All Forum Posts by: Alex Breshears

Hi Julie! Great question! As others have shared, there are two main options for you - conventional and then alternative financing (including DSCR, commercial etc). Conventional financing is going to be the most preferable rates and terms, because they are going to have the most strict underwriting criteria. The rates will be lower than other options. The second will be something in the alternative lending space - usually DSCR type loans or commercial loans (even though the property isn't a commercial property). These loans will have a WIDE swath of underwriting criteria and program guidelines. I would stay by talking to local credit unions that may have something they want to keep on their books as an investment for the bank itself (balance sheet lending is what this is called). They are not looking to originate the loan and then sell it - so don't have to worry about what the appetite for what a buyer might want.

I don't know if the partner you need to buy out is on the title to this property, but that may be another sticking point with some lenders, as they may underwrite the property the way it currently vested. If that vesting will change, let the lender know that early and often so they don't keep underwriting the property and the loan package as a straight cash out refinance. This may matter significantly to a DSCR or commercial lender because they may be requiring a personal guarantee, which would include your individual selves - versus the LLC or business entity who is vested - and if your business partner has the assets or the credit score, losing that option as a lender for a personal guarantee could kill the deal. Right now in the lending environment you see today, lenders want very well qualified borrowers and as many of them as they can get on a loan.

Hi Evan! 

As others have mentioned the 90% CLTV on an investment property doesn't exist in this lending environment right now. But I also wanted to offer some insight into the thought process and why this may not be the best option.

First, being overleveraged in one property to then buy another property (and potentially keeping this train going with the same business plan) can be building a house of cards for real estate. This situation is what helped take down the 2008 housing market with not only over leveraged properties, but also loose relatively free monetary policy. I think using this as your primary source of capital for a new property can overall be problematic in the current environment, especially on an STR property.

When you borrow from one property to fuel another purchase, if that 2nd property falters, you are also covering the costs on the first property. You are creating a case where the first domino falls, it takes down the rest. STR's in particular are facing lending challenges because lenders are seeing the headwind in the economy with record high inflation, increasingly regulations around these properties, and saturation happening in several markets. STR income can be highly variable, so unless you have the reserves for carrying costs when occupancy dips, I wouldn't recommend this strategy right now, especially if you are looking at a property in a leisure travel market. Inflation eats away at discretionary income, and leisure travel is usually the first thing cut from the list of expenses.

Other options might be using the cash flow from property 1 to save up for property 2, or looking at other ways of acquiring real estate other than 1 person on title for 1 property. There are a whole ton of options out there so don't pigeon hole yourself into one way and not consider other possibilities.

Hi Zachary!

What you are experiencing is all too common. The most common scam in lending (and private lending specifically!), is the 100% financing for investment property. What I want to make clear is that there COULD be ways to buy investment property with "no money down", but you will still need capital.

So first, let's consider just buying an investment property purchase straight up with 100% financing. This is actually a risk to both the borrower and the lender. Think about this economic environment. In the 1-4 unit space, the "value" is evaluated based on home sales in the past several months within a certain radius of that home. With increasing interest rates, the values of properties are going DOWN in multiple markets across the US with more anticipated going into 2023.  So here is the problem, 100% financing today means 105% or 110% or worse next year. This LOCKS you into the loan because you will have to bring cash to closing just to sell it, or the lender would have to take a hair cut just to get it off their books. Neither is an ideal situation.  Also - a borrower that doesn't have enough capital to close a loan, or none of their own capital, is the highest risk borrower for default.  Lenders are not in the business of owning properties, otherwise they would have used their cash to buy the properties in the first place. Zillow and other ibuyer types are getting crushed under the inventory they currently own losing value for this very reason.  

Now what could be possible for "100% financing" is that if you have the property under contract at a deep discount and then renovation costs plus the purchase price are less than 70% of the after repair value.  Even in this case, many lenders right now are going to do a 10% down of purchase price (or more) with the lending environment currently out there. THis also doesn't include paying for closing costs on either option. Even if you found a lender that would do 100% financing on a deeply discounted property, they likely will also hold the renovation money in escrow, which requires you to start some level of renovations, complete them, provide documentation that is is complete and paid, and then get reimbursed for that money outlay.

So you can see you are asking for something that is difficult on so many fronts. I'm not saying what you are looking for doesn't exist, I'm just expressing that you may have to talk to A LOT of lenders to find one, and if the property isn't deeply discounted, 100% doesn't exist for investment property period.

Just playing devil's advocate - if you do manage to get 80% of 185k, would the property still cash flow with current rates on DSCR loans? I'm looking at this from the eyes of a DSCR lender, the 1% rule isn't close at all if the rent is $1350. DSCR loans will likely require at minimum 1.00, so the monthly payment and rental amount would need to be equal or the rent higher. Just doing quick numbers - that total loan would be $1400 at 8% with the insurance and taxes you mentioned. So the problem might be not the seasoning but the DSCR ratio for a loan.

Hi Devin:  Option 2 sounds like a scam. As a private lender, this most common terms are 100% financing for 30 years at 5% interest only.  Please really really vet that lender BEFORE you send them any money (don't do this!) or make a full fledged plan on closing this opportunity  with this loan.  Think about how risky it is for a lender to be into something 100% right now. The economic downturn could make the market lose value, for multifamily over 5+ units the cap rates may increase, rental subsidy programs may lock tenants in at lower rates or a landlord waiting on the programs to make the payments on a tenants behalf, maintenance falls behind, a major fire destroys part of the building. There is just so much that COULD go wrong that can affect the value, and the owner/operator doesn't have control over all of them.

