Residential Real Estate Investors
Now is still a great time for investors to purchase residential one to four unit property. Property values are relatively low, interest rates are low and conventional financing is available to a point. The problem occurs when you have more than 4 properties financed. Today the answer is blanket mortgage financing. This allows the serious investor an opportunity to have own 10, 15, 20 or more units. When an individual investor decides to have a real estate business a blanket mortgage can help them continue to grow.
This is a commercial loan for businesses that will encumber multiple properties under one loan. For residential investors this allows them to have stable long term financing. This can get them off the hard money roller coaster, especially if they are looking to hold instead of flip properties. Blanket loan financing will not limit how many units they can have financed as does conventional residential financing.
Here are the basic guidelines:
- Minimum loan amount is $500,000
- Minimum number of residential units is 5
- Minimum individual property value is $50,000
- Minimum occupancy is 90%
- Properties must be owned by a company – not individual
- Property types include: single family, 2 to 4 unit, condominiums, town homes, multifamily properties and mixed use properties that are at least 60% residential.
- Up to 75% loan to value
- Minimum Debt coverage of 120%
- Perfect Credit not mandatory
If you are a residential real estate investor with more than 5 units that can use stable long term financing you should consider a blanket loan for purchasing property, refinancing your existing portfolio or getting cash out to help you invest in other properties.
When a Commercial Real Estate Investor is looking to purchase income producing property utilizing any number of creative financing methods, one of the most important keys to their success is that their ability to provide adequate, verifiable proof of funds – P.O.F.- to both the seller and the lender. The verification of funds can enhance the investors credibility with the seller as well as satisfy the lenders requirement to know that the borrower has necessary funds to complete their transaction.
Proof of Funds
There are a few ways acceptable to lenders and sellers to show P.O.F. to close your Commercial Real Estate transaction:
- Bank Statements or Bank Verification
- Brokerage Account Statements or Verification
- Escrow Account Verification
“Bank Verification” This is the most acceptable and widely used method to confirm the investors can complete the proposed deal. As such money must be put into a bank account and confirmed by statements or letter from the banker. This is a “hard” (versus soft) method of verification, because money are deposited in an account in the buyers name to serve as proof the buyer can complete the transaction.
“Brokerage Account Verification” Similar to bank accounts, brokerage accounts show acceptable means to complete a purchase transaction. Likewise, statements or letter from the brokerage house representative will meet the requirement to prove adequate financial strength. This is also a “hard” method.
“Escrow Account Verification” This is the one method that can be hard or soft evidence of necessary assets as the escrow agent simply needs to write a letter of confirmation attesting that the borrower has finances available to complete the transaction. It becomes hard when money is transferred into an escrow waiting for the closing.
Finally, there are companies whose sole purpose is to provide evidence of the financial ability of Commercial Real Estate Investors to complete their transactions. Many of them provide “Proof of Funds” and Transactional Financing. P.O.F. is necessary at the beginning of the deal and Transactional Financing is for the day of closing only. Both of these methods are a necessary part of an investors arsenal when utilizing creative financing.
No Money Down
This means no down payment to purchase investment property. Many investors are longing for the old days that hard money and bridge lenders would lend based on the equity of the property only. Those where the days of uncontrolled appreciation and values continued to rise beyond any logical means. Those were the days that novice investors thought that there was no way to lose money investing in property. The reality for many years there was no investment with a greater return than real estate.
The Bubble Burst
Then the out of control rising of property values hit a ceiling, the bubble burst and instead of appreciating residential and commercial property began to lose value. As banks and conforming lenders lost money during this “mortgage crisis” so did private lenders and hard money funds. The response from the banks and conforming lenders were to tighten there lending requirements. Private and bridge lenders did the same. The number one thing was to require buyers to have skin in the game. That is investors were required to actually invest money in their projects.
More important than asking buyers to participate in their investment, private lenders who provide short term funds to R.E.I.s (real estate investors) became more strict in ensuring their clients would have a solid exit strategy. To ensure this they began to make sure the R.E.I.s would qualify for take out financing. As conforming lenders reduced their loan to values, increased the credit score requirements and generally tightened their underwriting requirements, hard money and bridge lenders had to do the same. The R.E.I.s are tasked to have an exit strategy that is above reproach. To be a successful investor you must have a fool proof plan to pay off your short term lender and move into permanent financing.
Chicago Commercial Real Estate Investors
Throughout the country many hard money lenders pulled out of the market amidst mounting losses due to property values going down and R.E.I.s unable to sell or refinance the properties. As the market stabilizes and private lenders understand the new realities of financing today they have come back into the market. I have found legitimate bridge lenders that would lend up to 100% of the cost to purchase and rehab commercial apartment buildings in the Chicago Area.
Purchase Rehab Private Financing Guidelines
Though the guidelines are different for every private funding source these guidelines are representative of many lenders have polled in Chicago.
- Credit Score: 650 to 680 or higher
- Assets: 3 to 6 months of mortgage payments or more
- LTV: from 50% ARV to 75% of ARV depending on the property
If you qualify for these guidelines you may be able to purchase commercial apartment buildings with little or no money down.