Posted by colvegas on December 17, 2005 at 14:00:26:
Scotty and John,
You are correct that you are obviously still liable on the note but in a properly structured land trust the trustee would sent a debt to income letter to your next lender detailing the profiling of the property in the trust since you control it w/o owning it. In most cases you can qualify for 100% debt to income thus qualifyinf for your next loan. Every lender has different requirements but your 10 properties in my view should be in a trust thus asset protecting you and enabling you not to hit that ceiling as a dealer in your investing.
As to the corporate entity get with your attorney or CPA and let them advise you whether it is an LLC, C corp sub-chapter S corp and use that as the beneficiary in the land trust…
Jimmy: Excellent post on your deal I enjoyed the reading.
If you like more info email me at firstname.lastname@example.org.
i have been investing for a few years now and have hit the “10 property limit” that several mortgage brokers have with my property in Texas and Kansas. I can find plenty of good deals. What suggestions do you have for this problem?
The underwriting guidelines are what they are. You can’t go to a lender who conforms to FNMA or FMAC guidelines, and expect them to bend. So go elsewhere when you hit the limit (which changes from time to time, by the way).
A commercial (business) banker is not restricted by these guidelines. So long as your credit worthiness and ability to pay are sound, you can orrow as much as you want.
Any loan you transact in the name and TIN of an entity will be a commercial loan. and you will have to personally guarantee these loans for a few years, until your entity develops a borrowing capacity of its own.
forget about 30 year amortizations in this context. 15 is the norm. I just did one at 6.8%. with minimal closing costs, no title policy or appraials required.
scotty – i have been told the LLC does not help unless it is a separate business entity capable of its own credit separate from my personal credit. All of my properties are in LLC structures. That does not help with the 10 property problem. john
The way to go honestly is a more experienced Mortgage Broker. There are lenders out there that will do deals for those with more than 10 mortgages on credit. But please keep in mind once you hit 10 the amount of lenders accessible drops dramatically. Plus you start to get into the realm of no longer doing 100% investment deals or even 90% investment deals. Banks now want to see 15 to 20% down. So depending on the types of deals you are structuring ? you now have to change the game.
I will answer John Corey’s question, and elaborate on some other terms of a loan I just closed. I think it will help some folks get a handle on the differences between home loans and commercial real estate loans.
[side note: good credit and solid financials are very important to business bankers. fortunately, by the time most RE investors have acquired a small portfolio and are thinking about commercial loans, they have positioned themselves for this type of lending].
no title insurance. each lender will have its own policy on this issue. Hibernia National Bank (my lender) does not require a title policy for loans under 250K. They are satisfied with a title review by an attorney, which costs about half of what a Texas title policy costs.
no appraisal, unless I want one. if the loan denomination is less than 250K, I am not required to get an appraisal. the bank is willing to loan me 90% of the lesser of (a) my investment in the property, or (b) the county assessed value. about half the time, I am very happy with this arrangement. other times, it is in my interest to pay for an appraisal. In that case, they will loan me 80% of appraised. I just did a loan secured by 5 properties. I was happy borrowing based on my investment on 4 of them. but one was a huge rehab, where the after-rehab value was double my investment. the bank let me get an appraisal on this one property. One more thing. I don’t have to get a “full blown” appraisal, unless I want one. Sometimes, a summary appraisal gets me the number i want, and it svaes me a few hundred dollars. Other times, I want the appraiser to capitalize rents, which is a pricier deal. but I get to choose, and that is a valuable option.
term. 15 years. My deals are sufficiently cash-flow positive to tolerate the shorter ams. I will thank myself 1000 times 10-15 years out, when the these loans are completely paid off. I can’t imagine a better retirement plan. I will be in my mid-50’s when I start going free and clear.
rate. as recently as March, 2005, I was able to get these loans at 5.9%. by August, it ratcheted up to 6.2%. now the rate is 6.8%.
balloon. 7 year balloon. I have not yet hit one of my balloon dates, and am not sure if the bank will enforce it. if so, I will have to refi at that point, possibly at higher rates. but maybe not. I could refi at that point on an 8-year am, and those mid-term rates may be lower. or I could decide to refi based on then-prevailing values, which would allow me to extact a pile of capital, fueling more deals. lots of possibilities, depending on my state of mind at that point in time.
no points. no prepayment penalties. no surveys.
cross-collateralization ok. a couple of issues here. I had a fire take out one of my properties in a 3-property loan. this was pretty early in my relationship with the bank. they did not allow me to re-amortize the loan, even though they forced me to pay down a third of the principal when the insurance paid off. A year later, I sold one of the remaining two properties. By that time, my relationship with the lender had matured, and they were very cool. They confiscated an appropriate amount of the sales proceeds, but reamortized what was left of the loan. Now, they will gladly reamortize a loan if I sell a property. But I had to earn this privilege.
the biggest difference. I don’t spend time and energy fretting about lenders. I have a great relationship with my banker, and I know he can deliver when I need him to. It is relationship worth cultivating. It took a couple of deals for him to get comfortable (a) with me, and (b) my business. Once I gained his confidence, it was a downhill stroll. But I do not waste his time. I do not bring him little 50K loans. I buy a few properties with cash, and then bring him a package.
my strategy. Hibernia tightens up some of their rules for loans over 250K. knowing this, I bring them packages of 3-4-5 properties, and aim for loans between 150-200K.
Posted by John Corey on December 15, 2005 at 18:05:48:
Good points. Residential investors get used to loan terms that were designed for owner occupants. When you start to get up there in terms of units an investor certainly needs to start thinking about commercial terms. Some positive things happen and some negative as you noted. Maybe I should drop the ‘negative’ and ‘positive’ labels and just say that rules of the game are different.
I do have a question about one thing you mentioned.
You said you just did a deal with a commercial lender. You noted that you did not need a title policy. Are you indicating that you have no title insurance at all or just that the lender did not require a fresh policy to cover the new loan?
Posted by John Corey on December 14, 2005 at 16:13:59:
The loans need to be in the name of the LLC and reported on a tax ID separate from an individual. It is not the title of the property though you would normally expect both to be in the name of the LLC.