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Loan Options for Real Estate Investors (Setting Up More Deals) - YouTube
Channel: Clint Coons Esq. | Real Estate Asset Protection
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- Hey everyone, Clint Coons here,
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and in this video, what
I wanna talk about is,
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you know, funding your real estate deals,
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because I get a lot of questions on
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how to put these deals together
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using limited liability companies,
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you're working with lenders,
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so I thought, why don't we just discuss
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some of the different lending
opportunities that you have
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as a real estate investor?
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Where's the money gonna come from?
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All right, with that, let's get started.
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(upbeat music)
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Okay, so, what are some
of your lending options
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when it comes to buying real estate
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as a real estate investor?
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I mean, we're not all blessed with cash
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that we can just go out there and buy
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as many properties as they want.
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I know eventually myself,
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I run out of cash as well
with my own investing,
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but here's the thing that I've learned,
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that leverage is gonna
help you accomplish more.
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When you're able to use
other people's money
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to put your deals together,
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I mean, you can just buy more properties.
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The key is, is to finding
the right types of lenders
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that will help you fund your deals,
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and some of the things that often come up
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is that you've watched my other videos,
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and you've seen me talk about
limited liability companies,
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and the importance of
them for asset protection,
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but the issue that often arises is that
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the lender you're working with,
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if you're dealing with a
single family property,
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and that's really what
I'm gonna be discussing,
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residential real estate,
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they're not high or keen
to allowing you to close
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in a limited liability company.
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What they want you to do, of course,
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is take title in your own name.
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And some people then are
even under the assumption
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that once it's in their own name,
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they can't move it into a
limited liability company
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for asset protection, which
is not actually the case.
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If you've watched again,
some of the other videos
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where I talk about land trust and LLCs,
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and putting property into these entities
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that are encumbered by a mortgage,
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I mean, lenders just don't accelerate.
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I've been doing this for 21 years,
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and I have only seen a
handful of situations
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where somebody has
actually accelerated a note
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because the property was transferred in,
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and typically it's because the borrower
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quits paying on the mortgage,
or doesn't insure it.
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So, just keep that in mind.
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So getting back to what
I really wanna talk about
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is what are your options
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when it comes to financing your property?
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What type of loans
might you be looking for
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for residential real estate?
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Well, number one is you
have the conventional loan,
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so this is something that
you would find with a broker
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that is out there, you're gonna go
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and you're gonna buy
an investment property,
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and the thing about these loans is that,
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typically they're gonna follow
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Freddie/Fannie underwriting guidelines.
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And so whatever you would need to qualify
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if it was a Freddie/Fannie loan,
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they're typically gonna ask you
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to meet the same qualifications,
such as credit score,
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such as down payment, anywhere
between 15% to 30% down,
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you're gonna need in order
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to put this type of deal together.
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Now, these types of loans, you know,
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this is your normal broker loan.
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If you're working with
it with a mortgage broker
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to secure the property,
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I have a few of these that
I've worked with in the past,
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and quite frankly, I hate
these types of loans,
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and the reason why I try to shy away
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from this type of lending
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is because typically, you know,
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they're gonna scrutinize your tax returns,
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they're gonna look at everything you have,
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and it doesn't matter
the size of the loan,
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it's like a one size fits all approach
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because they have these
formulas that they work through.
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Now if you've looked at
some of my other videos,
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I typically talk about this,
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when you hold rental real estate,
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how I think it's important
structure it through
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limited liability companies,
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but have a partnership there eventually,
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that holding company in Wyoming,
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to make sure that that
hits your return via K-1,
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and doesn't flow directly
onto your schedule E.
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Because, for conventional lenders
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who are following
Freddie/Fannie guidelines,
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I mean, they're gonna take
and massage your income
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the way Freddy wants,
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which is basically only give you 75%
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if you have existing
rental income properties
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towards your debt to income ratios.
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But there's so many of
these types out there,
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this is how a lot of investors
try to fund their deals.
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Now the other option you
have is what is referred to
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as a portfolio loan.
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Now a portfolio loan
is just like a regular,
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conventional loan, but the difference is
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is that this type of loan
isn't going to be sold
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on the secondary market,
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it's not gonna be sold
to Freddie or Fannie,
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we're not using their guidelines.
