Debt financing and getting that loan is not simple: who will loan on investment properties?

by | Sep 14, 2015 | Article, Topics

Debt Financing and getting that loanQuick and consistent access to debt financing is a key component of successful real estate investing. Investors are often surprised, then, when their borrowing process hits roadblocks.

Who will loan on investment properties?

Perhaps surprisingly, getting a loan on a “flip” or other investment property is not always as simple as walking up to the local bank. Many banks are just not focused on investment property loans. They often want plain-vanilla, owner-occupied mortgages. That’s their usual business.

Rehab properties are typically vacant and are in need of some repair. This is precisely the opportunity the rehabber is looking for — and yet big banks often shy away from these properties. The underwriting rules at many larger banks are often quite rigid, and the banks typically reject properties in disrepair or that require more than a minimal amount of renovation.

Banks can also be a bit bureaucratic, while rehab loans are usually short-term, and need to happen quickly. Investors typically just can’t wait very long to know whether financing will be lined up; good deals go a lot faster than a commercial bank can approve a mortgage.

Most investors, then, look to various private money sources. These lenders generally look to lend against the asset value of a property (rather than the investor’s credit, or the property’s cash flow). Various online lending marketplaces – including some “crowdfunding” sites – also focus on investment loans for real estate.

Debt financing and getting that loan blog by Lawrence Fassler

Rehab loans are different

In addition to being “outside the box” of many banks’ underwriting criteria, rehab loans also need to have a lender take into account the renovation aspect of the project. A true rehab loan generally covers rehab costs as well the property’s purchase – while traditional loans typically fund only the property’s purchase amount.

Rehab loans typically manage this additional risk by disbursing some portion of the loan only as work is completed and the “after repair value” of the property approaches reality. The lender may look for evidence of the completion of the repairs, so you may need to take photographs and obtain lien releases from your contractors as the work is completed. But at least “the shoe fits” – the loan is made for the investor’s type of situation.

How much can you borrow?

If you’re trying to borrow against unpermitted land, you won’t get all that much — a lender just has no assurance that that land is going to become income-producing in a way that will help repay the loan.

For improved property, though, if you line up appraisals or broker price opinions confirming the likely property value may be after the repairs are made – well, then you’re in business.

Private hard-money lenders are often known for lending at conservative loan-to-value ratios (LTVs), meaning that they may only loan a small fraction of the value of a property. The better online lenders use networks of appraisers and construction overseers to get comfortable in lending larger amounts, including the money needed for covering rehab costs and not just the property’s purchase amount.

Some online lenders will loan up to 90% of the value of an improved commercial or residential property, and up to 80% of the new construction or renovation costs. Each property – and the value of the improvements being considered – is different.

Debt financing and getting that loan for investment property blog by Lawrence Fassler

Speed is key

Rehab investors need speed; they typically can’t wait long to know whether financing will be lined up, since good deals move fast. Online lenders can have an advantage here; underwriting (risk analysis) tasks are still performed, but technology is used to automate it as much as possible.

Some online lenders can deliver a letter of intent based upon just a few key parameters provided by the investor. For example, if you provide the location of the property, the purchase price, the rehab budget, your own income & net worth, and a few other items, these sites can let technology help take care of the rest.

Geographic reach may also be important

Private “hard money” lenders – so named because rehab properties are considered difficult for conventional banks to lend against – usually prefer to focus on a certain region or property type. They may want to stay local, or lend only to certain types of borrowers. Thus, it may be a bit difficult to locate a good one in your area for your property.

Online lenders tend to have a much broader geographic reach. The better ones have pricing models that account for local market differences and varied borrower characteristics. If you have projects in different cities within your region, this could be important.

Lending is changing – and it’s going online!

Banks are often uncomfortable with investment loans, and conventional hard-money lenders are often either too conservative or to limited geographically to be of much help to real estate investors.

Technology is changing many facets of our lives, and online marketplaces are using technology to simplify financing for real estate investors. At the company where I work, we can have capital ready for rehab projects nationally, using technology that provides not only competitive pricing and great leverage but fast and consistent answers – so that you can get on to that next project!

Visit Lawrence’s site here.




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  • Lawrence Fassler

    Lawrence Fassler, an attorney and real estate investor, is Corporate Counsel of RealtyShares, a leading real estate investment marketplace that places equity investments through North Capital Private Securities Corporation; a registered Securities broker-dealer, and member of FINRA/SIPC. RealtyShares as an institution does not advise on any legal issues, and this article is for general information only and does not represent professional legal advice. Contact the author at lawrence@realtyshares.com.

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