Finding Financing

July 21, 2008 · 28 comments

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!

28 responses to “Finding Financing”

  1. Siva says:

    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.


  2. Mark says:

    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.

  3. Tray says:

    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!

  4. J Scott says:

    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.

  5. altin velaj says:

    SCOTT you are an inspiration. Your articles are very helpful too us new investors.

  6. Charles Nebenfuhr says:

    Hi I am just starting out. I been reading a lot of info on the web. I am really wanting to get into flipping houses. I recently been laid off in work and have bad credit. But I do know a lot about fixing houses. If you could help me on this I would be most appreciated. Thanks for you help.

    Charles Nebenfuhr

  7. J Scott says:

    Charles –

    My first suggestion is to start working on improving your credit. Once you clear this hurdle, things will be much, much easier. While it’s possible to be successful in real estate without cash and with bad credit, it makes things exponentially more difficult…

  8. John says:

    Hi Scott,

    I have been reading you stuff for several months and I’m preparing myself for the final step and buy my first investment property, I’m looking to finance with OPM, I prepared a PowerPoint presentation and I showed to several potential clients and they are very interested on the big opportunity we have right now but all of them asked me how I’m going to guarantee their money, I told them they will included in the mortgage but still I need to know more about. I’ll appreciate any input or idea in how to guarantee OPM for RE investments

  9. J Scott says:

    John –

    First, I’m not an attorney or a CPA, so take this for what it’s worth…

    If you have multiple investors who will be covering the entire purchase price, I would recommend forming a business entity (most likely an LLC) with each of the investors as members/shareholders holding an amount of stock proportional to their investment. Then have that business entity hold a mortgage on the property.

    This way, if you default on the note, the business entity takes ownership of the property (they foreclose on it), and the investors will then have the property in return for their investment.

  10. John says:


    That is an excellent idea, thank you so much for your reccomendation


  11. Stefan says:

    J Scott,

    Your blog is truly a great inspiration for others to start investing in real estate. Just a quick question, what terms are you getting for the purchase loans? Are they shorter terms like a HML would do and you are expected to refinance out of it within a year? Also what kind of proof of funds do they look for to ensure that you would be able to finance the repairs and pay them back?


  12. J Scott says:

    Hey Stefan –

    The terms of my loans have been getting worse and worse over the past two years as a couple of the banks doing these rehab loans in my area have gone out of business, and the one left has had some bad experiences (with another big investor last year). So, my bank keeps getting more and more strict on how much they’ll lend against each property.

    It used to be that they’d lend 80% of the purchase plus rehab costs (which was great), and now they’ll only lend against 80% of the purchase price. I have to pay the other 20% myself, plus all the rehab costs myself. They don’t verify funds, but I fill out a personal income statement (balance sheet) once a year.

    The terms of the loan are decent: 6.75% interest only for 12 months.

    They also do longer term loans against my rental properties…generally 3-5 years with rates around 7-8%…

  13. Stefan says:

    Thank J Scott,

    Great info, seems like the same around my area in Dallas, TX. There are a few decent local banks that I work with but private money seems to be the best way to go these days. I have a few prospects through family and friends that I am approaching and it seems as if they are interested. I am starting out slow just to show them that it works to get up to 12% on their money 🙂 Hopefully if they see it work once, they’ll be more willing to do it again.

    Keep up the good work and let us know when the new baby arrives.. Best of luck for 2011 for you..

  14. Andrew says:

    Hey J Scott,

    Love the blog, it’s very informative. Even though you mention that the terms of your loans have been getting progressively worse, it still sounds like you have a pretty good financing situation.

    A couple questions for you: First, how did you find & secure this financing in the first place? I know you mentioned you went to smaller banks, armed with your business plan. Was it as simple as that, even without a proven track record of success?

    Second, what are your feelings about the 12-month loans? They sound rather risky. Have you always been able to repay or refinance by the end of the term?


  15. Andrew says:

    ^ How many loans did you use a co-signer for?

  16. J Scott says:

    Hi Andrew –

    I literally started walking into very small, local banks and asking to speak with their commercial lending department. I’d sit down with their rep, explain that I was looking to get into rehabbing and was looking for financing. Most would quickly explain that this wasn’t something they did anymore (this was 2008), but were nice about kicking me out… 🙂

    But, one or two said that they would consider this type of financing under the right circumstances and wanted to talk further. Ultimately, it boiled down to them wanting to look at the specific deal, at my credit, and at my ability to put at least some of the money down. There was one bank that seemed more willing to lend than the others, so I kept in touch with the loan officer from that bank, and when I needed funding I called him and he walked me through the process.

