All Forum Posts by: Jeremy T.

@Braden Hobbs and @Jerry Limber

Yes, the LLC can get the loan though depending on your newness personal guarantees may also be needed.

I can share our experience but please consult with a lawyer and your CPA if you want to make sure it is done the right way.

We a have a healthy pipeline of deals we are managing ourselves. And increasingly we are being presented with partnering opportunities to lead projects for either out of town investors or local investors with less time or experience. Here is what we do:

1. Setup an LLC in the property address e.g. "123 Main LLC". This makes it easier to keep track of filings, Quickbooks entries, etc. and the chances are the LLC is actually available. When you go to put the property under contract you should either have an LLC ready and available or use the street address approach and hope for the best. So far we've been pretty lucky with the street address.

2. In your operating agreement indicate the ownership structure. We use a basic operating agreement that one of my business partners downloaded from Legal Zoom. Towards the back of the operating agreement (partnership agreement if it is an LP) there is a section on ownership %.

3. The loan and the deed to the property should now be safely in the LLC's name. However, if you are newer, as we are, you will also have to provide your personal guarantee.

The kicker comes in with your wanting to only have one of the partners on the bank loan. In most cases, any ownership interest equal to or greater than 20% needs to involve showing your financials and signing on the bank loan. If the partner had 19% or less ownership they would not need to show their financials or sign on the bank loan.

There are work arounds but you really need to consult with your lawyer and CPA. For example, you could in theory structure a 50/50 or 60/40 partnership and still list only 81% and 19% ownership on the LLC operating agreement for the partner signing the bank loan and the one not, respectively. This could be done, presumably, by structuring in a separate agreement some sort of fees or other arrangements that resulted in the equivalent of the desired ownership split.

Be very careful though. If banks want any owner with 20% or greater ownership interest to sign on the bank loan and disclose their financials intentionally working around this could lead to problems and is not fully transparent; proceed at your own risk. Can it be done, in theory, yes.

@Donnell Evans if you have good credit and a fair paying job I would avoid private money until you have exhausted institutional lending options. With those criteria met, pretty much any bank will give you a line of credit these days. As a word of caution the bigger the bank the longer and more painful the process. Our go-to lender is Sun Federal Credit Union. They are based out of Ohio but they also have branches in center city Philly and a few of the suburbs. 

In the last year our little real estate company has submitted quite a few loan applications. We've received plenty of No's and just enough Yes's, but consistently the loan officers are impressed by our Finance Application. Our business includes flips, single and multi family rentals, and both single and multi family new construction so we probably hit most of the BP community in one way or another. I am outlining our approach below in detail because if it helps you then it probably helps us too. Enjoy!

The Phone Call

1. Call the bank and ask to speak with the commercial lending team. 

2. Give the 30 second commercial about who we are and what we do.

3. Ask what kinds of loans they are looking for

4. Explain our current need including the project description and financials.

5. Ask if this is something they would consider; if no, ask for a referral. If yes, share personal financials to make sure we're not wasting each other's time. 

The Application - project profile

Include everything a loan officer would need in a single document to make a fair assessment. Our "project profiles" include the following

1. Simple cover sheet with the title "Finance Application", our LLC name, the address of the property, 1 line description (e.g. Single Family Home Renovation and Resale), Table of contents, and a footer that says in huge letters "Confidential".

2. The first page includes three sections: 

(A) Project Overview with 3-4 sentences describing where it is in Philadelphia, the current property condition, the target renovation, a note about high-end or rental-grade and any features (we go green - so split mini ducts, tankless hot water heaters, etc), and the financials: (i) Acquisition cost, (ii) renovation cost, (iii) ARV estimate. For bigger proposals I've included the "equity contribution" to demonstrate I get that we have to have 25% skin in the game.

(B) Company Overview with 1-2 sentences noting our mission statement (copy / paste from our website) and a note about anyone else we are partnering with (we now often have an equity partner in our projects so we list their LLC name).

(C) Management Overview with a picture of each person and brief bio about each person on the management team. The bio includes their real estate background, their role in the company or on the project, and any specific education or certifications they have (e.g. JD, MBA, General Contractor license).

(Yes, that's right... all that on the first page.)

3. The second page includes a section we call Neighborhood Information. This includes a big huge photo showing how cool the area is, a website link to a helpful webpage about the area (we use www.visitphilly.com for ours because they have a blurb about all the great districts in Philly), key financial statistics including average $/sqf, and median listing $, and then a few more links to helpful pages about that part of town.

