How do you avoid running out of loans?

Question

Hi all! I've been reading a ton and learning a lot from you all, too, but there's a part I'm stuck on, and I'm wondering if you all have solved the problem in creative ways (or maybe I'm just missing something!).

The concept of BRRRRing is that you pay cash, rehab to up the ARV, rent, and then refinance to get all your money back out. Rinse and repeat. Genius.

But, from what it sounds like to a very (VERY) new investor, most banks will limit the amount of loans they'll give you, right? Four, five, maybe ten? The BRRRR book suggests finding a portfolio lender that won't cap your number of loans but how rare are those? Are they like infrequent but available, or incredibly rare magical mythical institutions?

So, if they are incredibly rare (which I fear they might be) once you've used your four or five (or ten) loans... how do you keep going? What have you all done?

Andrew Postell · Answer

@Josh Johnston you are on the right track here but essentially you can find loans relatively easy in the market. If you are new it might seem daunting but as you progress in your investing career you will see that money is easy...and actually finding a HOUSE is the hard step.  You will 100% be able to find loans beyond 10.  I'll help clarify the loans a little here:

Generally speaking there are 2 main types of loans for investors:  “Conventional” and “Portfolio”

Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names).  These loans are all 30 year fixed rate loans.  They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending.  Fannie/Freddie money = Fannie/Freddie rules.  NOT the bank's own money.  The 10 loan limit is FANNIE AND FREDDIE'S limit.

Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money.  Sometimes referred to as "commercial" loans.  These loans are a lot more flexible than "conventional" loans.  Bank's money = Bank's rules.  If they like you, then maybe they will lend to you.  But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term.  The most common portfolio style loan in Texas is a 20 year adjustable rate loan.  These loans are easier to get but the terms are different.  A lender STILL might have some type of a limit here but not as hard as Fannie/Freddie.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders.  Portfolio loans can run the gambit.  Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs.  A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

Hope this helps.  Thanks!

Ned Carey · Answer

@Josh Johnston there are many types of lenders and many types of loans.  You can get loans that cover more than one property for example.

We just did one loan for three properties. That helped us because the value of the properties separately was not enough for the lenders minimum loan. By grouping three properties we were able to get a loan.

Small local banks, the kind with 1 to 5 or so branches tend to be portfolio lenders and will tend to be more flexible.

Josh Johnston · Answer

That was really helpful, Andrew! Thank you! It helps to hear some good news! I appreciate you.

Kevin Sobilo · Answer

@Josh Johnston, I think @Andrew Postell was very much on point.

One addition I would make is that if you are concerned with portfolio lenders having an issue with the number of loans you have, then buy properties in multiple LLCs. Portfolio lenders will lend to LLCs with you as personal guarantor (like a cosigner). So, the debt is the LLC's debt not yours.

This way, each LLC can have loans and when you apply for a new loan only the loans of THAT LLC are applicable to any criteria they have with regard to number of loans.

David Quan · Answer

@Josh Johnston

Agreed to everyone’s posts.  Just to share a bit of experience I’ve had very recently as I’m new to real estate investing and putting together the pieces now for my plans to BRRRR

Earlier in the month I got preapproved with a traditional lender for a Conventional 30 year.  In Virginia it’s right at 4% with no points.   Make sure that your credit score and debt to income is good before you start so you know you’ll be able to refinance. I was able to ask the lender about the limit and indeed it is 10 loans under the rules. Yesterday, I sat down with the Exec VP of a community bank that has a great reputation in the area and are portfolio lenders. It’s exactly as @Andrew Postell explained.   It’s a 20 year loan with a 5 year call.  As of yesterday, 6% interest.  About a 0.5% point at closing. Interest only payments. They will want to develop a relationship with you, be high in community involvement, requires you to bank with them on the business side bc that’s where you’ll get your draws should you use them for the acquisition and rehab. None of those are bad things. We are comparing it with Hard money just to get all our options and definitely cheaper. They will run your credit and require a personal financial statement. Hard money will not.

And you can move it over to a conventional refi with unlimited number of loans.   I need to confirm, but I believe they require Class A contractors. My question:  If you can start out with a portfolio lender to build the relationship, keep it all in house for leverage, and use OPM (not family and friends just yet),  would that make the most sense?

Josh Johnston · Answer

Thanks, Ned! So much to learn.  So appreciative of this community.

Josh Johnston · Answer

Oh, that's really helpful, too! Thanks, Kevin! It sounds sort of fun to own a handful of LLCs, too. Like a person who's actually making it! Here's to making it someday. Appreciate it, Kevin.

How do you avoid running out of loans?

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