    The bank ended up getting shut down by the FDIC a year later (it went out of business), but by that time I had a bit of experience and could start approaching some other banks that only considered lending to more experienced investors. Unfortunately, even these banks are few and far between these days, and the main bank that does this kind of lending in my area is now requiring large down payments, reserves, etc. It’s only worth considering on very specific deals for me…

  17. J Scott says:

    Andrew –

    I never used a co-signer. I personally guaranteed all the loans, and having decent credit and some cash reserves (to pay downpayments, etc) will be required.

  18. Kevin says:

    Hey J Scott,
    Thank you for having such a wonderful website. Right now Im into web development and have several projects going. Anyhow, my in-laws have ran a multi million dollar business in the real estate department. Not so much flipping homes, but starting from the ground up. I’ve been really looking into it for the past 6 months, and am now starting to look into getting financing.
    Im 22 with a credit score around 640-650
    Never missed a payment on any bills or loans I have etc.
    Im trying to prepare myself for anything the banks may throw at me.
    I dont have “taxable income” but I do make decent money in the web department.
    I have my car thats valued around 8-10k(equity)
    I see that you said you didnt have any income which might have turned alot of lenders off, but my question to you is what do you think I should do in order to obtain a loan successfully?
    The only thing really holding me back right now is the financing part.
    Im going to be heading to the local credit unions and banks monday 2-13-2012
    Id be real grateful for anything you can provide!

  19. John says:

    Hey Scott,

    Great site and very informative and thanks for share your expericnes with us, I only have one question, can you share the name of the banks that you have been using for you rehab loans.


  20. J Scott says:

    Hi John,

    Unfortunately, both of the banks that I have been working with over the past couple years on rehab loans have shut-down their rehab lending. So, these days — at least in my area — portfolio lending is pretty much non-existent. I’ve been using cash and private lenders for the majority of my deals over the past 6 months.

  21. J Scott says:

    Hey Kevin,

    Unfortunately, with you low credit score (probably due to not having much credit at your age), it’s going to be very tough to find institutional lenders. It will be especially difficult given that you don’t have any income (per your tax returns). While there may be some small banks that are willing to loan against things other than credit and income, they are likely going to be looking for some experience and success in real estate. Basically, without experience, credit or income, you’re going to have a tough time getting bank loans.

    My suggestions would be as follows:

    – Start with friends and family and see if you can find someone(s) to partner or lend you money;
    – See if you can find private investors (professionals in your network who may have $$$ in their retirement accounts that they’re looking to get better returns on);
    – Worst case, start talking to hard-money lenders in your area — if your deal is great, they will likely lend regardless of your credit and experience situation.

  22. Kevin says:

    Thanks for the info! Im definitely going to look into it.

  23. Tracey says:

    Hello J,
    Am going for a meeting with a two local banks tomorrow and just want to go prepared.
    Below is a list of what I have :

    Current credit reports from the 3 credit bureaus
    Company registration
    2months statement of acct – both personal & business
    Monthly P/L for my company
    Contract for property an looking to purchase
    Information from auditor’s site showing all the properties that I own.
    Letter of experience
    One page business summary
    Two years tax return
    My business card.

    Is there anything you think I would take along ?

  24. J Scott says:

    Tracey –

    It sounds like you’re very well prepared! Probably more so than 99% of people that walk into that bank…

    The only thing I would add to your list is a detailed overview of your financial success. If you’ve done flips, put together a basic spreadsheet of your purchase/rehab/sales prices and your profits. If you’ve done rentals, put together an analysis of your cash-on-cash return and cash flow since purchase. A solid history is always a great indicator of a prosperous future…good luck!!!

  25. Tracey says:

    J Scott,
    Thanks for your advice but can you share with me a sample of the financial success speadsheet . I have done a couple of rentals and my average is buying at 45-56k cash with 5-8k in rehab and renting for $1200. Year built is 2005 with 1300 – 1700sq with basement. Am looking to refiance two of them so that I can recycle the initial cash.
    I’ll PM you my email address if you can email me the spreadsheet. Am still struggling calculating my cash- on -cash since I purchase them with cash.

  26. J Scott says:

    Hi Tracey –

    Those rental numbers sound really good, especially for such new properties — congratulations!

    Just let me know which spreadsheet you’re looking for and I’m happy to provide it. The rental analysis spreadsheet is available on the site, as is the rehab analysis spreadsheet (just sign up for the newsletter and check out the Goodies page)…

  27. Shanika says:

    How do 203k loans fit into the picture? I’m guessing 203k loans are for owner occupied only?

  28. J Scott says:

    Hi Shanika –

    Yes, 203K loans are just for owner occupants…

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