Im new to this RE Investing game and interested in purchasing property,rehabbing them and renting. Is it wise to try get pre approved for mortgages for leverage at a number of institutions? Will they give me money to rehab? Are there hard money lenders willing to give to new investors?
Am i going about this all wrong? i have good credit and would have money for1 or 2 down payments.
Im in Austin TX and any advise would be appreciated.
Thanks
If you’re going to finance rental properties, you need to find a bank who 1) is currently lending on NOO (non-owner occupied) properties and 2) will give you a chance since you aren’t an experienced rehabber / LL yet. I would go in with the expectation of putting 25-30% down. If you find something better than that, it’s a bonus. Once you get some experience, you’ll probably find it easier to get financing and also better terms. We use local banks for commercial (or portfolio) loans. They are shorter term and usually carry a little higher interest rate, but we don’t have to worry about the current FHA limit for the number of properties financed.
We did find one banker who would also lend money to rehab in addition to the purchase price. That was a great deal we used for a couple years until we reached his personal limit for the number of properties we financed with his bank. I would say that kind of deal is pretty rare to find outright at a bank.
We don’t use hard money and have no experience with that.
If you can get a couple deals under your belt and things are going well, things will get easier for you. No bank is clamoring to lend on NOO properties to newbies, but if you can prove yourself then you’ll find doors open up for you.
Learn your market so you’ll know what is a good deal and what to pass up. Find a good Real Estate lawyer and a good handyman (if you’re not going to do the rehab yourself). If you get good people, stick with them. We still use the same Realtors and lawyer we started with. We had some people do some work for us, but didn’t keep using them if they were too expensive, unreliable, etc. We have a great handyman now who can fix anything and has good connections to get things done at a reasonable price. We keep him busy.
Also learn your state’s LL/tenant laws as well as the proper eviction process for your local area. You can probably get a few good examples of leases from your area if you contact some Real Estate offices and apartment complexes.
Also realize for any property built prior to 1978, you have to provide the EPA lead based paint pamphlet to your tenant and have them sign a lead based paint disclosure form stating they got the pamphlet and any copies of lead based paint reports you may have for that property.
Develop a good applicant screening process.
Figure out in the beginning if you are going to do all of this in your own name, use a DBA name, or establish a business entity. Better to establish an LLC in the beginning and put the properties in the business name if you want to go that route rather than trying to shift the properties over later. We established our LLC as we were making our first deal and it was officially created prior to closing so we could title the property in the LLC name.
Recommend you find a good CPA in the beginning so they can set up depreciation schedules for your properties the right way from the start. We use Mark Wagner (mcwagner on here) and he’s also in TX.
Setting up your systems and finding people in the beginning for all of these different things is the hard part. After that, it’s just replication.
There are loans available that will wrap repairs into the purchase price. The down side is that many of them require them to be owner occupied.
Here are some options:
Wells Fargo Renovation Loan: https://www.wellsfargo.com/mortgage/articles/renov_loan
Home Path Renovation Loan (on a FannieMae property): https://documents.efanniemae.com/sf/ns/hpreo/pdf/renomortmatrix.pdf
FHA or HUD 203(k): [url=http://www.fha.com/fha_article.cfm?id=37]http://www.fha.com/fha_article.cfm?id=37 [/url]
There are other options available, but these are the top ones.
Justin0419 and Campbellsimon Thanks for the valuable information. Much appreciated.
Will keep ye posted on my progress.
Better to establish an LLC in the beginning and put the properties in the business name if you want to go that route rather than trying to shift the properties over later. We established our LLC as we were making our first deal and it was officially created prior to closing so we could title the property in the LLC name.
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Once you title the property over to the LLC, whose name is then used to obtain loans…the LLC or the individual?
The loan will be also in the LLC name, but the bank will make you sign a personal guarantee of the loan. That way you are still personally on the hook for the loan too. No banker in their right mind is going to blindly loan a new LLC money. After several years of doing this with a sizable portfolio, we still sign personal guarantees for our business loans.
You should start with hard money and then refinance into a long term mortgage. Most banks will shy away from you if you tell them you want multiple properties. Start with the small community banks. Most very active investors you meet have a line of credit at community banks to purchase and rehab and then a standing approval for long term financing to a certain number of properties. You will probably need to gain some experience until you get to that point.
Before signing for a hard money loan, make sure you can carry the risk. Hard money loans can be very expensive and can quickly eat out whatever profit you plan to earn. Their upfront fees can be high as well as their interest. These are short term loans but if you have not finished remodeling; are not ready to convert to traditional financing or have not sold the property - then you will find yourself in a very stressful position.
I am not saying that there is not a time or place for HM loans, just make sure you count the cost and the risk.
What does a typical HML schedule look like?
campbellsimone
I am not a big Wells Fargo fan, they have different policies in different states. They do not have rehab loans in ND. Keep in mind many of the big banks have what I call “baby bankers”, someone just out of college that basically has no clue about investing in real estate, but they are the banker and you are not. I am not going to say any more on WF. I do totally agree with your great comments on HM lenders. Today’s markets have a lot of competition and newbies are going under estimate the cost of a rehab and can be underwater very quickly. I used one on my second rehab and only made because I did 90% of the work. Very risky.
Your best bet is to go with a small local bank, justin0419 had great input on that subject.
Bill,
Here are numbers from a HML deal I’m in right now:
Origination: 3pts
Interest: 11.9% for six months
Processing fee: 250
Admin fee: 400
doc fee: 300
wire fee: 60
flood cert: 40
courier fee: 30
recording fee: 100
title fee: 350
Also, I paid for an appriasal for $420, Hazard insurance, HOA transfer fees, Escrow taxes.
pete