lets say you find a house for sale for 70k and the owner will finance and give you title. The home needs 20k in rehab and has an ARV of say 120k. you wind up controlling 30k in equity.
You put the home in a trust or however you choose to hold title. Then rent it out for positive cash flow. Eventually you’ll want to cash-out some of that equity. The only way to really do that is refi through a conventional lender…be it hometown bank or local mortgage company. if your credit is good you can get up to 100% ltv on NOO properties.
Then you repeat this whole process…
My thing is, eventually you’ll wind up w/ many mortgages on your credit right? My next ? is, is there really any other way to access the equity in the home, other then a conventionaly refi/heloc(btw I don’t know of a lender that will do a heloc on a NOO property.)
When you refi you are only pulling out left over 10% of value. So your refi is 80% LTV not 100% or you will pay Property Mortgage Insurance which could put you into the red if you’re renting it out. So in your scenario you would refi for $96k which is 80% of $120k so you would immediately profit $6000 ($70k + $20k = $90k) and hopefully have cashflow for the next 3 - 30 years depending on the terms and conditions of your loan. You wil always have 20% equity left in every property which will increase your NET Worth over time.
In the loan industry if you have multiple loans in your name but have positive cash flow from those properties they are now considered ASSETS (income producing) so they do not negatively affect your credit at first. But eventually you would be considered high-risk if your income from these properties are not significant enough. Your Debt to Credit ratio need to be lowered also so working on improving your credit and lowering your “Consumer” debt is important to longevity and bank approval. When your credit is really good and you have MANY assets you can borrow against those assets, which means your loan would be secured by specific properties. I don’t know about the HELOC on NOO but borrowing against your assets is done all the time, look at Donald Trump. He claimed bankruptcy and he can still take out million dollar loans because he has a ton of assets that he protected through his bankruptcy.
transfer the property to an LLC and refi into the LLC with a personal guarantee. this gets the property off of your credit, you can still show the cashflow as income from the company.
I agree in part with what your saying, however, in terms of refying the property, you would go through a mortgage company that deals w/ wholesale lenders and they don’t charge PMI b/c the loan is non-conforming. you’ll pay several thousand in closing costs, so 80% ltv would not work. I’m a mortgage broker by trade and even If I do the loan myself for free, I still have title company fees that will run about $1200+/- a few dollars and the lender fee which is generally about 1k, plus taxes and insurance have to be current, so you’re looing at about 3k right there, + your interim interest etc…
So 80% wont work. anyway, that wasnt so much my concern as is dotting up my credit 10+ mortgages over time. Sure the lenders allow for up to 10 and some of them even no-limit…
I guess I was always of the understanding that the idea was not to use your personal credit…ie banks/mtg. lenders; Hence the whole point of creative financing. If I’m invaribly going to use a lender to get the cash out, why not just use the lender up front and have the seller hold a 2nd to cover what you don’t qualify for…ie…you qualify for 80%LTV on a NOO and have the seller hold the 2nd. Then you can just refi later to get the cash out and pay off the 2nd mtg note.
I guess I’m missing the whole point of creative financing/seller financing if I’m invariable going to use a bank to get to the equity?
Would the LLC need to have credit to do this or a couple of assets in its name or age? I was under the impression that most banks do not do personal guarantees and they want the loan in your personal name so you’re a truely on the hook for it. I have an LLC and was advised that it would take years before the LLC would be even considered to have a loan in it’s name even with a personal guarantee.
I noticed that you are a CPA in your title and your advice is greatly appreciated. Sorry I hope I’m not too far off topic.
I’m not a CPA, but what I can tell you is that you would need stong business profile w/ several high trades, a high padex/D&B score etc…to get a loan in the name of the LLC and 2+ years in business minimum. Additionally, no traditional mortgage lender is going to do a loan in the name of the LLC even w/ a PG. basically, you buy it, it’s in your name. ***(there may be a few home-town-home-grown banks that will do this, but you aren’t going to get this done w/ your local mortgage broker!)
Now, I’ve read where you can transfer the property into a Land Trust held by your LLC, but that only transfers title. Your mortgage servicing company is still going to report your tradeline evey month to the 3 major CRA’s, so it’s still on your credit. Which takes me back to square one w/ my orig. question, where is the benefit of owner financing other then a supplemental seller held 2nd, IFyou intend to get the equity out. I can using seller financing if you’re not going to strip the equity and lease/option it out w/ the intent of selling in 2 years, but if it’s a buy and long term hold, I cant see any benefit…
I see what you’re saying and yes, you are going to use a wholesale lender/hard money lender ONLY in the beginning to do the rehab project THEN you would go conventional when you refinance so it would be a standard conforming loan where PMI does affect your bottom line. Closing costs would be normal at 1% origination plus documentation fees, etc. This is my understanding of it and it works for me.
Creative financing where the seller takes back a second is not normal when wholesaling properties in my experience. If you structured your deal right then why would you bother having the seller take back a second? You should be able to get 65% - 85% LTV which should cover the full purchase price + your repair costs. Owner financing would be even better if you could do that or Subject To then you can cash them out completely in the near future when you refinance with a conventional loan. Using OPM is the best thing you can teach yourself especially through “Private Lenders or Private Money”. Where people lend you money directly and there is NO closing costs but high interests. There are full courses on this subject also and every other creative financing there is like Lease/Options to purchase and sell, Subject To, Owner Financing, Seller Carryback/Note creation, etc… The list goes on and I’m sure I missed a few.
I see what you’re saying. I’m talking about buy and hold/rent. If you lease/option, you can take title, owner finance and cash out in 2 - 5 years, but you still cant touch the equity until you cash out, unless you can find a lender that will do a heloc on a NOO, which I don’t think exists.
My only point is, eventually, your going to have to use a conventional lender to get to the money or your going to have to sell to get to it.
The issue here isn’t how to get a loan. The issue here is that taking out a 100% LTV loan on a rental property will cause you to have negative cash flow on the property. So, you would be paying interest on the loan AND losing money on the property - NOT GOOD!
You should go talk to Bank of America. They do NOO HELOCs. At least, they did them 18 months ago when they gave me HELOCs on two of my rental properties.