Expert Financing: The Key to Successfully Owning 8,000 Multifamily Units
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Expert Financing: The Key to Successfully Owning 8,000 Multifamily Units

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6 Expert Strategies to Maximize Your Investing Abilities, Options, and Returns.

The quote "I owe. I owe. It's off to work I go!" is one of the most frequently repeated lines I hear about debt. Thankfully, an early mentor of mine told me that the real best quote about debt is, "Only borrow against income-producing assets." He said it was the secret to his success (and he owns 8,000 multifamily units!).

Cash is King, but Credit is Very Close

Cash is the most effective way to purchase a rental property. It also comes with some big advantages:

  • Fast closings
  • Leverage during negotiations

 

Although cash is usually the best source of capital to purchase rental properties, most investors use other people's money (OPM) to finance their purchases. Whether you call it leverage, financing, borrowing, debt, OPM, or credit, obtaining funds from another party is the primary means by which investors purchase properties.

The distinguishing mark of a credit purchase is that the subject property serves as collateral for a loan (i.e., a Deed of Trust is recorded).

Expert Financing Strategy #1: Conventional Financing

Traditional mortgage financing for investment properties is almost exactly like standard owner-occupant mortgage financing (i.e., stringent requirements, lots of documentation, high closing costs, fixed rates, long amortizations, etc.). The loans have to conform to Fannie Mae guidelines. Typically, the number of loans an investor may hold is limited to 10 properties, with each house being financed on a separate loan.

In addition to the high costs and limitation of 10 actual loans, qualifying for the loan and obtaining a sufficient appraisal are the two primary hurdles for using mortgage companies to finance rental houses.

Key Variables:

Interest Rate:
Lowest possible market rate

Term:
Up to 30 years

Loan-to-Value (LTV):
Usually up to 80%

Underwriting:
Strenuous and based on personal creditworthiness

Guaranty:
Yes

Future Borrowing Capacity:
Limited to 10 loans

Interest Rate:
Lowest possible market rate

Guaranty:
Yes

Loan-to-Value (LTV):
Usually up to 80%

Term:
Up to 30 years

Underwriting:
Strenuous and based on personal creditworthiness

Future Borrowing Capacity:
Limited to 10 loans


Expert Financing Strategy #2: Commercial Bank Financing

When borrowing from a local commercial bank, the character and creditworthiness of the borrower is of the utmost importance. Typically, the bank loan is less stringent than a traditional mortgage company requiring only a tax return, a personal financial statement, and a rent roll on the property (in addition to a personal credit report). However, banks typically charge higher borrowing rates and have shorter amortization periods than mortgage lenders.

Pro Tip: Having a strong commercial bank relationship is very beneficial for successful long-term real estate investing.

Key Variables:

Interest Rate:
Market rate

Term:
Between 5 & 20 years

Loan-to-Value (LTV):
Up to 85%

Underwriting:
Somewhat strenuous and based on personal creditworthiness

Guaranty:
Yes

Future Borrowing Capacity:
Limited to bank's discretion

Interest Rate:
Market rate

Loan-to-Value (LTV):
Up to 85%

Guaranty:
Yes

Term:
Between 5 & 20 years

Underwriting:
Somewhat strenuous and based on personal creditworthiness

Future Borrowing Capacity:
Limited to bank's discretion


Expert Financing Strategy #3: Hard Money Lending

Hard money lenders primarily lend against the property. They charge higher rates than banks and mortgage companies but are usually much more flexible with their terms and conditions. Hard money lenders are a great source of capital for foreign borrowers, un-bankable investors, and less creditworthy borrowers.

Key Variables:

Interest Rate:
Well above market rate, the highest of all lenders

Term:
Short (less than 5 years)

Loan-to-Value (LTV):
50-90%

Underwriting:
Not personally strenuous since it is asset based

Guaranty:
Negotiable

Future Borrowing Capacity:
Limited to lender's discretion

Interest Rate:
Well above market rate, the highest of all lenders

Loan-to-Value (LTV):
50-90%

Guaranty:
Negotiable

Term:
Short (less than 5 years)

Underwriting:
Not personally strenuous since it is asset based

Future Borrowing Capacity:
Limited to lender's discretion


Expert Financing Strategy #4: Private Lending

Private lenders usually lend to borrowers with little regard to the specific property because they already have an existing relationship with a borrower and view the lending situation as relational rather than purely business. This can render terms and conditions very favorable for the borrower.

A typical example of a private lender is a family member loaning money to another family member for the purchase of a property.

Key Variables:

Interest Rate:
Market rate

Term:
Flexible

Loan-to-Value (LTV):
Negotiable

Underwriting:
Lax

Guaranty:
Negotiable

Future Borrowing Capacity:
Limited to lender's discretion

Interest Rate:
Market rate

Loan-to-Value (LTV):
Negotiable

Guaranty:
Negotiable

Term:
Flexible

Underwriting:
Lax

Future Borrowing Capacity:
Limited to lender's discretion


Expert Financing Strategy #5: Portfolio / Professional Real Estate Lenders

Historically, “sophisticated” rental home investors were limited in their financing options to the four financiers we already covered. In 2013, however, Wall Street firms established new lending companies to offer investors a competitive alternative. Since then, even more firms have entered the market.

The new lenders are a cross between traditional mortgage companies and hard money lenders. They offer the benefits of traditional real estate lenders such as low fixed rates and long amortization periods and the benefits of hard money lenders such as non-recourse (i.e., no personal guaranties), unlimited amounts of loans, package loans, and asset-based loans (vs. personal income).

Key Variables:

Interest Rate:
Market rate

Term:
Between 5 & 30 years

Loan-to-Value (LTV):
Up to 85%

Underwriting:
Asset based

Guaranty:
No

Future Borrowing Capacity:
Unlimited

Interest Rate:
Market rate

Loan-to-Value (LTV):
Up to 85%

Guaranty:
No

Term:
Between 5 & 30 years

Underwriting:
Asset based

Future Borrowing Capacity:
Unlimited


Expert Financing Strategy #6: Seller Financing

When available, seller financing can be the best form of credit. It is typically the least stringent and least costly, so it is usually the first-choice method of financing a purchase for long-term investors.

How it works: Sellers that own the property “free and clear” (i.e., without a mortgage) can accept less cash than the purchase price at the closing and allow the buyer to pay the remaining purchase price amount in cash over a predetermined time period (i.e., the seller carries the note). If the seller has a small mortgage balance, they can oftentimes accept a sales price that pays off the mortgage and then give the purchase a second mortgage for the balance.

Owners typically finance the sale of their property to earn interest or as a concession to close the deal.

Key Variables:

Interest Rate:
Market rate or below

Term:
Flexible

Loan-to-Value (LTV):
Up to 100% or the amount on the second mortgage

Underwriting:
Lax or non-existent

Guaranty:
Negotiable

Interest Rate:
Market rate or below

Loan-to-Value (LTV):
Up to 100% or the amount on the second mortgage

Guaranty:
Negotiable

Term:
Flexible

Underwriting:
Lax or non-existent


Most long-term real estate investors use some form of credit to fund the purchase of their investment properties. Determining which form is the best usually depends on the circumstances of the deal. The more important thing to remember when using credit is the advice of my mentor, and only leverage when you are buying income-producing assets. Otherwise, your borrowing may lead to your owing more than you bargained for!


Douglas Skipworth, CPA, CFA is the Co-Founder and Principal Broker at CrestCore Realty in Memphis, TN. CrestCore manages over 2,500 units for approximately 500 individual investor clients, of which Douglas and his business partner Dan Butler are the largest. Connect with Douglas at douglas@crestcore.com.