Hi Samantha!

The difficulty you are likely going to run into with financing is that manufactured homes are not considered a permanent fixture to the property. They are going to be considered something like your car, it will have a title not part of the legal description of the property or even possibly showing it up on tax records depending on how long it's been there.  Lenders for real estate are going to want a permanent structure, since the loan would be covering the structure and the land.

Your best hope is to get a loan for the land, but given it's 6000 sq feet I'm not sure how much that may be because you are also likely going to have a really low LTV for "raw land" and a lower end of a loan amount that many lenders will want to do, usually around $75k, but increasingly it's $100k.

Hi Eric! Love the enthusiasm, and there are some great points written here, but I will tell you that officially raising capital with an SEC exemption is no small task. What may be a better option since you are new to the business model would be to start cultivating private lenders for each property, rather than going full bore into 20 properties that haven't been identified yet.  That way you can match up one individual lender to one property, the lender gets title insurance and is named as a mortgagee on the hazard insurance, and you sign a promissory note and whatever the lien instrument is in your state (mortgage vs deed of trust).  Some people may have capital sitting on the sidelines that they want just regular income coming in monthly, so they would be happy to have a private loan out for longer periods of time because they want the steady income.  That way you could get a few properties under your belt with this business model, knock off all the dust, build the processes and infrastructure to run it well, and then go to the market to raise capital with experience from the first few properties. 

As a private lender myself, this is something we routinely fund in my markets because of this lower asset levels. Depending on what state, I may know a private lender in that market. I am the coauthor for BiggerPockets private lending book, Lend to Live. I mention this because the book can be a blueprint for you to build your own army of private lenders. I work with an active investor in this type of market to help her build this private lender army to fund all her deals. She routinely gets loans for $20k to $50k for her acquisitions, and then after she has enough, she refin's into a portfolio loan with several properties, and then starts again. There are ways! Feel free to send me a message if you have questions, but in case you are interested in learning more about the private lending process here is a link to the book: https://store.biggerpockets.co...

Hi Ian! I hate to be the Debbie Downer here but there are a lot of considerations you may be skipping over in this line of thought. I just wanted to chime in with some additional information so your close friends and family understand what they are truly lending on, and how everyone can enter the lending relationship with realistic expectations of what can happen, and what will be happening in the future.

If you are borrowing from friends/family and having just a promissory note before closing not secured. Additionally, you should consider how long your friends/family are willing to have their money out to you. If you use DSCR loans as permanent financing, (or really any!), you may be required to let the lender know there is now another debt out there before closing, which could affect your approval. Most lenders use a standardize application, and there is generally a question on there about any other outstanding debt that you are responsible for that doesn't show up on your credit report. In order to prevent mortgage fraud, you would need to disclose this new loan before closing.

Also - lenders may ask there large deposits come from if they are sourcing where the capital came from. If they see a large deposit, they will want an explanation, and then you will be forced to explain you took out another loan before closing, so again, just be upfront if this is the route you want to use. 

While borrowing from friends and family is typically the starting point for most people when finding private money loans, it's also the quickest way to sink relationships, if not done correctly or as a true business transaction. I find a lot of people just assume that since they inherently trust their friend/family member, a lot of the "what ifs" and worst-case scenarios are not hammered out in fine detail which can lead to confusion and personal interpretation after the deal is closed, which it should have been addressed pre-emptively before the money was lent out. The other party may think they are lending on a property, but unless they have a recorded lien they are not lending on property, they are giving you an unsecured loan, like a credit card. I would make them fully aware of this. If you decide you want to record the lien after closing, the 1st lien holder needs to know and also you may not be allowed to take out junior liens, so asking about that before closing on your 1st lien would be a good idea. 

So my recommendations are 1) get an attorney involved so you know what your able to do legally and s/he can draft up the proper legal documentation to support the path forward, 2) consult with your lender to understand if they will want to know the source of funds and would allow another loan to be the source of funds,  and 3) consider the cost of capital in relationship terms rather than monetary since that matters more than getting the money. You don't want to burn any bridges by miscommunications or not properly addressing resolution paths, buy-outs, exits, etc. in a legal manner on paper and signed by parties. If you and your family wants to become more educated in how to transact this loan safely, you could check out BP's newest book - Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. I happen to be one of the co-authors and an experienced private lender. 

Hi Chris! As a military family, we have used Navy Federal several times for a variety of products. I will say by far their home loan department was THE WORST interaction we have ever had with a bank. Normally Navy Fed is on top of things, they understand military life, and are a pleasure to work with. We've bought several cars with their financing, have some of the their CD's, credit cards etc. No issues. We TRIED to close a VA loan with them (twice! because evidently we didn't get it the first time), and they were terrible. Couldn't get a preapproval letter in under two weeks, we would resubmit documents multiple times, they would lose things, not request the right documents, it was abysmally slow and after 60 days in escrow, the seller was not going to extend again. I'm not sure what the disconnect is in their loan area for home loans, but being unsuccessful at closing a home loan twice with them has made them a no way lender for us for any future home purchases.

We ended up going with another lender and closed the VA loan in 30 days, very easy process, so I know it wasn't us. lol. We had stellar credit, tons of reserves, just W2 income at the time, like textbook borrowers and NF still couldn't get it done lol.