Were getting ready to start another house next week. I’ve been getting tired of self-financing these things so I decide to get a business line of credit.
I call my usual credit places (places that have offered me lines of credit) and I get turned down.
We have over 700 credit scores and no late payments. The problem? Too many inquiries on our credit reports…….we buy houses, of course we have too many inquiries!
The irony, you ask?
One bank turned me down for a 9% line of credit, but will be happy to cash advance me 20k at 3.9% on a credit card.
Man this gets frustrating.
Replies
MSA1,
The biggest mistake I have made is not having a different entity for each thing. Turned down for a refinance with cash out 2 weeks ago. They counted the debt of mortgage for rental properties, but not income, went by the tax return. Only made 2000 dollars, after paying the mortgage ,taxes etc.
I do construction, remodel etc, under my own name. IRS is fine with it, not the bank. The truck is a debt, and it comes out of my profits, before the schedule c(including insurance, gas,registration, maintenance,etc etc). So my $360 a month truck looks like $800 in debt.
They would rather loan to somebody who has a larger income on tax returns, than someone who can manage money and knows how to work with the tax system. If I show zero income on the rentals I am still ahead by 2-4 thousand , after mortgage, taxes etc. Loan agent said she knows that, but it is not how they look at the numbers!
Nirtheast, you're just working with the wrong bank. I'd start shopping that mortgage application and I'll bet that you could find a loan for your projects in less than one hour.
EVery bank has their own rules and it sounds like the one you applied to just doesn't like investors. Find an investor friendly loan company. They are everywhere and they loan everywhere. Were getting some financed right now in TX from a MI outfit.
jimfka (formerly known as) blue
I agree with Jim. Find another lender. I have a broker up here that could get my cat a mortgage.
Ok maybe not, but he's pretty good.
As careful as i've been with my credit I cant find a banker to do anything for me. This broker can get my stuff through quick and has many places to shop the loan. As far as your DTI ratio. We've gone stated income for awhile now. You'll pay a little more interest but the way I see it, thats my tenants problem. After all, they pay the mortgage.
Mark, the banks want you on that unsecured credit card because the fine print is predatory. One mistake and that 3.9% can be changed to 24%. You don't even have to make a mistake. If you get turned down on credit FOR ANY REASON, they can raise the rate.
Additionally, if you go bankrupt, that line of credit is not wiped out like your 9% line of credit would be.
Can you get a line of credit using another property as the security? You'd have to have some equity available somewhere for that.
If your finances are secure, I'd use that line of credit but you need to make sure you have a backup plan to pay them off if they escallate.
How did you finance the property that you are starting on? Is it financed as an investor property?
If you are landing some excellent deals, you might want to consider hard money. The hard money lenders are steep, but it gives you enough capital to pay for all the fixing costs.
I think I may have already suggested this, but I will again. Go attend the Oakland Real Estate Investors club meeting over in Clawson. They meet once a month and you will find enough money to finance the Silverdome renovation. Google REIA and follow the links to the Michigan chapters. You won't be sorry. You are a perfect fit for that type of meeting and if you aren't thrilled, I'll pay for the dinner (you don't have to pbuy the dinner ticket...but it's good value for the $8.00). They'll let you attend the first meeting as a guest free...I think.
I hope you are taking advantage of all the free financing available all over MI. With the market in the condition it is, you should not be needing to get your own mortgage EVER! Start buying everything subject to the mortgage and don't worry about the due on sale clause. There ain't no bank in Michigan that's going to call a performing loan in...
jim
fka (formerly known as) blue
Damn Jim,
You're way over my head. You need a protege? I've had the REIA suggested to me be someone else, i've just been too busy lately to do anything else.
I've got good equity in all my finished houses. My plan was just a simple line of credit to pay subs while keeping myself liquid to take care of regular family/business bills.
The project were starting on the 26th (number 4 in Ferndale) is on a standard 30 year mortgage which will refi'ed after were finished fixing it. The bank does know its an investment.
