All Forum Posts by: Bradley Laddusaw

Hi Kevin,

There are actually loan programs offered by many HML companies out there that are great for the BRRRR strategy. They do not require a seasoning of rents and do not put much weight on your initial purchase price. Rates start in the 5's for a 30 year fixed. Though going through a credit union or bank will of course get you slightly pricing and rate, there are more hoops to jump through. At the end of the day it comes down to opportunity cost and your overall strategy.

Hi Kam.  Each state is a little different but in CA, you could independently verify your lender's license to confirm they are active.  If they are funding loans under a DRE Broker's license, you could also see if there are any violations recorded against them.

I put on a presentation last week identifying some direct questions you could ask of any lender to help vet them on the front end.  We recommend saving the pricing question for last because all lenders should be comparable.  If anyone is charging over 2%-2.5% on a 1st position loan, chances are there is typically 1 too many people involved in the transaction.  Here are a couple questions you could ask that will help you determine if they are actually a lender and if they could meet your closing timeline.

- Are you a direct lender or Broker?

- Do you require an appraisal on all loans and must these be ordered through an AMC?

- What source of capital do you use for your loans (ie: private investors or institutional?)

- Do you draw loan documents in house?

- Do you allow for junior financing?

- Are there any prepayment penalties?

- Does interest rate change with/without experience?

- Do you have an interest guarantee?

- What length of term are you offering?

- What extension fees do you charge if the loan goes past maturity?

- Do you have a minimum credit score requirement?

- What parameters are set around your various loans (ie: capped at 100% of the purchase price or off of the ARV?)

- For rehab loans, is there a fund control and how does the affect my cash to close?

Once you run through some of these questions you will quickly see that the highest and best leverage that is always quoted out the gate quickly changes.  Which ever lender you go to, that knows what they are doing, should be able to run value on your deal day 1 and give you a reasonable range on leverage and pricing.  We have seen loan structures change drastically on some borrowers due to "exceptions" that should have been disclosed on day 1 and they were not.  These questions should help narrow down your loan structure on Day 1 vs. when docs make it out.  Feel free to message me directly with any questions.  Depending on state, I could also introduce you to some great sources.

There have been a few comments already pertaining to your strategy, ie: Flip vs. Rental.  Once that is determined, you will be able to direct all your efforts targeting assets that fit that strategy. 

What more and more of our clients have been negotiating on their flip acquisitions are seller carrybacks.  This allows them to obtain a lower leverage point private money loan in first position, which reduces overall costs of the loan, the seller carries back the difference in junior position.  This works when the seller has sufficient equity and could understand the mechanics of a seller carryback.

Result for you as the borrower is a combined loan structure equal to or at times, greater than the purchase price.

You would want to communicate this strategy with any lender you are potentially going to work with as not all private money lenders will allow for junior financing.

As with all strategies, this one will not work on every acquisition and comes with potential headaches and risks.

I have seen this mistake hurt borrowers and private lenders and it is a simple one to avoid. As in most states, each California city has different zoning laws. I have seen flippers acquire a distressed SFR of which they thought was at a steep discount to the market, take out a high leverage point loan from a private lender and then simply can not move the property. Turns out this property is an SFR but zoned commercial. Some cities are ok with the use, will classify it as legal nonconforming, but an important question to ask the city directly is, "What happens if my property gets destroyed by more than 50%? Can you rebuild it as an SFR?"

Some cities will say yes while others will say "No", it needs to be rebuilt per the current zoning code.

This not only creates some potential insurance issues if this is missed by everyone but just as bad, there are huge property value swings. In the situation described above, if the building were to be damaged by more than 50%, it would need to be rebuilt into an office space "with no room for parking" which is required by the city. The resulting building would need to be smaller than the current layout. The value difference went from $650,000 as an SFR to $450,000 as a storefront retail. Borrower lost the property and the lender ended up having no protective equity.

This huge miss could be avoided by simply pulling a property profile to check the zoning.  If the zoning does not match the current use, further work is needed.  Some cities in CA will issue a "rebuild letter".  Basically indicates what the building is allowed to be rebuilt as if destroyed by more than 50%.

