Find the Financing & Getting the Finances for your Real Estate investment

Once you’ve reached an agreement with a seller on a good real estate opportunity, financing is the next step. Financing is about finding the money for your investments. What’s the best source for obtaining funds? There are many sources from which you can borrow money: However, if you’re just starting out or you have bad credit, there are other avenues by which you can borrow money. For instance:

·    Look into borrowing from the seller.
·    Partner with a friend or family member.
·    Partner with someone interested in a healthy return on an investment.

When you’re just starting out with real estate investing, you want to try to avoid going into personal debt (other than financing the property). In order to do this, you’ll likely need to flip properties, use lease-options, or any other technique.

Then, once you’ve become more experienced and you can identify a truly worthwhile real estate opportunity, you can begin to buy and hold properties using your own money or partnering with private investors.

To finance this type of investing, always try to get owner’s terms and use cash from one property to buy more properties so that you don’t have to dip into your personal income funds. Then after a few months of accruing cash from properties, you can turn to private investors for funding.

Also, draw up a business plan and visit banks repeatedly. This helps you understand the banking/lending system, as well as allows you to get to know the bankers themselves. These are good relationships to have, as when it comes time to launch your real estate “business,” one or more of those banks you’ve developed relationships with will more readily open a credit line for you. These relationships are important.

When getting a loan from the bank, it’s probably best to use cash from the credit line to purchase a property and then refinance it with a permanent mortgage. When you refinance, pay off the credit line and start looking for another property.

There are two steps you can take to minimize the need to borrow more money than you need to:

1.    Have a cushion of savings in case anything goes wrong.
2.    Make absolutely sure you purchase a good deal before you incur any debt.

A cushion of extra funds is essential. In fact, you should have enough to cover at least three to six months of debts on your household and business, should anything go wrong. For example, if you have $2,500 in monthly expenses, try to have $7,500-$15,000 as a cushion.

Let's look at three different ways in which you can finance a real estate deal:

1.    Bank financing
2.    Partnerships with private investors
3.    Seller financing

Borrowing money from a bank can sometimes put you between a rock and a hard spot. You see, the bank requires that you have a clean track record, good credit history, and the ability to put some of your own money at risk. However, many beginning investors simply cannot meet such requirements... and such a situation puts them between the proverbial rock and a hard spot.

Nevertheless, it isn’t impossible to borrow money from a bank if you’re a beginner. What you need to do is establish a good relationship with a bank and it’s lending personnel, while making sure you have a decent credit history and that you continue to keep it clean. Doing this, you should be able to find a bank that will lend you money.But be prepared. Banks and lenders want organized information

Below is a partial list of the information a bank will need when you apply for a loan:

• Tax returns
• Financial statements
• A detailed analysis of the property, including:
• Market value once it’s renovated
• Potential rent income (if you rent it)
• Repair expenses
• What you expect for it

After describing your business and what you do, ask the banker’s opinion: What do you think of it? Do you know anyone who would be interested in financing this project? The banker may be able to provide some valuable information. In fact, the banker could tell you if your proposition is something his/her bank would be interested in.

Remember: The primary objective of a bank, credit union, or savings and loan institution is to make safe and secure loans. The more supporting documents you provide that proves such, the more you will convince them that lending you money is a solid proposition and a good investment.
One way to do this is to prepare and present a powerful financing package that will blow them away. Then when you do this, provide the bank with an in-depth business plan for the property you intend to purchase.

Even though you’re a beginner and you feel lucky that a bank will give you a loan... don’t jump at the first interest rate that comes along. When a bank provides you with an offer on interest rates, compare that interest rate with interest rates from other financial institutions in your area. Remember, everything is negotiable. Not just pricing on cars and houses... everything. This includes interest rates, points, fees, and terms.

So tell the bank you’ve been led to believe you will get the loan you’re seeking... you just want to see if they can give you a good deal – you’re shopping around! When the bank realizes they’ve got competition on what could be a good investment for them, they’ll be more in the mood to offer you a better interest rate.

Note: The reason any bank will lend money is they count on getting that money back... with interest. Thus, banks want to be assured they will be paid back. One way they determine this is to look at the debts on your credit line. Bankers live by the 28:34 rule – this is a ratio to debt and expenses/income. This rule states that mortgage payments, including real estate taxes, should be approximately 28 percent of an individual’s gross monthly salary with no more than 34 percent of their gross monthly salary spent on all other debts. So avoid having numerous credit line debts and keep your credit report clean!

