Own to Rent / Buy and Hold Real Estate Investor Financing

Real Estate Investor Financing

Wannabe Investors, now is a great time to invest in residential properties. Whether your strategy is single family, two to four unit buildings, condominiums and town homes as well as multifamily apartment buildings the combination of great prices and accessible financing makes this an optimal period for investing.  If you are a Real Estate Investor operating in the business buying residential properties to hold for profit from the positive cash flow and equity appreciation, there were only a few financing options available. For conventional residential one to four unit properties the standard conventional guidelines limits a borrower to only have four properties financed, including their owner occupied personal residence.

Now there is a great solution for you. Even while conventional financing guidelines severely limit who can qualify (and this has only gotten worse in the past few years) there has been a rise in private lenders that will lend on residential investment properties with similar guidelines as commercial apartment financing. This is great news for the those in the business of owning and managing their own portfolio of rental property. Here are a two examples that were not often available even a few months ago.

Blanket Financing

Like all options discussed in this article this financing is for business entities, such as limited liability corporations or “C” Corporations, and not for individual sole proprietors. This is to make sure the lenders are not violating any residential lending laws meant to protect consumers as the purchase and finance their owner occupied homes. Inherently these collateral must always be non-owner occupied and used for investment and business purposes. Understanding this, it is natural that any blanket mortgage must cover at least five units. Anything less would not be considered commercial lending.

What is a Blanket Loan?

A blanket loan is where two or more buildings are encumbered and used as collateral for one loan. In other words one mortgage can cover two properties or one hundred properties versus two to one hundred loans. Could you imagine being a small business owner with fifteen or more projects that you own and are holding that each have separate loans. Generally, they are like buildings in a relatively close proximity, but that is not always mandatory. For the Entrepreneur who seek to buy and hold multiple properties for long terms the blanket loan could be a great option.  Additionally, it may actually cost less even though there are not many programs available for these small business owners.

No Seasoning Cash Out Refinance

The term “seasoning” in the mortgage world means how long an owner has owned the specific property. It can sometimes mean how old a loan is, but for our discussion seasoning is limited to ownership of property. The underwriting rules for a conventional lender requires a property to be “seasoned” or owned for at least one year for the value to be based on the current appraisal versus the acquisition costs. For example if the purchase price was $50,000, the rehab cost is $10,000 and the current appraised value is $100,000 the maximum loan would be 75% of the purchase price or $45,000. The value is $60,000 based on the the seasoning rule. With no seasoning requirement the the loan amount would be 75% of $100,000 or $75,000. This real estate investor strategy allows the investor to buy and hold plus earn an immediate profit of $15,000 if they refinanced (minus closing costs). This allows the investor to have similar immediate return as a flipper yet they still own the property with all the benefits of the cash flow and equity growth. This works on small transactions as low as this seventy five thousand dollar deal to as high as multi-million dollar commercial apartment buildings. Quite often with commercial lenders the seasoning time may be two years cor cash out refinance transactions.

No Seasoning Cash Out Blanket Loan

Finally and most importantly, there is the ability to use both of these strategies simultaneously. This offers the businessmen to access cash in their real estate portfolio they they would not have access to with any conventional funding programs.

These are just two financial options that can help the small business real estate investor succeed when they choose to own to rent or buy and hold their properties for long term cash flow and equity building.

 

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Blanket Mortgage for Residential Real Estate Investors

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.

Blanket Mortgage

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

Finally

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.

 

 

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Credit and Commercial Real Estate Finance

There are great programs for Real Estate Investors to purchase Commercial Real Estate especially apartment buildings and mixed use residential and commercial properties. But I get a lot of people with poor credit, no money for down payment and no ownership experience asking to borrow hundreds of thousands of dollars or even millions of dollars bringing nothing to the table.

So first of all you can purchase commercial real estate with less than perfect credit. To do so you will have a significantly higher down payment, significantly higher interest rate and significantly higher closing costs. If you qualify for agency financing you can have 30 year amortized fixed rate financing below 5 – 6%. (The rates change regularly and this information is not about quoting today’s rates but making a point about credit and qualifying for commercial real estate financing.) The credit score should be above 680 but there is a little flexibility. Conversely, you can have less than perfect credit qualify for interest rates from 8% to as high as 16% or more. The portfolio programs are generally amortized over 20 to 25 years (like most bank financing) with a five year balloon. The hard money loans are generally interest only.

Therefore there is a significant cost for poor credit even if you can get financed at all. For example a $1,000,000 mortgage at 5% amortized over 30 years has a payment of $5,368 per month. The same $1,000,000 mortgage amortized over 20 years at 9% interest is $8,997. At 14% interest only the payment would be $11,667. The cost of poor credit could be as low as $3,629 per month or as high as $6,299 per month or more based on this example. That is over $75,000 per year in interest that would go in your pocket if you have good credit or work with a reputable credit restoration company to legally restore and improve your credit score.

When we look at the cost of credit and some clients unwillingness to address this issue it makes me wonder if they are the business minded people that will be successful owning commercial real estate and repaying the loan. I am pro customer. I want every customer to meet their financial goals and get the financing they desire to do so. But, I understand lenders who do not want to risk their money when the borrower has less than perfect credit and or is unwilling to restore their profile and improve their score.

So when a borrower is working with a reputable legal credit restoration service to improve their credit score not only will they save money monthly, but the savings in down payment and closing costs will be well worth the effort. For an agency mortgage of $1,000,000.00 the down payment on residential or mixed use property can be as low as 15%. Most portfolio programs require a minimum of 25% to 30% down and hard money financing may not finance any more than 50% to 60% of the purchase price.

So the message is clear. To be a commercial real estate investor you should do whatever you can to improve and maintain a good credit score. Even if you own property now and are paying a higher interest rate make sure you work on your credit profile. Often its more than just paying your bills on time. The way you pay your bills accounts approximately 35% of your FICO Score. That means that 65% of your score has nothing to do with how you pay. If you can not improve the score on your own seek professional help from a reputable legal credit restoration company. It will save thousands if not hundreds of thousands of dollars.

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