As @Ben Stoodley referenced, a lot of lenders hit pause at the end of March.  The lenders that hit pause were backed by Institutional money and sold their loans on the secondary market.  These large capital providers also extended their loan options to smaller lenders in the form of "Correspondent Programs."  All these small "lenders" of course hit pause as well since they were not really making the credit decision and were all backed by the same money.  The secondary market stopped buying of which I think showed their cards on what will happen if there is another market shock.  With that being said, there was still liquidity in the market place with your traditional private lending companies still writing loans.  The loans being written just were not as reckless as some of the loans being written by the big money chasing yield.  There is just a lot of money chasing yield yet again but history does tend to repeat itself.

Nothing beats a phone call to confirm it was sent.  We started using an encryption service at the end of last year of which also screens emails and attachments for authenticity.  Nothing is 100% full proof but we are able to log into our portal, check the quarantine folder and see if any good emails were caught up.  You would be surprised, or not, the types of emails that make it in there.

Great post to bring this up as we all get busy and it is easy to get lost in the craziness that is "fast paced real estate."

Unfortunately for the first property you are jumping into, you may not be able to get the initial purchase loan with money down combo you were seeking.  Though more loan options are coming to market, they are still a lot more tight from Pre-Covid standards.  

This platform could be a wealth of knowledge so learning from other's mistakes and successes could be extremely valuable for you.  You may need to come in with more money down and pursue more of a non-qm option.  I would continue the conversations with you current lenders to see where you need to be to get the loan you are seeking.  Just because you do not qualify today, does not mean you wont down the road.  

At the end of the day it comes down to opportunity cost and making an investment decision on your end. Does it makes sense to pass on a property you plan on holding over the foreseeable future due to not getting the FHA loan or does it make sense to close with an alternative form of financing leaving other exit strategies on the table?

What do they say? "If it was easy, everyone would do it."  Feel free to message me with any other questions and I would be more than happy to make intros in my network.

I run a private lending firm but in speaking to colleagues in the conventional and non qm world, there are a multitude of loan options out their for investment properties.  If someone is looking for a loan on a primary residence, chances are they are not receiving private money financing for that.

US Bank is just one lender.  Regional banks and credit unions are also a great route to start as they may have more flexibility on their loan options.  All questions should be asked ie: purchase loan vs. refinance, primary vs. investment, etc.  

In addition to this, the NON QM options have started to make their way back into the space.

Long and the short is, before someone jumps into an investment, there are many avenues to explore when it comes to financing options.  

@Philip Seymore, depending on the opportunity coming across your desk, a private money loan is always an option to acquire and reposition an asset.  At times, it is easier for the banks to push through a refinance on a property that already has a loan recorded against the property.

With that being said, there are a lot of lenders out there that will over promise, under deliver and change pricing on you at the finish line.  There are steps you could take to vet each particular lender out and I would be more than happy to share those steps with you.

As a couple of other comments above mentioned, it would be more cost effective to entertain all permanent forms of financing before going the private money route.  Those local banks and credit unions could be great long term resources for you.  When speaking to them about purchase loans, it may also be beneficial to discuss what their refinance options look like.

-Brad

Good Morning Lauren,

You find yourself in a fortunate position to ease into the real estate investing space.  Though you are based in NY, there are strong rental markets across the country that do not carry a high price point to enter and the overall return based on %'s, can be quite appealing.  There are many strategies you could target but more times than not in the RE investing space, slow and steady wins the race.

I am not a fan of telling other investors what is the "best investment" strategy because there are so many out there.

Starting here on Bigger Pockets is a good start but you can also start building out our real estate agent, property management, turnkey investment provider, and inspector network in any target market.  To some, spreading your initial capital stack across multiple assets may be a better way to diversify than acquiring one large multi-family asset while still achieving a comparable overall return.

Feel free to send me a private message with any additional questions.  I would be more than happy to introduce you to anyone in my network based on what you decide.