All Forum Posts by: Alex Breshears

Hi Jonathan!

The markets I lend in tend to have this problem. What my investors do is they will use private money (truly private like an individual) to acquire a few properties at a time - fix them up, rent them out, and then refinance all of them together in a portfolio loan with a local or regional bank. When you do it that way the collateral for the loan is more than $75k, as it would be multiple properties and it gets the loan amount in a range where a lender would be interested. 

Quote from @Derek Tuohy:

I have 2 projects that I need financing for.  I bought two rental properties with cash.  One I need delayed financing on, and the other im looking to finance purchase amount plus rehab, then into a mortgage.  I reached out on Facebook to a private money lender.  This was part of his loan application:

"The only fee charged is for the Loan Protection Insurance (LPI ) which
is charged at 2% of the loan amount and has to be paid before closing
after signing our approval contract then we proceed to disbursing the
fund into your provided account as soon as the loan is duly insured."

Sounds fishy.?!

D

 Yes! This sounds super fishy! Any private lender that wants a significant amount up front before a loan closes is likely a scam. I could see something for a credit pull or maybe some sort of appraisal fee, but 2% of the loan amount? No! 

As a private lender we don’t require borrowers to pay anything before closing other than the hazard insurance - and that they pay directly to their insurance broker or company. We want everything documented through the closing for what was paid to who and for what purpose. That keeps everything transparent and everyone is aware. 

Hi Zachary!

You are asking the right questions now so I applaud you for that! 

What you are really needing is some guidance in underwriting. You need to run the numbers to see if this will pencil out as a deal that gets you closer to your goals for why you were interested in real estate in the first place. Cash flow from rentals isn’t just the money coming in minus the mortgage. There’s going to be a lot more expenses - especially in older properties or ones poorly rehabbed. 

While it sounds ideal to bring on another lending partner in addition to seller financing - as you can see you have to pay the piper at some point. That money has to be repaid on a monthly basis - and whatever balloon payment you negotiate with BOTH lenders. I personally wouldn’t rely on monthly cash flow to “save up” for that balloon payment either. 

I’m going to make up numbers to give you an example - you get seller financing for the triplex for 5 years - your payment is $1500 a month for a wrap mortgage the seller agrees to do. Then you also find someone to lend you more money for the rehab - which you estimate to be $60k for both units. The payment for that is $600 a month, balloon in 2 years. You agree to pay them both monthly payments which total $2100 a month. Your tenant in the first unit is paying $900 a month - I’m leaving out mgmt and repairs - so you have $1200 a month negative cash flow while the property is being renovated and you look for a new tenant. 

A few months later you have one unit done - $900 extra comes in. You have $300 a month loss (again - ignoring mgmt and repairs) - you finish unit 3 in another month - by month 4 or 5 you have all three units renting for $900 a month - so you have $2700 a month coming in with a mortgage of $2100. In this ideal world scenario you have $600 a month extra coming in - which as you can see will not add up to $60k to be repaid in another 18 months.  

That’s where the refinance into permanent debt comes in. You could refinance about 70-75% of the after repair value - which would hopefully pay off lender 1 and lender 2. If not - you are bringing cash to closing just to get out of the loans you already have. Secondly, depending on the interest rate you get for the new loan - a highly leveraged property may not cash flow or cash flow well - so one missed month of rent due to vacancy or a major expense comes up - that wipes out your cash flow for the entire year (or more!). 

This is where solid underwriting comes in. You will be able to see the numbers based on some assumptions. You can also put those assumptions out into the forums here on BP for others to comment on. There are also lots of great videos and information on how to underwrite these deals. Only when you have a solid foundation in underwriting would I pull the trigger on a purchase because as you have seen - it will be a money pit for awhile and if you don’t have the exit strategy to pay everyone back - it won’t be your money pit long because they will foreclose. 

You are unfortunately finding out the hard way there are two main ways to invest in real estate - invest for equity and invest for cashflow. Most methods will do a bit of both - but will often highly favor one over the other. Unless you have owned a property a long time, low leverage, lower expenses because the property has been well maintained and cap ex is low - that’s where the magic of cash flow happens. It could be the first 5 years of a rental it will be a money pit - for reasons you describe. The hard parts are at the beginning. What you really build with rentals is equity - but also as you have discovered you can’t eat equity. That’s why you really are a cash flow investor. Cash flow investing can look really different. For example I do private lending - so it’s alllllll cash flow with zero appreciation or tax benefits. So if those two things are important to you - then private lending doesn’t fit your goals at all. It’s about finding the right way to invest in the first place that gets you to your goal. From your post you sound like a cash flow investor because you want to leave your W2. It’s totally possible and many have done it using real estate - but the play is cash flow focus not equity focus. 

