financing options that I'm not seeing?

- How likely are banks to loan on buy and hold properties you don't plan to live in under the basis that they will be performing assets?

- Is it even possible to get rentals to cashflow with HML interest rates in the double digits? (most properties I've analyzed so far work beautifully with cash but not when financed, especially at higher rates)

- Anyone in the NW Oregon area have recommendations for mortgage brokers or hml who work with investors on buy and hold?

- What is your strategy for financing buy and hold properties?

Thomas S. · Answer

Your best/wisest approach to investing is to not invest until you and your father have repaired your credit ratings. This business is not a race and it is essential that you build on a strong credit foundation. Bad credit means you are not in a position to be a investor.

You should also spend more time studying finances and investing. A property that will not cash flow based on a hypothetical 100% financing scenario will never have true cash flow from the property regardless of how much cash you throw at it.

The use of cash is in effect "buying" cash flow at a extremely high cost. Buying cash flow is the approach investors take when they have money they no longer wish to invest. Their agenda is to park cash they no longer have any use for.

Beginning investors need to utilise leverage to increase cash flow and grow their investments.

Derek Dombeck · Answer

I would NOT worry about waiting until your credit is better. Instead, focus on creative deal structuring. Learn how to buy property Subject To the sellers financing staying in place, or use leases and options to control property while it cash flows and purchase it at a future date, or find free and clear properties and only make offers to people that will hold financing for you.

Is this easy? That depends how much effort you are willing to put in......

Happy Investing

Derek Dombeck

Nghi Le · Answer

There are secondary lenders for people that can't qualify for bank financing.  Terms will definitely be higher, somewhere between 5-8% for either a 5-yr ARM or 30-yr loan.  But still cheaper than your traditional hard money with double-digit interest on a 1-yr loan.

They still have minimum credit score requirements though, I think 640+.

Allen Tucker · Answer

There are definitely hard money deals out there with 2+ year terms. I have trust deed investors who buy longer terms all the time. The bigger question for you is your exit strategy. If refinance today is not an option, then you are taking a risk by getting in to a deal with the hope that your credit will be improved by maturation.

My recommendation for you would be to consider other options other than buy and hold to try and gain experience and capital. 2-3 successful flips could really improve your ability for financing. Reach out if you have any other questions. Happy to help.

Edward B. · Answer

@Christina Traffanstedt, HMLs in the traditional sense will not lend a buy and hold at all. They make much of their money on velocity and do not want to be in a deal for too long. There are some new players in the game that will do long term financing on investment property based predominantly on the assets performance, but you will pay for them. Higher rates (although not HML rates) and points, etc.

You can try to find a seller financed deal or woo private lenders. It is not as easy but definitely possible to invest in RE without traditional lenders.

Basit Siddiqi · Answer

@Christina TraffanstedtI echo what others have mentioned - spend a couple of months on the sidelines as you repair your credit scores. Pull up the credit scores and see what the issue is.if it is high-utilization - look towards way to paying that down. You can look at wholesaling some deals as a mean of being in real estate and also getting extra cash.I would also agree with the accountant that you do not want to take an early distribution from a 401K plan. Your father would be hit with paying tax on the distribution and a 10% penalty. If he is above the age of 59.5 he may be eligible to take it out without the penalty.He may also want to look to see if his employer allows him to take a loan against his 401k.

Patrick Hermans · Answer

@Christina Traffanstedt seller financing is always an amazing option and you would be surprised how many properties are owned free and clear. Other than that, your options are limited. I would shy away from haard money lenders when it comes to buy and hold, because if you cant refinance quickly, youre stuck with a low performing asset.

Bo S. · Answer

Can you please PM me the details of these lenders. Thanks in advance!

Christina Traffanstedt · Answer

Thanks to everyone for the advice, I clearly still have plenty to learn! Sounds like it may be better to focus more heavily on wholesale and flip projects as I'm still building credit to gain some capital for down payments then pursue conventional loans when that time and the right property comes along.

Best financing options for buy and hold?

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