What free financing are you refering to? I havent made any contacts with anyone that has mentioned anything like that.
I need to increase my business knowledge, how do you buy "subject to mortgage"? I need to use more OPM. I still have not been able to buy more than one property at a time and thats slowing me down.
Mark, there is a wealth of information regarding "sub too" financing.
Basically, you would be making the payments of the existing mortgage and taking the deed to the house.
The reason I know that you can find these all day, every day in Michigan is because so many people are hurting and in a bind. People are leaving Michigan in droves and setting up shop in other states and leaving their houses empty. They are choosing to pay rent in another state and are still paying their empty Michgan house mortgage, rather than let their credit get ruined. If you contact them and offer to take over the payments for a couple of years while you fix the place up, you probably would get at least one yes for every ten offers. That ratio might get even better than that once you learn how to present the idea.
Sales are so bad in some areas of Michigan that the selllers have lost hope. Many are upside down when you factor in the sellers fees. Some are so deparate, yet have good paying jobs in other states that you probably could arrange deals where they make the first few months payments!!!
Don't let the naysayers tell you that this is seedy or it isn't being done. You can honestly help people out by using your skills and financial position to take over their payments. The seedy investors are taking the deeds subject to the mortgage, then not making payments and sending the house into foreclosure, while taking rent from tenants. That is illegal, immoral and gives the business a bad name. The legit guys are taking the mortgage with full disclosure, and doing what they say they're going to do, which includes making the payments on time.
A secondary method is buying on a lease option. That should work for you too. There isn't any reason why you should be financing the purchases and subjecting yourself to all the closing costs. Your are tossing out good money on every purchase.
All these "creative" financing is available at any price range. I provided enough secondary financing on the Au Sable property to qualify the buyer with an 80/20 loan. He basically bought our place up there for zero down. The realtors were worried for me, but thats because they don't understand anything much more than conventional financing. If I wouldn't have created that deal and worked it out myself with the buyer, I'd still be holding that lakefront property and wondering how I was going to sell it as I worked my azz off here in Texas.
As long as you are going to stay in that lousy MI market, you might as well take advantage of the buying opportunities that are there.
Call me on the cell and I'll explain it a bit more if you want. You'll have to email me for my TX cell. All my old MI numbers are history.
I'll find a couple of websites for you tomorrow. And please, don't tell me your too busy to get over to REIA unless your too busy to double your income.
jimfka (formerly known as) blue
Okay, i'll get there. I think they're meeting at the hall at the 696&I-75 intersection now.
Cool.
I just sent you a long email with some numbers. I also included an investors package that you might plagerize a bit to find some funding for projects you do in MI. I'd give you a couple of local names of people there in MI, but I'm saving them for projects here in TX.
I know you'll enjoy that REIA meeting.
jimfka (formerly known as) blue
Jim_Allen,
Thank you for the advice,(msa1 also) I guess I need to find the right"team" to work with. Just started with investment properties, so I am still learning, and appreciate your input.
northeastvt
Curious - You say you were once "Blue". Is that Blue Eyed Devil?
Don K.
EJG Homes Renovations - New Construction - Rentals
Yes Don, that would be me.
fka (formerly known as) blue
I've had some positive responses talking to credit unions in the past when i was up north. Never went forward with them though.
We moved to a small town within the last year and I have had a totally different change of attitude from a small town bank. The last line of credit took me about 30 minutes to get, and I spent at least 25 minutes of that time talking to the loan officer about his family and mine. He asked me if my balance sheet was the same as it was last year, handed me a form filled out with the name of the company, the amount that I wanted to borrow and the "Purpose". Told me to sign it and called the lawyer I picked to see when we could close. (He made sure there was a personal guaranty clause in it when the papers were done. I had no problem with that.) I have since seen the balance sheet for the bank - they are SMALL, 5 branches, but only have net income of ~2,000,000/year. I would try a small local bank and see if it helps.