I agree with Andrew who posted above - private lenders will not be able to lend on a primary residence because of federal regulation protecting primary residences. 

I know initially it sounds like a great idea - pull out equity and use it to buy more assets. If you already know the DTI is an issue - imagine adding yet another rather hefty mortgage payment to the situation. Could you support that without using the money you pulled out in the first place ? If you start canabolizing the principal you pulled out to do debt service - you are setting yourself up for having to get even greater returns, which may not be possible without some serious increase in risk.

For example - if you pull out $1M from a HELOC - that's going to be easily be $7500 a month in interest alone. That's assuming simple interest at 8.5%. Yes you may not draw down the entire amount at once - but as you pull down more and more to put into the investments you choose - that payment amount also keeps increasing.

It sounds simple - borrow at 8.5% and put it into something that earns more than that. But in reality you need to worry about cash flow. For example - you buy a property that needs renovations, upgrades, furniture and decor for a short term rental. The time between acquisition and stand up (outlay of capital) and the time your first guest checks in could be 2-3 months in that example. You will have a payment due on that HELOC money in there before the first chance at getting cash flow to cover it comes in. So in addition to pulling the money out and it's return you may need to think about the cash flow logistics too.

What's so bad with using the money you have in the HELOC to pay the interest payments in that time frame? You are reducing the amount of capital you have to work with - so therefore you need an even higher return to cover the payments because you are working with a lower amount.

Think of this example - you have access to $1M - but because you have been using the money to cover interest payments for a year - and maybe bought a few things for your own home or maybe even a rental - a year later you have $900k of money to use to cover the payment for $1M. What may have required a 12% annual return to cover the payments (don't forget income taxes!) now you may need something like 14% to make up that difference from the loss of principal. It happens easier and faster than you think. You have one rough month - so you do it once. Your rental has to have a new heating system - that's $10k being drawn from that HELOC that has no direct increase in cash flow to cover the debt payment.

Is it possible to use your HELOC and come out ahead - absolutely. I know many people who have done it. The question is do you have a clear path for that money, the discipline to use it only for assets that will produce an income to pay off that debt or service the monthly payment. For some people that answer is really just no. Others have no struggle with it.

I’m going to be a little out of the box - but what stops you from GIVING a loan? You could do private lending - a loan secured against an asset like real estate - and get the monthly cashflow from it without the overhead of a mortgage, issues with tenants etc. Worst case scenario you own a property which is what you wanted in the first place. Obviously there are some safe guards and due diligence to it - but with that amount of capital it would be easy to get $4k to $5k a month coming in routinely - auto debited to your bank account. 

Im one of the authors of BP’s private lending book Lend to Live. If this is something you want to know more about you can pick it up here. https://store.biggerpockets.com/products/lend-to-live

I’m always happy to connect and talk strategy if this is something that resonates with you. Feel free to ask questions and also welcome to the real estate investing space! 

As a private lender who lends out her own capital I’ve done these loans. 

But before you get too excited here a few things to think about. 

1) Equity to the active investor is often thought of in dollars. You look at a property and think my mortgage is $150k and the property is worth $200k - so I have $50k in equity.  The lender on the other hand looks at it and says you are already at 75% loan to value so there’s really no equity to tap. 

2) Will tapping that equity cause the property to become cash flow negative? Extra leverage means extra monthly payments. Can the property truly support that. The last thing you want to do is turn an asset into a liability. 

3) What is your plan to repay that lump sum? Most lenders I know willing to do this are short term loans that have a balloon payment in 12-24 months. Are you using the capital in a way where the time frame aligns with paying off that lump sum? For example - pulling equity out to do a fix and flip - you could get that capital back in a year and repay the 2nd. If you are pulling it out to spruce up a STR and think the increased cash flow will repay the loan - that timeline may not add up.

there are a few other metrics I look at when thinking about second lien - and there may be a way to shore up more equity to make a second lien more appealing. Feel free to ask questions - always happy to help! 

Congrats on finding two deals! A great problem to have! 

As others have mentioned - hard money is going to want to be a 1st lien. They are not outfitted to do anything but that. Many will sell their loans on the secondary market - so the loans have to conform to what the market is willing to buy - which isn’t 2nds. There’s also a greater risk with seconds - especially with a 1st mortgage that isn’t in the new owners name - that could be asking for an escalation clause to be triggered any day. If you can’t come up with the cash - the first mortgage company will foreclose. 

