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