Once I decided to pursue investing in single family houses more seriously, it became clear that I’d need a serious financing strategy. While I can afford to buy a few houses for cash and pay for all the rehab costs myself, if I’ll be holding those houses for any period of time before selling, the cash wouldn’t go nearly far enough. So, I started talking to banks about the possibility of getting loans for each of the houses I buy.
I knew that the big banks likely wouldn’t be able to help me much, considering I didn’t have any income, so I decided to start with the smaller, local banks. Surprisingly, a number of them were very receptive to my business plan and my investing approach, and said that they would consider providing some type of financing for my investments. While that was good, what they proposed wasn’t going to go far enough based on my investment goals (at least 6-10 houses in Year 1).
Late last week I made the decision to ask a friend of mine (who currently has a couple rental houses and a good income) if he’d be willing to partner with me on my investments. Basically, the deal was that if he’d co-sign the loans with me, I’d give him a percentage of the profits from my investments. The risk on his side was obviously his credit (if I ever default on any of the loans, it will hurt both of our credit); and the upside is that he will get part of the profits from all the investments I make without ever lifting a finger.
I went back to a couple of the banks I had been speaking with to see if having a co-signer with income would help me with my financing. The answer was that it would help tremendously, and I decide to move forward with one of the banks to submit preliminary loan applications (for both my partner and myself) to find out what the terms of loans we requested would be.
Essentially, the bank offered us two types of loans. The first — Purchase Loans — will be used to purchase properties. Once a properties is purchased using a Purchase Loan from the bank, I will use my own cash to rehab the property. Once the property is rehabbed and I get a tenant into the property, I use the second type of loan — a Refinance Loan — to refinance the property to pull out some or all of cash that I used to pay the down payment and the rehab costs. If I can get properties cheaply enough, I should be able to refinance to take out all the money I have invested, and still make a profit each month from the rental income, even after paying the mortgage. This would allow me to keep buying property after property withot investing much (if any) of my own money, but still turning a profit every month. Then, when I sell the property, I would pay off the loan, and keep the difference as my profit.
Financing my real estate investments have been my biggest challenge to-date (as I have no provable income), so getting past this hurdle is quite relieving!
{ 4 comments… read them below or add one }
Hey Scott,
I’ve been reading your blog for the past few days and I have to admit that you’ve done a great job so far. Your planning (& past experience) shows that you’ll succeed in your adventure. All the best.
If you can execute what you have planned so far, with additional future learning, you are certain to be a success story. Hope to read more and about your adventures and successes.
I’ve been considering about RE investing for sometime and your blog has encouraged me to look forward. Though I’m kind of busy for the next year or so with studies, I will follow your blog. Keep up the great work.
-Siva-
It appears you’ve gotten over a major hurdle as far as financing is concerned. Looks like this will make obtaining the properties easier for you and once you start turning dollars the banks will clamor for your business.
I enjoy reading your blog. Lots of good info. A question about using other peoples money. Is any one concerned that the bank will decide to call your loan in? I have ben reading more and more cases where this is happening. End result is usually bankruptcy for the investor. Thats my biggest fear lately!
When you say “bank” are you referring to an actual bank, or are you referring to a private investor who has loaned you money?
Other way, you should have a written contract with the lender that stipulates if/when they can call a loan due, and assuming you don’t give them a reason to do so (such as being late on payments), there is no reason they would. In fact, most lenders don’t want to own the property, so as long as you’re paying off your loan as promised.