Take a balance sheet and income statement in with you and do a face to face. maybe take a group of pictures with you and current appraisals - something they could digest in about 3 minutes or less. Don't waste time on the phone.
As an aside, some banks may not be happy with your taking out standard residential mortgages in houses that you aren't living in. If you sign papers saying that you will be living there, that also happens to be fraud - Federal too. Happens all the time, I know. I also know that the government can prosecute for it.
Good luck.
Don K.
EJG Homes Renovations - New Construction - Rentals
Don, excellent advice about small time banks.
Most banks make several types of loans as a standard way that they do business. Each bank has their own appetite for different types of loans. Some refuse to get involved in certain types of loans. Others specialize in those same types of loans. Banks are like carpenters: there are finish carpenters, framers, jack of all trades, etc.
Local banks in small towns are very likely to make loans that are called "portfolio loans. These loans typically stay inhouse and are not sold to the secondary markets. They often end up as loans to "people", rather than to "property". Your personal contact with the local banker in a small town becomes a critical step in the networking needed to secure these types of loans. Also, these loans are offered because the local banker understands the property better than some multinational internet lender and knows whether the investment is sound based on reality and history, rather than comps which are often nothing more than numbers on a page.
Portfolios can be created with a wide variety of rules as opposed to the rules that govern Fannie Mae and Freddie Mac loans.
jim fka (formerly known as) blue
I've never even implied i'm living in these houses. What I meant was they're normal 30yr mortgages but the bank does know they are investments.
MSA-
I don't want to come across as a Pollyanna in terms of residential financing where the mortgage is for an owner occupied house. The reality is that thousands of closings are held daily where people buy homes that they don't intend to live in, using "standard" 30 year mortgages. I bought my first one that way, and rationalized that I "intended" to live there. Well, I did, as I fixed it up. But that was a long time ago.
I did a lot of closings after that (as a lawyer on Long Island) and watched the paperwork requirements grow and grow. At the end, a couple years ago, nearly every bank required at least one or two written representations, usually affidavits, that the buyer intended to live in the property. Rates were based on risk and the owner occupied houses were less risky as finance projects for the banks. I believe that the feds - Fannie Mae and Freddie Mac - required this too when they bought the packaged loans from the banks. As some loans have failed, the banks and the investigators have been looking into some of these loans and they have found (Surprise!!) that some of these were investment properties, from whence the fit hit the shan. In terms of percentages, it's probably well under 1%.
Based on your statements, it sounds like you told the representatives of the bank that you were buying these as investment properties. For kicks and jollies though, you might want to look through the closing papers you signed to see if there was anything that said you would be living there. Could be a separate document and could be as simple as something in the mortgage (Now there's some interesting bathroom reading.) Verbal comments would be meaningless in that situation.
One area where it can be more troubling is in insurance. I have seen and handled cases where people bought homeowners' policies for tenant occupied homes only to have them recinded (cancelled) when the insurer found out who was living there. Problem is when that's after the fire...ouch.
No personal offence intended, and hopefully none taken. My comments are offered as a personal point of reference, maybe to make some people think.
Don K.
EJG Homes Renovations - New Construction - Rentals
This may make me sound stupid or maybe show my naiveity, but dont find any advantage in lying to a lender or insurance agent.
I cant say for sure that I signed this doc on every loan, but I know for sure that I have signed papers stating that what i'm buying is an investment.
Insurance too.
That was one of the things that bothered me about my past business partner, he always tried to fly under the radar. The first three flips I did with him and he would always get homeowner permits and the fight with the city insisting he was going to live in the property. Then magically at the end of a project he and the misses would "patch thing up" so he could go back home and now sell the property. In my opinion you WILL NOT be successful running your business that way.
Since I began I have always tried to give the best product I can provide and run my business as legitimate as I can.
Edited 10/17/2007 10:15 pm ET by MSA1