Financing for single family rental property |
| Posted by: rjsproperties Mar 10 2004, 09:40 AM |
| I would like to find out how and where to get financing for rental property. I’ve set up an LLC for my business and opened a bank account so I have taken steps to getting things going, but I’m a little discouraged. I don’t have much money saved yet for a down payment. I know that most if not all of the time an investor would need at least 10% for a down payment. Are there any institutions/sources/options that I could use? I’m not interested in anything shady or even slightly “below the table.” I’m sort of in a rut and would like to know if there is anything I could be doing or if I just need to continue saving. I hope there is somebody out there who could help. Thanks, Rick |
| Posted by: loanuniverse Mar 10 2004, 09:59 PM |
| Rick: Actually the percentage required as a down payment for non-owner occupied rental property is usually 20% not 10%. Organizing an LLC and opening an account in its name does not actually build any business credit. The loan will be underwritten with rental income as a source of repayment being the most important factor. We rarely look at the strength of the real estate holding company because it usually isn’t there. The holding companies are just to hold the real estate and usually have the property as its single asset. I don’t have any mainstream sources for financing that would give you a higher loan-to-value. On the other hand, without using anything shady you can look at the following: Seller financing: ask the seller to keep a second mortgage on the property so that the lender gets the required loan-to-value. Using other sources of financing: Can you borrow from another source and use that money as the down payment? Of course, you don’t want to get into a position that the combined debt service coverage is higher than the net operating income. Hope this helps. |
| Posted by: rjsproperties Mar 14 2004, 05:46 PM |
| I have heard of owner financing, but am worried that I would be taken advantage of because those deals usually benefit the owner-financer. What can I do to ensure that I’m protected and not being taken advantage of? I’m talking about specifics not generalizations like using common sense. Thanks, Rick |
| Posted by: loanuniverse Mar 14 2004, 08:59 PM |
| ”I have heard of owner financing, but am worried that I would be taken advantage of because those deals usually benefit the owner-financer. What can I do to ensure that I’m protected and not being taken advantage of?” In my limited exposure to owner financing, I have noticed that the seller uses it as an enticement to attract those buyers that may not be able to buy the property on their own, and by doing this they can get probably get the buyer to overlook shortcomings in the property or the deal as in “a higher price”. When I say seller financing, I don’t mean for you to get the full purchase price financed by the seller. I mean for you to bring this up when you do the offer. You are the one bringing the financing up under your terms. Of course, the terms would have to be fair in order for the deal to be appetizing to the seller. This means a relatively quick amortization and a competitive rate all of it secured by a 2nd mortgage. Make sure to run the numbers using tools such as the sensitivity spreadsheet in this site to make sure that the debt repayment is there for both loans. Hope this helps. |
| Posted by: rjsproperties Mar 17 2004, 09:07 PM |
| Forgive me, but what do you mean by a quick amortization and a competitive rate all of it secured by a 2nd mortgage? I’m still just learning about real estate investing so sometimes I need a picture drawn for me. Thanks for replying and for you patience. How do you, personally, feel about seller financing? Do you think it’s something I should explore or leave alone? I would really appreciate your input and insight. Rick |
| Posted by: loanuniverse Mar 18 2004, 09:17 AM |
| ”Forgive me, but what do you mean by a quick amortization and a competitive rate all of it secured by a 2nd mortgage?” No problem Rick let me see if I can make it clearer by using a hypothetical example: Lets say that an investor is interested in purchasing a 4-unit apartment building that is being sold for $200,000. However, the investor only has $20,000 to be used for this transaction. The bank is only going to lend up to 80% of the value of the property so the largest loan he can probably get is one for $160,000. This means that he is at least $20,000 short {probably more since there will be about $5,000 in closing fees, which will leave only $15,000 of his money to be used for down payment}. Lets look at the numbers: Purchase price: $200,000 Closing costs: $5,000 Money needed at closing: $205,000 This will be funded with: Loan from lender {1st Mortgage}: $160,000 Your money: $20,000 Shortage: $25,000 One way the could get the money is by getting the seller to give him a loan. However, the seller is not going to give him the loan out of the goodness of his heart. You have to make the idea attractive to the seller and get the seller to agree. You do this by giving him a structure and terms that the seller will be happy with. So when I say ” a quick amortization”, I mean that the loan should be relatively short. Do not ask the seller to give you a thirty-year loan on the $25,000. When I say ” a competitive rate”, I mean that if the seller could get a 3.5% return on a five year CD, and the lender with the first mortgage is getting 6% from you, the seller is going to want more than 6% on his loan {a smart seller anyway}. ”How do you, personally, feel about seller financing? Do you think it’s something I should explore or leave alone?” Seller financing is great when you can not get the money for the deal yourself and the property provides enough cash flow to pay for both loans. I have a certain aversion to the idea of the seller financing the whole deal because I think that the idea of getting a third party involved as the lender will help you avoid problems. For example the lender will require an independent appraisal, which the seller might not require if he is going to finance the deal himself. Nevertheless, in a situation like yours, where you are short money, I think it is a good thing to look at all of the options. I am glad to hear you have found the site helpful <hint> |
| Posted by: Don Lepley Mar 19 2004, 02:03 AM |
| If your mid score is high enough I can get you a 95% noo loan Don Lepley 1-877-632-2018 United Capital Mortgage Depending on the state |
| Posted by: Guest_rjsproperties Mar 21 2004, 09:28 PM |
| Don, How do I figure or find out my “mid score?” I reside in Missouri and intend to buy property here. Thanks for the reply. Rick |
| Posted by: loanuniverse Mar 22 2004, 02:23 PM |
| “How do I figure or find out my “mid score?” “ I think he means credit score. You now as in FICO or Beacon, depending on the vendor. By the way, I think it is always a good idea to find out what your credit report says about you. It only costs like $10 to get a credit report pulled from each of the main three. You should do something like that, I did it a year ago prior to changing jobs since my type of job usually requires that your credit is investigated. |