The key to obtaining financing is to prepare a professional, organized package that includes a detailed business plan... one that explains exactly who you are and what you plan to do... a plan that is written to anticipate every question a lender might want answered. The financing package adds a professional touch to your presentation to a lending institution. In it you will want to include such information as:

• An explanation of who you are and what you want
• A business plan
• Financial statement
• Property description
• Loan request details
• Pictures of the property
• A copy of your credit report
• Two years of your tax returns
• A list of benefits to the bank
• Six references

Keep in mind that a bank will not lend you money until you provide them with the following documentation:

• Property appraisal
• Accurate survey report
• Termite report
• Test results on wells and septic tanks
• Proper title, liability, and property and casualty insurance

To get a loan from a bank, you need to have the criteria a bank requires:

• Good credit score
• Proof of income
• Money for a down payment

Credit Score
A spotless credit score is not necessary, but a clean credit history is certainly something that will help you get a loan.  You should note that credit information remains on your report indefinitely, though federal law insures that after seven years, you may request that any negative remarks be removed, except for bankruptcy filings, which cannot be removed upon request for ten years. Thus, be sure you request that negative information to be removed.

To remove negative remarks, write a letter to the credit bureaus asking them to reinvestigate the information. Send your written request by certified mail/return receipt. The bureaus then have within 30 days to report back to you. If they don’t, the item must be removed automatically.

Actions that improve your credit score include:

·    Paying installment loans (home mortgage, automobile, etc.) on time
·    Keeping low balances on a few open credit lines
·    Having a history of living at the same address
·    Owning a home

Actions that lower your credit score include:

·    Too many revolving credit card accounts
·    Too many inquiries on your credit report
·    High balances on credit cards
·    Too many recently-opened accounts

A credit score above 600 is considered good, though some loans require a score above 700. If you have a credit score above 700, you have excellent credit.

Proof of Income a provable income requires strict documentation:

·    Two years of W-2 forms
·    The past two pay stubs from your work check
·    Two years of tax returns

Down Payment a down payment is money you have on hand to put down on the property.

Note: Don’t expect to be able to borrow the down payment money from a credit card or other unsecured source and think the lender won’t notice. They’ll notice if money suddenly appears in your account.

When financing a loan through a bank, look to get a 15-year or 30-year, fixed-rate mortgage. If you’re going to buy and hold the property, a 30-year loan is best, as it allows for monthly payments to remain the same while property value and rent payments (if you choose to rent) increase.

Some investors argue that you can save money and get out of debt faster with a 15-year loan than a 30-year loan. You may be better off making extra payments on a 30-year loan than locking yourself into the higher payments required for a 10-year or 15-year mortgage. Remember, you must pay the bank whether the economy is weak or strong. The 30-year loan gives you smaller, more affordable mortgage payments.

The most popular types of mortgages include:

·    Adjustable-rate Mortgage: This has an interest rate that is adjusted periodically in response to market conditions. It is usually tied to something like the Federal Funds Rate.

·    Federal Housing Administration (FHA) Loan: This is insured by a federal agency and enables borrowers to finance a large portion of the purchase price of residential real estate.

·    Department of Veterans Affairs (VA) Mortgage: This is made by a private lender and guaranteed by the Veterans’ Administration designed to assist veterans in financing the purchase of homes with small or no down payments at a comparatively low interest rate.

Listed below are other types of mortgages you may want to familiarize yourself with:

·    Blanket Mortgage
·    Graduated Payment Mortgage (GPM)
·    Graduated Payment Adjustable Mortgage (GPAM)
·    Pledged Account Mortgage
·    Shared Appreciation Mortgage
·    Rollover Mortgage (ROM)
·    Renegotiable Rate Mortgage (RRM)

Most financial institutions require a borrower (you) to personally guarantee a loan and to comply with very stringent credit and paperwork requirements. Because of this, many investors turn to partners or private investors who will lend money on the property without requiring a personal guarantee.

There are advantages and disadvantages to using private investors

Pro:    You can often bypass a bank’s stringent asset and income requirements, as well as lower or even eliminate your liability and risk.

Con:    When you borrow from private investors, you almost always pay a higher interest rate and, therefore, must give up more of your profit on the property.

As stated earlier, if you have little to no money to start with, getting a loan from a bank isn’t easy. So, you may want to think about having a partner and/or using private investors rather than going the banking route.

Private investors can consist of friends, family, relatives, employers, co-workers, and people in general who are interested in getting higher returns on their money. Again, you’ll want to present these investors with a business plan and show them that it’s a solid investment on their part and that they can profit.

