A Interesting Article On Funding Deals

Funds with Non-Recourse Loan
Owner Carry Mortgage
Private Money Loan
Subject-to Existing Financing
Joint Venture Agreement
Syndication Sponsorship

Public and Private Real Estate Loans Explained

1. Mortgage Bank Loan - Although the days of freewheeling investment property loans are over, the bank mortgage is still the most common method for financing investment property. Currently lenders require a minimum of 20% of purchase price as a down payment and a debt-to-income ratio of 42% or lower for investment property. Since the sub-prime lenders all became defunct, very few mortgages have prepayment penalties and are thus suitable for either fix and flip projects or long-term hold rental properties.

Always work with a mortgage professional who specializes in investment loans
It is best to work with a mortgage banker who funds loans on a warehouse line
2. Local or Specialty Bank Loan – Local banks provide funding to investors with similar qualifying criteria as mortgage banks, but often with more flexible terms and programs. Local lenders and smaller banks are more apt to provide short-term loans (albeit at higher rates) for investors and some will lend on a Loan-to-Cost (LTC) basis rather than a Loan-to-Value (LTV) basis. If you use a bank or mortgage company that lends on LTC basis you may be able to borrow all or a large portion of funds required to make repairs or renovations. Many smaller banks have specialty loans, including construction loans and construction to permanent loans.

3. Hard Money Loan – Professional hard money lenders will make investment property loans based on the equity in a property and are less concerned than bankers about the quality of the guarantor. Hard money loans are significantly more expensive than bank mortgages and most lenders will require at least 35% equity in the property. Some hard money lenders will loan 100% of the acquisition price as well as the cost to repair or remodel the property. Hard money loans are short-term, and therefore only suitable only for quick-turn or fix and refinance projects. Rates fluctuate based on demand, but borrowers should expect to pay 20% or more annualized interest in the form of points, fees and carry.

4. IRA 401K Funds – Funding real estate investments with IRA funds is also becoming more mainstream. To use these funds, you must be able to roll-over your retirement funds into a self-directed retirement account. Self-Directed IRA account custodians will be able to provide you with rules and regulations about what you can, and cannot purchase, with tax deferred retirement funds. The simplest way to invest these funds is to purchase a property for all cash within your retirement account. The property is titled in the name of your IRA (not you personally) and the custodian works with you on reporting to remain in compliance.

5. IRA Funds with Non-Recourse Loan – Leveraging your IRA funds by obtaining a mortgage for part of the purchase price is more complicated than paying all cash, but is possible. There are banks that will lend up to 65% of the purchase price on a “non-recourse” loan to your IRA. This means that you are not personally signing as a guarantor on the loan.

6. Owner Carry Mortgage (OWC) – Some property owners who have no mortgage debt may be willing to “carry the mortgage” for purchasers. This is in effect a private money loan. In the current economic climate this can be mutually beneficial to lender and borrower because it is difficult to obtain mortgage loans, and it is also difficult to find safe places to put capital with good returns. The amount of down-payment, rate, and term of the loan are all negotiable between parties.

7. Private Money / Private Equity Loan – Private money loans (sometimes called peer to peer lending) are becoming more popular since bank lending has subsided. More and more people are looking for a way to get a return on idle capital that has been pulled out of the stock market. These types of loans are similar to a hard money, but the difference is that private money loans are generally not made by people who are “in the business” of lending money professionally. They are generally loans from friends, family, contacts or colleagues. This is an excellent method for experienced real estate investors to fund deals. Private lenders will either lend on a simple interest basis, take a percentage of the profit for the loan, or a combination of the two – called a “Pref and Profit” arrangement. The “pref” is a preferred return that is paid before the profit is calculated.

NOTE: There are many securities laws that govern lending money which you should become familiar with before engaging in these types of loans or investments. Most real estate professionals will “fly under the radar” if they do a low volume of business with friends and family on single investor first deed of trust notes and do not advertise. However, if you have any intention of “pooling funds” or advertising for investors we strongly recommended that you discuss your business with a qualified securities attorney.

8. Subject-to Existing Financing – One of the least understood and rarely utilized methods of the real estate investing business is the subject-to existing financing mortgage. Generally this type of mortgage will be between a distressed property owner and an experienced real estate investor who understands the legalities and risks. “Subject-to” means that the buyer will “take over payments” of the seller and leave an existing mortgage in place with a new deeded owner. Although modern day mortgages will all have a “due on sale” clause in the deed of trust, few lenders will actually initiate a notice of default if regular payments are being made by the new owner. Although there are crooks in our business who abuse this strategy and defraud sellers and lenders, in many cases a subject-to mortgage can be negotiated as a win-win scenario for all parties. It is recommended to utilize an escrow officer who is experienced in these types of transactions when closing subject-to existing financing.

9. Joint Venture Agreement – This strategy may have some elements from each of the other methods of financing property: a mortgage bank loan, private equity, OWC and sweat equity or other services rendered. When two or more people or entities combine skills and resources to finance and operate a property it is done in a joint venture. In many cases a capital investor will joint venture with an operator who finds and manages the investment. In other cases partners agree to split equity and/or debt obligations on a pro-rata share. Many joint ventures are set-up legally as Limited Liability Company (LLC) memberships.

10. Syndication Sponsorship – This is the most complex form of financing properties and usually reserved for larger capital raises on commercial, development and multi-family projects. Syndication means a sponsor sells investment interests in an entity: Limited Partnership, LLC, corporation, or tenancy in common titled real property. At this level of financing state and federal securities laws become applicable and legal representation for both sponsor and investor are recommended.