The other consideration I would think about when the conversation of leverage comes up is the equity you have in the property with the additional proposed leverage and cash flow of that asset with that much leverage. If you are taking a deal subject to at 80% of the value - in your mind you might see $40k in equity - where as your lender sees none. There has to be some equity buffer with that additional debt - so if that doesn’t exist you may have better luck looking for a capital partner to go in on the deal with you. At that point they are an owner and could help direct and manage the asset (safeguarding the capital they contributed) while potentially getting a larger payoff for taking on the higher risk. 

If you do find someone to give you a loan (secured or unsecured) think about the exit strategy, cash flow and time frame you agreed to. If your plan is to repay the loan with cash flow from this rental - but it makes $200 a month and you owe $22k in 12 months - you need to have a plan to get that addressed. The stress of trying to acquire right now may end up causing you to make even bigger mistakes down stream as your focus was getting to the closing table and not worrying about beyond that moment. Remember the biggest part of the life cycle for any asset is the holding phase. Figure that out and you will be wealthy! 

I know this can be really frustrating and you don’t see the point from your perspective - totally valid. From a lenders perspective if they put a forced policy in place they must pay for that policy. It is a literal cost to the lender - and most of the loan documents I’ve seen (done professionally) say that a borrower will repay fees incurred by the lender to safeguard the property. Insurance falls under that umbrella - as would something like a tax lien that isn’t cleared up relatively quickly. In reality it’s not that they want you to pay for insurance over a period of time where nothing happened - they are asking you to repay them for fees they incurred to safeguard the collateral that is the asset to their loan. It’s more repayment than paying for coverage for something that never happened. A cost was incurred, that did happen, and they are asking for reimbursement. Mistakes happen, life gets busy - I completely understand that. Take it as a life lesson and move on with the knowledge you have. 

Quote from @Jonathan Rivera:

Hey, My name is Jonathan Rivera & I’m from NJ. Im currently a semi truck driver, I’m 32 years old & I want to connect with investors who invest remotely or even here if it makes sense . I know that NJ is pretty expensive & isn’t landlord friendly for the most part . My goal here is to able to come up with game plan, learn & implement information that is given..

Any thoughts on what I will need to invest remotely. What resources i will need in my corner to be able to invest remotely? My plan is to find discounted properties & do the BRRR strategy & potentially have section 8 tenants.

Hi Jonathan! I love where you head is at - you want to invest in a way that goes along with your goals and lifestyle! As someone who often invests remotely I will tell you there can be some challenges - and choosing the method of investing is going to be crucial. 

Since you mentioned BRRR in your post - those properties are often going to need renovations, and sometimes significant renovations. This is going to require a contractor to be your boots on the ground that you can trust to be your eyes and ears. This will be THE MOST critical part of that business model because you aren’t there locally to handle things, make sure they are done up to your standards, or even make sure they are done period. It won’t take a lot of searching on any real estate forum to see horror stories of investors and contractors. It would also help if you have some background knowledge in construction so you can “throw a flag on the play” so to speak if something doesn’t pass the sniff test. 

After that, a great property management company will be your best friend. Notice I said great, not good. They will again be the eyes and ears of your property during the longest part of the lifecycle of that asset - the holding phase.  Talk to people and find out what they feel is important in a property management company - and then start looking for managers that have those qualities and track record. 


Investing remotely in the BRRR method may be more expensive as you aren’t there to keep things on track or do small jobs for the property that may cost a few hundred bucks to do for each project. Be well capitalized going into your first deal - you will go over budget - you will make mistakes - you will learn a lot. The last thing you want is for your first deal to take you out of the game for a few years while you recover. 


To avoid that - you could consider teaming up with someone in that market locally. Maybe you have the ability to sign on the dotted line for the debt, they have construction know how to the ability to manage the team. Etc. 


The other thing I will mention is investigating a wide variety of ways to invest in real estate before you buy something. I invest remotely - but I do private lending for example. Less oversights secured capital against an asset - zero contractors and tenants. It works for me. It may not work for everyone. But it fits my lifestyle and my goals. There’s a ton of ways to invest remotely that don’t involve single family homes or even residential real estate at all - or even owning the property - like my chosen path. Talk to people doing that style of investing - but instead of asking them the technical know how questions - ask them their opinions of their experience. What did they like about it? What would they change? What’s the biggest thing they have learned doing it? What would they do differently? The answers you hear to those questions will be far more valuable to you than “what form do I need a motivated seller to sign?” type questions. 

I hope this line of thinking helps! You are in good company as I know several people personally that invest remotely. It can be done easier now than ever before in history - so take that as an advantage to use!