Hello All,
I am in the process of purchasing my first property, a quad. With down payments on 3 & 4-family properties being 25%, my savings has been left at a pretty low level. My goal is to purchase 4 more quads in the next 5 years. Saving up a large down payment the old fashioned way will never get me to my goal.
Can anyone advise me on what strategy(ies) I should take to acquire my next property (I actually already have one in mind)? Would a personal loan work at 8.99% as long as I can still get the property to cash flow?
Also, I would like to take steps to set this up as a business so that eventually, I can obtain an unsecured line of credit against an LLC. I believe I need to show 2 years of landlording experience to do this. Do I hold this property in the LLC and collect rent payments through it? I don’t want to be in a situation where I have to personally guarantee the loan. Basically, I just need to now how to raise money for my down payments going forward.
Thanks in advance for any and all advice provided.
Thanks,
PA Investor
Do you have any other assets you can use or borrow against? Money in stocks/mutual funds? Cars that are nearly paid off and worth more than you owe?
Borrowing against a vehicle would at least give you a lower APR than if you did a signature loan.
You could also ask the owner to hold a note on a certain percentage of the purchase. Some will be interested in this while others will not.
Ultimately you have to be ok with the terms to get the property. Is it worth it to you to pay 8.99% if you can still get the property to cash flow?
My LLC is not even two years old yet and I’ve had multiple offers for business lines of credit. It’s kinda like getting credit card offers…you always get more offers than you need. So I would say you don’t need two years of experience to find a line of credit.
Until your LLC has some age and transactions going thru it, you will still have to personally guarantee the loan. After a few years, you may be able to just borrow with the LLC and not personally guarantee it, but not in the beginning.
If you want to hold property in the LLC, you will need to do some things. Tell everyone (Realtor, Mortgage Lender, etc) up front you’ll be titling this in the LLC. Some lenders won’t lend to business entities. You want to make sure they know what you’re intending to do up front so you know they’re willing to lend to your LLC and also what the terms are. You also need to have a business checking account set up to avoid co-mingling of funds. This means every part of the transaction from the earnest money check to the payment at closing needs to be done thru the business checking account. If the LLC holds the property, make sure you put in your lease that your tenants need to write the rent checks to the LLC. Make sure any bills (property taxes, insurance, any utilities you may be paying, repair bills for plumbing/rehab/electrical/etc) are in the LLC name as well.
From the way I see it, you may have at least 2 ways to proceed. First, find a lender that only requires a lower down payment. Yes, there are some that still do this. I know of a couple, 10% at least. Possibly obtain a HELOC on the equity in the property you just purchased, or pledge the equity in your purchase as down payment for another property.
Hi Justin,
At this time, I don’t have enough funds in my other assets to borrow against.
A couple of things…
Do the line of credit offers you’re receiving require a personal guarantee?
I thought that once I owned the property, I could deed it over to an LLC that I create???
And James,
I tried to find lenders that would accept a lower down payment – only found one that would go to 20%, which is still high. You can find lower ones on 1 & 2-family units, but not 3 & 4-family units. If you actually know of any please PM me.
Thanks,
PA Investor
PM,
There are prgrams available that will allow you to put down either 5% or 10% depending on loan amount. However the ARV needs to be at least 70%. For example if your loan sales price is 250k you would have to put down 12.5K, but the value of the property would have to be 340k. Hope this helps.
The conventional markets no longer have options of getting 90% financing for 3-4 units. Most lenders will want 20-25% down. There is 1 wholesalender that will do a 85% first mortgage and even allow the seller to hold 10% so your down payment is only 5%. You can only have 2 loans with this lender though.
If you’re lucky, you may be able to find a local bank that allows 10% but not likely in todays market and you would need to be buying below market value.
As Chris mentioned, there are lenders that based their financing off future value (if rehabbing) or the appraised value (if purchasing in condition but below market value. Typically 70% arv if you’re doing a rehab and 60% of the as-is value if no rehab is needed. These would be considered hard money lenders so you may not even need to bring in a down payments. Cost and rates would be high and loans would be short term…6months - 1yr.
Buyers (maybe not in your case) can also use their own funds, equity from helocs, cross collateralized properties (usually local banks can do this) to purchase the property as well.
In any case, if you’re buying well below market value and you happen to use hard money or your own funds you’ll then want to refinance those loans using a conventional lender. That type of loan would be best for holding long. The program used will require no seasoning time to use the actual value of the property to determine the ltv rather than using the purchase price. This way you get a great conventiona rate for having a low 70-75% ltv. Local banks may also do refiances like this as a commercial loan. Terms on that would be shorter amortizations with balloons coming due every 3 to 5 years. But since commercial the loans stay off your personal name. I do recommend opening up the yellow pages to the banking sections and call about 25-30 different banks (not branches) and speak to the commercial banker (not retail loan officer).
PA Investor,
I honestly can’t remember now about any guarantee for the LOC. My wife wasn’t interested in doing that at the time, so we just trashed the offer.
For changing the deed, you’ll need to talk to your lender and see if it will trigger the Due On Sale Clause. We set up our LLC once we knew we would be purchasing a property so everything could be in the business name from the beginning.
Instead saving the “old fashioned” way, perhaps you could do some rehab/flips. Rehab/rent & refi to pull money out for your next property. Personally, I think if you can rehab/rent & refi a property that still cashflows, that’s not a bad idea. As long as it has a positive cashflow and you’re not overleveraged. You could see if you can get the property under a Land Contract or Lease Option, or Short term owner finance. Then you can refi out of those contracts when the seasoning (if any) expires. You won’t have to put any money down when you refi. You may have to give the owners some “consideration” (money) up fron, but not as much as you would for a convention loan.