All Forum Posts by: Nick Gaines

Welcome to BP Inga. I am also an active real estate investor in Central Illinois with properties in Champaign, Urbana, Tuscola and Mattoon. 

My wife and I started out buying a two-unit apartment house about 7 years ago with a similar goal... buying 1-2 small multifamilies per year to hold and pay off the mortgages to cash flow supplemental income. Life happened and we found ourselves not saving up the 20-25% down needed to get conventional financing to carry out this plan. 

After learning more about the possibilities of creative financing, we've began to really ramp up our REI business and have accumulated 13 units over the last 18 or so months and I have the goal to get to 100 doors by then end of 2019. We've accumulated these new properties through one version or another of the BRRR strategy, but most recently by using commercial loans based on the after repair value. This has allowed us to "force appreciate" approximately 20% of the value of the property and get into deals with far less money out of pocket.

I have not had much luck yet with brokers bringing me deals in the Champaign/Urbana market that have enough value add opportunity to make this strategy work. I am sure they are out there, I just need to cultivate more relationships. Building your network is also going to be a great source for deals. I recommend attending both the Chambana Real Estate Investors Meetup and the Rental Property Investors Forum (both can be found on Meetup) to name a few.

Quentin makes a great point, house hacking is a outstanding way to get started if it fits into your lifestyle.

I wish you the best and I hope that we cross paths sometime.

@Eric Davenport I laid some groundwork with the bank ahead of time by discussing our business plan, submitting our financials, establishing rapport, etc... but we had not done any business with this bank prior to this loan.

We did not have to put anything up a collateral for this loan. My wife and I do have three other rental properties, a decent personal finance balance sheet, and high credit scores. I am sure the bank took those things into consideration, along with our detailed project proposal and track record as investors (5 years owning and managing rental properties) into consideration. 

The bank we are dealing with is a smaller local bank with only a few branches. I don't think we would be able to have done this type of arrangement with a big national bank. Even some of the other local banks I met with would have required us to put our money in first and/or put up equity in one of our other properties as collateral. I think as we get a few more projects under our belt, these other local banks will loosen up on those requirements. 

My suggestion is to get together a detailed project proposal containing your "business plan", rehab estimates, comparative market analysis, cashflow analysis, etc... and go and meet with a bunch of commercial loan officers (usually VP's) at local banks to present what you're trying to accomplish. Listen and respond to their feedback. Eventually you will find the best match for your needs. 

Even if you don't have a subject property identified yet, prepare what you can and start building relationships with local lenders. Discuss what is and isn't possible. Then when an opportunity comes up, you are ready to jump on it. 

We had an (almost) BRRRR where we started with a conventional loan (25% down on $105k purchase) did about $10k in light rehab and got about 75% of our money back out when we refinanced at 6-months. But as @Andrew Syrios mentioned, paying loan fees twice really added up. Even though we have some cash in it, our cash-on-cash return is around 40% and the property has plenty of opportunity for both rent and resale appreciation, so I'm ok with it.

What we are doing instead now is getting an interest-only adjustable rate line of credit from a commercial lender for the rehab period based on an after-repair value appraisal, then refinancing with a conventional fixed-rate mortgage at 6-months. Our bank allows us to draw on the line of credit first and then, if needed, use our money last. If the deal is enough value-add that your after-repair value is 25% higher than your purchase price minus rehab cost and loan fees, you can be in it with no actual money out of pocket. We've also found that the loan fees for the commercial loan are lower than a conventional mortgage, not to mention the application process is way less cumbersome with a commercial lender. You need to make sure your conventional mortgage lender will refinance based on your after-repair value and agrees to refinance at the 6-month mark.

Buying initially with cash is always going to be the cheapest way to go when you factor in loan fees and interest for the rehab period. But you can also get creative on how pay for your rehab. For example, get a 6-month no interest credit card or an interest-only line of credit and then pay it off when you refinance. Or if you have enough equity in another property, such as your primary residence, take out a HELOC to pay for the rehab. Obviously this involves precise timing and risk, so make sure you have your numbers tight and that your bank is on-board with refinancing with a fixed-rate mortgage as soon as possible.

Awesome. Thanks for the response @J Scott.

@J Scott - Does your book come with digital spreadsheets? Are they available somewhere else for download?