As mentioned, your return rate may be lower when you have private investors, as you must pay a higher interest rate. But because you found the deal and you’ll be the one doing all of the work to ensure the deal gets done, make an offer to your partner that if he/she will put up the money, you will split the profits 50/50.

Then, once you’re starting to make a profit on the property from rent or the sale of it, make sure you always pay your investors back 100 percent of their investment money first before taking profits. By paying the investors back their initial investment before any profits are split up, you’ll make them happy to do business with you again. Then once there is a profit on the house above and beyond the loan cost, you will be able to realize your profit and use it to make additional investments.

If you can’t get the funds you’re looking for from a bank, some sellers – usually those who are desperate for a buyer or who have little or no balance on the property – will provide the financing for you. This is one of the best sources of capital for real estate purchases. It has low risk with an endless supply of funding and great terms. Always ask for seller financing before you seek any other type of financing arrangement. You see, while almost all sellers will say they want cash, it is possible to obtain owner’s terms if you can negotiate it. If sellers demand cash, find out why, and then ask what their plans are for the cash.

If the sellers need to pay off a small debt, ask what they are going to do with the remainder of the money. If they tell you they are going to invest it, ask how much they plan to make on that investment. Perhaps they answer that they can earn 6 to 8 percent. If so, your response should be: “How would you like to pay off your debt plus earn 9 to 10 percent on the remainder with a safe investment?” This should get the sellers’ attention because it meets all of their needs.

For instance, you can then offer them $3,500 cash down with owner’s terms for the balance over 20, 25, or 30 years at 9 or 10 percent interest. If you don’t have good credit, it’s the easiest way to get financing. Even if you have good credit and any bank or private investor would be happy to loan you the money, you’ll probably end up with a better deal using owner financing. This form of financing is attractive because it does not require traditional lender income and credit approval. Plus, it saves your credit since you don’t have to borrow from traditional sources.

Assuming an existing loan or mortgage is another type of owner financing. When you assume a loan, you are assuming the responsibility for the payments on the seller’s existing mortgage (the difference between the sales price and the balance owed). This is the way to go if you have available cash and you want to avoid closing costs, as well as sometimes benefit from a lower interest rate. Loans that can be assumed are a very good find, but they are not necessarily easy to find.

Many new loans are also qualifying assumable loans. That is to say, you have the opportunity to take over the seller’s loan once you’ve applied and qualified with the bank or mortgage company that has the original loan.

You should note, however, that many pre-1986 mortgages are assumable non-qualifying... meaning this is a great option! Unfortunately, after 1986, most mortgages are either qualified as assumable or not assumable, not making it an option at all.

Most mortgages have a due-on-sale clause that entitles the bank to call in the loan if the property is sold, making them unassumable. To get around this, some investors ignore the due-on-sale clause and make payments directly to the seller, who remains on the first mortgage, and the seller then makes the payments to the mortgage company.

Another way to get around the due-on-sale clause is to lease-option the property. This means you lease the property from the seller with the option to buy it. The option is put in the lease contract stating that you, as the buyer, have the exclusive right to buy the property anytime during the time stated in the contract. While a lease-option will not usually trigger a due-on-sale clause, you or your attorney should review the original loan document to make sure.

A wrap-around mortgage is an all-inclusive trust deed (AITD) that allows the buyer to take title to a property by combining a first mortgage and a second mortgage that then includes (wraps around) the first. This is also called an all-inclusive mortgage (AIM).

A wrap-around mortgage can give you an opportunity to purchase a property at a lower interest rate than the current market, while at the same time giving the seller an additional safeguard against non-payment. In addition, the seller can earn more money due to the difference in interest rates after the property is sold.

However, be aware that many lenders do not allow wrap-around mortgages because such a method requires a clause in the contract that stipulates a continual interest rate. Also, some secondary lenders prohibit wrap-around mortgages.

The contract for deed – also called a contract for sale or land contract – is very similar to the wrap-around mortgage. You see, normally, if you pay cash for a house and get a new loan, you get both the title and deed to the property. But in a contract for deed, the seller retains the title to the property until you, the buyer, meets the complete terms of the contract. Also, the buyer has to provide a down payment on the property and pay the monthly loan balance. This is an excellent mortgage option if you want to leverage cash or if you can’t qualify for a loan.

A contract for deed states that you get the deed (title) after you perform a contract. With a contract for deed, the property is yours to sell, rent or contract-for-deed to someone else.

An additional method for borrowing money is through an equity line. This allows you to use the equity in your house to borrow money. While an equity line loan can be attractive, it is not recommended. You see, you are using property as collateral, and there is the possibility you could lose that property if a deal goes bad.