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These are the types of lenders
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who are gonna keep the loan in-house,
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so that it's part of
their portfolio of loans.
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So when it comes to such things
as what do you need down,
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or can you close in a
limited liability company,
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or what type of credit
score would you need
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to qualify for these loans,
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it's not gonna be like your
conventional lender, in fact,
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this is my preferred
type of loan to look for,
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is to get a portfolio loan,
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because they will oftentimes,
that is, the lender,
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will let you close in the name
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of a limited liability company,
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because they don't have all
those other same concerns
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trying to meet Freddie/Fannie guidelines.
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Now, where do you find a portfolio lender?
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Because that can be an issue for people,
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I've talked to real estate investors,
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and they said, "I've searched,
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and I don't know who
a portfolio lender is.
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You know, is this some person
that has their own money?"
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No, this is typically gonna
be from an institution
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like a community lender,
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that is going to be your best
choice for portfolio loans.
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And that is why I often recommend
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that you start banking
with a community bank
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if you wanna borrow money.
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I have a community bank
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that I've established a relationship with,
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and it just started with me
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opening a personal account with them,
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just to break the ice,
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and once you've broken that ice,
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then you'll find that when
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you're putting certain deals together,
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that that may be your first
choice because of their,
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maybe they have more favorable rates,
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more favorable lending standards,
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and they'll allow you to do things
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that conventional lenders will not allow.
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Now, the other one that
you would have here
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would be private money/hard money lenders.
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Now this is a completely
different area now,
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where you're definitely
gonna be paying more,
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but you're gonna have least restrictions
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out of all three of these,
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because, with a private/hard
money type of loan,
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this is typically on the asset itself,
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they're just looking for
the asset as security,
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so if you wanna close in
an LLC, they don't care,
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you wanna close in a trust, no big deal,
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because it's all about the numbers.
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Will there be sufficient equity in there?
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Now you may have to come
up in certain situations
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with more down, depending on the lender
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that you're working with,
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and they are gonna be more expensive,
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you're typically be paying points
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and a higher interest rate.
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Now who typically would want to look
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for a private money/hard money loan
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as a real estate investor?
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Well, if you're a buy and hold investor,
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I don't think that's gonna
be the best choice for you
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except in a limited circumstance,
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and I'll explain that in just a moment.
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Typically, these loans
tend to market themselves
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to individuals who are flipping property,
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so you can go out there,
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you get this loan so
you can fund your flip,
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many of them will loan against
the rehab value as well,
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depending on what type of loan you have,
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if you hear a 90/10, 70/30,
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what those numbers are telling you
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is how much they're willing to loan
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against the actual after-rehab
value of your investment.
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Some of them will do a hundred percent,
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but it's just finding.
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The more, of course, money
that you're going to borrow,
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the more risk that they take on,
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the more expensive that
loan is typically gonna be.
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These lenders want to
turn their money quickly,
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so you're not gonna use this
for residential mortgages,
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because they don't wanna be
in it for 10, 15, 30 years,
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that's not how hard money
lenders make their money,
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they make their money on the turn,
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the points and the interest rates,
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and keep moving that money around.
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So for flippers, this is oftentimes
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the ideal strategy for them,
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because they're not gonna qualify
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for a conventional or a portfolio loan.
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Well, maybe with portfolio,
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if you have enough of a track
record with that lender,
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but face it, if you flip property,
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you're a risk because
the market's in flux,
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and lenders are concerned
about your ability to repay.
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So, when might you use
this type of funding
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if you're a residential
long-term hold investor?
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Well, oftentimes if you're
gonna buy a turnkey property.
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So let's assume that you found
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an individual real estate investor
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who markets turnkey properties pre-rehab.
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So what you'll do is you'll
come in with a hard money loan,
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and they oftentimes,
they will actually have
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hard money lenders who will
fund these deals for you.
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So you come in, and you may only have to
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come out of pocket 5% or
less on these types of loans,
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and it will pay for the
purchase price of the property
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and the rehab on the property.
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And the idea is, is that
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you're gonna use this hard money loan,
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and I've used this many times
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to actually purchase properties myself,
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residential real estate,
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under this scenario where
I use someone else's money,
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I pay a little more,
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but I don't have to tie
up my cash in the deal,
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and then once the deal is finalized,
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and there's a tenant in the property,
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then you go and you do
a refi on the property
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and move it into a portfolio
loan or conventional loan.