4. The third page includes a Financial Overview. This page is split in two:

(A) Project financials for our flips we include both the resale exit and the rental exit, so they see we have more than one viable exit. I am not going to give everything away, but we simply list out under each of those columns (resale column 1, rental column 2) the key data banks want to know such as your cost and expected net pre-tax profit, and for the rentals the NOI and debt service coverage ratio (1.25 is stellar if you can meet that minimum, though not always feasible on a flip). I note on the bottom the assumptions, such as source of rental rates and the expected mortgage terms. On the bottom half of the page

(B) Draw schedule including a table of three columns: draw description and date, details of what is included in that draw (e.g. permits, rough ins), and the cost of that draw including any portion that is our LLC's responsibility and also show the % of the overall draw schedule.

5. The fourth page is where we show the architectural renderings. Ideally this is the final architectural drawing, but in reality it is usually either our near final architectural plans or a 3D rendition one of my partners who is a total tech wizard has cooked up. If we are very early in the design process we will include pictures instead of the drawings or renditions. Some banks don't really care about the plans they care about the financials, but chances are part of their team is going to ask for it so best to include everything in one package.

6. The sixth page includes the details draw schedule which usually means the result of our best estimates after meeting with several builders and drawing on our own experience. If we are further along then we have included the copy of the signed builder's quote. In either case, we are within a 10-15% margin of error and can pull from our own reserves if the finance application is approved and we miscalculated by a reasonable margin. We have also been off by 20% and in that instance the bank increased the loan size (and we had to resubmit the application). The only reason it was feasible though was because the ARV appraisal came in high enough to allow our loan to go up; if that's not the case then your problem is less about the renovation and more about buying a bad deal (or other factors).

7. The seventh page includes our comps analysis for properties sold in the condition we expect our ARV. Google maps allows you to include a picture of a map (just take a screen shot), and we also go to Redfin to capture a picture of the front of the house of each comp. The information in the table includes the basic statistics - beds/baths, total square feet, $/sqf - driving towards an average $/sqf that is multiplied by our ARV sqf to equal the proposed ARV. Sometimes it is above, sometimes it is below, but this approach is always a fair and honest representation rather than a number based on hopes and dreams. My day job is audit and risk management, some of that philosophy no doubt comes through in our application approach.

8. The eighth page is the same but for the as-is comps. This is particularly helpful when you bought the property in cash and the bank you are using will offer you 80% Loan to Value instead of Loan to Cost. We had one project where we had almost no cash in the deal because we picked up the property at such a discount compared to its appraised as-is value.

9. The ninth page is a rental analysis and this goes into greater or lesser detail depending on whether we are including this just to demonstrate the viability of the rental exit for a project intended to be a flip, or if it is a rental project we go into full details of property addresses, conditions, rental rates and note other factors driving towards a rental $/sqf just as above for the ARV.

10. The tenth page includes a single page snapshot of a like project we completed in the past to demonstrate we have the qualifications to be successful. We may include the number of days on market, the terms of the sale, and pictures and the write-up from the listing. In this section we have also included a spreadsheet of all our real estate projects to offer the full breadth of our team's experience.

11. The final pages include copies of the LLC certificate of organization, operating agreement, business license, and other key legal and registration information that should be expected of any company asking to borrow money.

Company and Personal Financials

Finally, in a separate document we will include the financials for the business and the principals. We are still a new company so personal financial statement, two pay stubs, and the last three years of tax returns are expected. 

There you go. Two documents with a short covering note in your email that forms the basis of a full and professional application in the humble opinion of an audit and risk management professional - and a nights & weekends flipper with big ambitions. 

@Tabitha Fox That question comes up every time I ask for a HELOC or personal unsecured loan. My answer is always "home improvements to my personal residence". We could always use another family room, redo the mud room etc. I don't think any of the lenders in my network would approve the request if it were related to real estate investment.

@Isaac Blocher 

Similar question. We are using cash to acquire land ahead of packaging the deals for investors and banks. In the short term, we are looking for lenders who can give us a line of credit to help finance the early stage investment then pay off the line once we are ready for the construction financing stage.

This is our basic approach:

1. Buy the land and adjacent parcels

2. Finalize best use architectural plans

3. Evaluate and confirm builder quote and commitment

4. Secure investor participation for 25% total project cost and Senior Lender participation for 75% total project cost.

5. Pay off short term lines that were used to secure the land.

Right now we use our own personal and business lines of credit but we are looking for an alternative. We have excellent credit and high paying day jobs. 

