Are you considering a 1031 exchange but aren’t sure you can qualify for the financing needed for the replacement property?
Do you have more than 10 Fannie or Freddie loans but still want to buy property?
Would you like to leverage your IRA or 401K to buy more real estate within your retirement account?
Are you a foreign investor who hasn’t been able to qualify for U.S. financing?
Or maybe you had a short sale, foreclosure or bankruptcy in the past, but have cash now and want to invest.
Lending options have been limited since 2008 when the credit market seized up, but that’s all changing now. As the housing market strengthens, more and more lenders are emerging with new, creative programs. This is GREAT NEWS for real estate investors like us who want to take advantage of today’s incredible deals.
Hedge funds bought thousands of single-family homes when prices were dirt-cheap and turned them into rental properties. Now several of those funds have turned to lending and are offering blanket loans to investors. A blanket loan is simply one loan that covers multiple properties.
Terms are generally:
- 5-10 years fixed rates
- Amortized for 30 years
- Loan amounts from $350,000 – $5,000,000
- 5 properties minimum
Loans you get from a bank, credit union or insurance company are called “Institutional.” Institutional lenders are heavily regulated because they are not lending their own money. For example, a bank lends out the money that is deposited with them and insurance companies lend out money that is paid to them as premiums. While strict banking regulations do help protect those depositor’s funds, it also places serious limits on the lender’s ability to issue loans.
Lenders who are using their own money are not subject to the same regulation as institutional investors. Private lenders dried up during the recession but they are now coming back into the market.
Here are some of the terms we’ve seen lately:
- Rental verification only – no personal income verified
- No limit on the number of financed properties
- 75% LTV
- Minimum FICO score – 620 and no BK, shortsale or foreclosure in past 36 months.
- 30 year fixed rate mortgage at 6.5-7.75% up to 25 loans!
Non -recourse financing simply means that the lender can’t come after you for the deficiency in case of default. In other words, if you can’t make your payments for some reason, the non-recourse lender can take the collateral property, but they cannot come after you personally if the collateral does not cover the full amount owed.
Commercial loans are often non-recourse, but 1-4 unit residential loans are usually recourse. That has been extremely frustrating for self-directed IRA investors looking to leverage their retirement funds with single-family home rentals because the IRS only allows IRA’s to obtain non-recourse financing.
Over the past several years, only a handful of banks have offered non-recourse financing on 1-4 unit rental properties, and their terms have been very stringent. But that is changing now.
One of RealWealth’s property providers has educated several banks on the safety of non-recourse financing when funds are secured to fully-renovated, cash flowing rental properties in strong markets under experienced management. Those banks got it and are now on-board offering non-recourse financing on this particular turn-key company’s properties only :
- 30 year amortization
- NO POINTS upfront
- In Virginia: 55% – 60% LTV @ 6% interest-only, fixed for 7 years
- In Chicago: 55% – 65% LTV @ 5% interest-only fixed for 7 years
- In Omaha: 60% – 65% LTV @ 5.5% for 5 years and 8% for years 6 & 7 (Principal & Interest)
These non-recourse loans can be used to finance self-directed IRA’s, and for these options as well:
Financing Your LLC
Many investors want to own property in an LLC for the asset protection and anonymity. But unfortunately, conventional lenders will not lend to LLC’s. That has forced many Investors to obtain the loan in their personal name and then transfer the property into an LLC shortly thereafter. While this is common practice, it does actually violate the bank’s “due on sale” clause.
Most investors don’t worry about it because the commonly accepted belief is that as long as the note is being paid, the bank won’t care that the investor has transferred ownership into a company they own. However, this should not be taken for granted. The bank can indeed call the loan. You would be forced to either transfer title back to yourself for a fee, find a new loan, or come up with cash to pay the bank back.
Non-recourse financing allows your LLC to obtain financing, offering both asset protection and anonymity.
Asset-based Lending for 1031 Exchange Relief
Many investors are selling high-priced properties and exchanging them tax-deferred for high cash-flow properties. They can literally sell one property and trade it for several, tripling or even quadrupling their cash flow.
However, 1031 exchange rules require that both the purchase price and the new loan amount be the same or higher on the replacement property.
That means that if an investor were selling a $1 Million property in San Jose that had a $650,000 loan, she would have to buy $1 Million or more of replacement property with $650,000 or more leverage. But what if she’ss in a situation where she can’t qualify for a loan? Maybe she has a short sale on her credit, or currently can’t prove income?
This is when asset-based lending is invaluable. Asset-based lending means that the lender qualifies the property, not the borrower. Personal credit is not considered. They look at cash flow and condition of the property.
We are so thrilled to see that these loans are available now for investors.
If you would like a referral to these lending partners, get the list simply by joining RealWealth. It’s free. Plus, you’ll get access to weekly webinars featuring the emerging real estate markets, property management advice, asset protection and tax savings tips. Join here.