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Now in the last couple of years,
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I've noticed that these types of loans,
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if you're gonna refinance out,
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it may not be as quick as it used to be,
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the bank may require more
seasoning on the back end,
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so obviously if you're
gonna go this route,
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you want to make sure you
have your lenders lined up
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so you're talking to them,
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so you know what their requirements are.
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The last thing you wanna do is be stuck
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in a hard money loan
for a year or two years,
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and there may even be a balloon on that,
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where they come along and
force you to try to refi it,
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and you may have a hard
time refi-ing that property,
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and then you could be stuck.
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So if you, if you go that route,
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make sure that you're checking
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and lining everything up ahead of times.
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Now here's another one,
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this is the Freddie/Fannie
HomeReady programs
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that, if you're not aware of,
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you might wanna check this out,
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this is great for house hackers.
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So this particular loan program
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is geared towards getting
people into properties,
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they wanna develop home ownership.
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So, if you're gonna buy a
duplex or a quad or a tri,
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or just even a single family home,
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and you fit within a certain category,
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that is, if you go to Fanny's website,
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you can check all this stuff out here
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on the HomeReady Mortgage program.
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As you can see right here,
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it's got plenty of information,
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you've got these low down
payments, as low as 3%,
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I think on some of them
it's 0% to get into it.
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They have really flexible funding options
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that are available here.
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I think you can even get out of pain PMI
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on these types of loans.
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And as you can see here,
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look at the credit scores they have,
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they tend to lean towards people with
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a little lower credit scores as well.
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I mean, this whole program is built around
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lower-income people,
first-time home buyers,
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to get you into a property,
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so it's something you'd wanna check out
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if you're an investor who is investing
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in house hacking strategies,
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or those triplexes in which
you intend to live there.
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And the nice thing about it
is that you can use the income
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from the individuals who
will be renting from you
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to help you qualify for those mortgages.
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So, this is, I think, a great program,
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not a lot of people have
heard of or are using it,
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they're not aware of it,
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but it's something you
definitely wanna check out.
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Now, something else that
you may not have considered
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is how about a home equity loan?
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So if you have a personal residence
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and you have a lot of
equity in your property,
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now might be the time to go out there
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and get a home equity line of credit
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against your individual residence,
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or maybe you're working with a lender
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and you can get it against your
rental real estate as well,
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if you do a blanket loan,
a blanket equity line
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against all your properties.
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But the idea here is that
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when you take out a home equity line,
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you're not actually using the
money until you borrow it,
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and a lot of people operate
under the assumption
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that if I get this home equity line,
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I'm gonna have to start paying
interest on it right away,
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and it's gonna cost me money,
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it doesn't cost you anything
to get this type a loan.
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You're not gonna pay anything
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until you actually use the money.
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And the fact is, with these equity lines,
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it's really cheap money for many of us.
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So, if you have a personal residence
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and you're thinking about getting
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into real estate investing,
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you know, the key is you wanna
have your lending lined up
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before you go out there,
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and so you know what you're gonna need
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in order to close on that property.
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Because really good deals, you know,
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or off-market deals that come around,
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what are they looking for?
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The seller's gonna be looking for someone
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who is gonna give them
a quick close, you know,
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all cash offers of course
are always gonna be the best,
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but, you know, how fast
can you get me the money,
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what is your due diligence
inspection period,
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the financing contingency?
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So the less you take out that
could make that deal go south,
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the more apt the seller's
going to wanna work with you.
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So with a home equity
line, what you could do,
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and I've seen many investors do this,
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is that you pull the
equity out of your house
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when you find the deal,
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you use your home equity to fund the deal,
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so you do an all cash offer, right?
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Let's say you did an all cash offer,
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10-day contingency due
diligence, 30 day close.
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Now you're coming in, you look
really strong to that seller,
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you use your equity to buy the house,
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and then you go through
and refi your properties,
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suck the equity out of the rental,
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put the money back on
your home equity line,
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and then you just keep working
the money that way over time.