It seems frighteningly easy to walk into a bank and request an unsecured personal line of credit or even an unsecured commercial line of credit (w/personal guarantee). Is there a better alternative for borrowing money to purchase lots or land? I would rather have a secured line of credit on the land purchase but most BP posters are saying no banks will underwrite buying undeveloped dirt.

Alternatively, I am interested in learning more about private money but contrary to conventional lending it seems like private money lenders want to take all of the potential profit out of your pocket just to borrow the investment capital needed to get a deal started. Hence I keep falling back on the decision to look into  personal or commercial unsecured lines of credit. I would rather pay 6.75% to 9.5% to borrow from a bank then the terms private money lenders are asking even for people with good credit and higher earnings.

Anyone have any different experience or suggestions?

The challenge is sometimes the last record on the deed is 10 or even 30 years ago. I am curious how big an issue this is because I know dealing with the city to try and buy properties can be a dead end. For example, I recently tried to buy a couple vacant lots. They said it was transferred to PHA, and then PHA said they couldn't do anything because the Council President had their eye on it for improvements to the neighborhood. So I walked down to the Council President's office and they gave me a hard time saying the home prices were rising too quickly for the people who live there now to afford to buy new homes and stay in the area. I am not sure why they think having vacant lots is a better idea or how that helps anyone, but if there is a way to track down private lots for owners that are back on taxes or that passed through one or a few estates I'd be interested to hear more.

If there isn't, contact me in a couple weeks because it's a business I'll be starting!

Thanks for the great posts @Gilbert Dominguez and @Travis Sperr. Our team is in a similar situation but a lower order of magnitude. We are looking at combining two SFH lots to build a 5 or 6 unit condo. One of the lots has an existing SFH we originally planned to flip. Then we threw caution to the wind and put the lot next door under contract. We will now build across both lots tearing down the existing SFH.

Our acquisition costs are closer to $150k, build costs estimated around $600k and anticipating $200-225k average sale price per unit. I'd estimate another 100k+/- in various selling and permitting costs.

Within our team we have rehab experience but are limited in new construction. We plan to partner with a big name architecture firm and an experienced GC who has a good portfolio of building small multifamily properties. We just started speaking with a local community bank for construction financing and hopefully our selection of experienced partners will augment our lack of construction specific experience. I'd be open to any other suggestions you might have on this.

@Ryan Rubel

Agree mostly with other commenters above. I was in a situation quite similar to yours and @Jerry Padilla

 said it best... take your time and do what you're comfortable with. We did the same leaving our money in Vangurard funds until we knew enough and the conditions were right. Read "Rich Dad, Poor Dad" and come up with a plan that works for your family. Then take your time, network and meet the right people and evaluate every deal conservatively. Our first properties were purchased above retail price (way above the 70% rule, more like 110%), but a few years into ownership it doesn't really matter because our initial investment is back and the properties are still  rented and cash flowing. Sure, we can't sell yet but why would we?

As far as cash vs. mortgage I would always go with mortgage. Firstly, if you are sued they can only collect the equity available in the property - the banks own the rest. Secondly, locking your money into the property means not having access for major expenses, or when other things in life happen - babies, sick persons, etc. Thirdly, as noted above cost of capital is dirt cheap so it's a good way to diversify your portfolio between real estate and your Vangurad investments. Fourth, even though we pay a little extra to have bankers, lawyers, accountants, property managers, etc. involved it's more layers of oversight that have the potential to offer asset protection. 

Good luck, you're problem is a pretty nice one to have!

Similar to @Andrew Syrios and @Josh Eitingon I own a couple probably C/C- maybe D class in some people's minds. One of the properties has two great long term tenants - respect the property and pay their portion of bills on time. The other property is more of an albatross, not necessarily a result of the tenant just sometimes what you end up with is a mixed bag. What you think will return 20-35% cash on cash (or more) is not always the case. 

Personally, my future investments will be focused on more developed and appreciating areas. Owning these was a low cost education and I'll continue holding as long as the numbers make sense, but I can't imagine the headaches that are compounded by owning multis or even complexes the size you're describing in that asset class. Agree with Andrew would only go in with property manager... but do you really want to invest in an asset where you're not comfortable stepping during the period between firing the PM and hiring the new one.