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So this is a process where
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you don't have to keep
requalifying initially
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when you're buying the properties,
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you're gonna do that on the back end,
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after you've already closed on the deal.
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I think having a home
equity line of credit,
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if you have equity in your house
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is something that you should do,
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I think it's imperative
as real estate investors
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to know this is another financing source
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that could be available to you
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so you're not struggling for the money.
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With that, you can also
consider retirement plans.
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So, if you have an IRA,
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you can borrow money out of your IRA,
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and as long as you get
it repaid within 60 days,
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it's not taxable to you.
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Now, the problem with the
IRA type loan strategy,
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and I've heard people
talk about this before
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at certain events that I've attended,
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is that you got to get
that money paid back in,
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or else it's gonna be taxable to you.
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You know, early withdrawal
penalties, income tax is on that.
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So, I would call caution people
to use an IRA to fund deals,
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but you know, there's
another plan out there,
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which is your 401k plan,
that you can borrow from,
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where you can borrow up to
50% of your vested balance,
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not to exceed $50,000.
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A lot of our strategies
[844]
when working with real estate
investors that have IRAs
[847]
is to set them up with a solo 401k
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and roll their IRAs into the solo 401k,
[853]
and now that's in an account
[855]
that they have
check-writing privileges on,
[856]
so if they need it,
[857]
they can turn around and
issue themselves a loan
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for up to 50K, or 50%
of their vested balance,
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and there you go, now they have the money
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they need for closing.
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Or, actually, maybe depend
on the value of the property,
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because I know a lot of my investments
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I picked up in the past,
[872]
you know, we're talking $25,000 for homes.
[875]
Again, you have to find
the right market for these,
[877]
but, you know, you can get in with $50K,
[879]
you can pick up two properties.
[880]
So, using your retirement
plan is an option for you.
[885]
And the last one I wanna talk about
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is what we call, you've heard
of this term before maybe,
[888]
is bank on yourself.
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And in this particular program,
[892]
what you're doing is you're
actually funding your own deals,
[894]
but you're using a life insurance product
[896]
to put it together.
[897]
So I started using this
bank on yourself system
[900]
a number of years ago,
[901]
and I built up a
considerable amount of cash
[904]
inside of a life insurance policy.
[906]
And the benefit of it
is that the money grows
[908]
completely tax-free inside
of this policy for me,
[911]
it's tied to the market,
but when I need it,
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I can borrow the money out,
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and there's no limitations on borrowing,
[917]
you don't have to qualify for anything,
[919]
so you borrow from your own account.
[921]
And the best thing about this strategy
[922]
that really attracted me to it
when I started utilizing it,
[925]
is that the money that's
invested in this account,
[929]
I'm not taking that money
out, it's used as collateral,
[932]
so as the market's been roaring,
[934]
my account is continuing to go up,
[937]
but I'm also using that
as collateral for a loan
[940]
so I can go out there and
invest in real estate.
[942]
So basically my money's
working twice for me,
[945]
once in the market, and
then once in real estate.
[948]
So, if you have a need for life insurance,
[951]
or if you see an opportunity here
[953]
where you may wanna
start putting money aside
[956]
and have it grow in a
tax deferred account,
[958]
have it grow in a place where
[960]
it minimizes your downside risk exposure,
[963]
but you still have access to it,
[965]
this bank on yourself program, I think,
[967]
is something that should
seriously be considered.
[969]
We've actually helped
several of our clients
[972]
set up these programs,
[973]
and they've been utilizing them
[976]
in the way I just described.
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So here's a couple of ways
in which you can go out there
[980]
and put your real estate deals
together using financing.
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You know, it's not a
one-size-fits-all approach,
[985]
but the idea is, is
that know your options,
[987]
and more importantly,
[989]
start the conversation
before you start buying,
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get all your ducks lined up in a row
[994]
so you know what the type of deals
[996]
that you're gonna be putting together,
[998]
that you already have your
lenders pre-qualified with them,
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you know what your limitations are,
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what you can do,
[1005]
and that's gonna help
you find the most success
[1006]
with your investing.
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And then after you close on it,
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if it didn't go into an LLC,
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well, watch my other videos,
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I'll show you how to get it into
[1012]
a limited liability company.
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All right, take care, everyone,
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all the best with your investing.
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(upbeat music)
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