There’s always more to learn in the world of real estate investing. Blake Yarborough goes over a few areas that you need to look into as you become a seasoned investor.
Find out 3 different types of advanced lending to be aware of and when they make sense to use.
Mike: Welcome back to the flipnerd.com REI Classroom, where experts from across the real estate investing industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Blake: Hello. This is Blake Yarborough with the Capital Concepts. I’m today’s host for the REI Classroom. Today I’m going to take a few minutes, and I’m just going to hit basic details of what I consider a very important topic as you grow as a real estate investor.
Mike: This REI Classroom real estate lesson is sponsored by uglyopportunities.com.
Blake: What it is, is I’m calling it advanced lending for the seasoned investors. There are certain programs out there and things out there that a lot of investors don’t know about, and they may or may not benefit from them. So consider this a quick snapshot of a college-level class for real estate investing. So there are a few things I want to talk about. I want to talk about secured lending, securitized lending. I want to talk about guidance line of credits, and I want to talk about cross collateralization to purchase more properties.
First of all . . . I can’t even say it. Securitized lending. What that is, is people that bundle stuff up and then they securitize it on Wall Street. So what they’ll do, the benefits is sometimes they’ll lend where we may have trouble with local banks or other sources of lending to get it done. They’ll be looking at mainly the cash flow of the properties and not necessarily your personal tax returns.
The other thing about it is there will be a prepayment penalty, essentially. In simple terms, that’s what it’s called. What that is, is when these people lend their money, they put it out, they expect a certain expected rate of return for a certain period of time. So you can’t get into these types of loans and try to sell it six months later. It’s going to cost you. But securitized lending is another source of lending that a lot of people don’t realize.
Now another form of that, a spinoff of that, is we can get nonrecourse loans with this type. So nonrecourse means you’re not personally liable to you for the debt. They just take the property back. But nonrecourse is typically at the larger loans, maybe $3 million and up. And also what’s good about nonrecourse loans, your IRA can have nonrecourse debt. So depending on what your situation may or may not be part of it, but I just wanted to throw that in there. Nonrecourse loan is the only type of loan that an IRA can have. And there are some other smaller ones, case-by-case, and we can talk about.
The next thing I want to talk about is guidance lines of credit. A guidance line of credit is where a bank underwrites you one time for a certain guidance, and then at that point you can get a contract, you get an appraisal, and you kind of figure out where in that guidance you fall. So for instance, it may be instead of putting 20% down, they may underwrite you for $500,000 or $1 million one time for houses. So they’ll go and give you a guidance line of credit, that says 90% loan to cost as long as it doesn’t exceed 75% of value.
And what you do is you figure out a number, acquisition plus cost, I mean acquisition plus repairs, and you take 90% of that. So they’re going to make you have at least 10% in there. That gives you one number, and then you’ll take 75% of your after repaired value, and that gives you another, and whichever one of those is the lower will be the amount they lend on.
So you don’t have to go back through underwriting each time you buy $80,000 or $100,000 house. They’ve already underwritten you. So at this point, like I said, get your acquisition, get your repairs, and then you’ll get an appraisal, and then it’s easy to close. Probably three weeks or so once it’s set up. So a guidance line of credit. You do have to have, let’s say, that 10% in each deal, but then you’re getting, in today’s market maybe five and a half percent loans.
And the next thing I want to talk about is cross collateralization to buy commercial properties. You could do them on residential investment properties. You could do them on apartment buildings, storage, many other things. And it’s one of my favorite things because as an investor, a lot of times you’re house rich, cash poor. All your money is tied into bills and is tied up.
But one of the advantages of this, even if there is a lien on the property, they can go get an appraisal. Let’s say you owe $100,000 on a property worth $200,000. They can go get an appraisal and lend you, cross collateralize, that extra $60,000. So instead of you being 20%, 25% down, you can do that on a couple of properties, you might only be 10% down. It really opens up the world of finance to you and what you can and can’t buy because your money’s tied up into your properties.
So that’s a couple little quick hints I wanted to talk, what I call advance lending for real estate investors. Please give us a call if you ever have any questions, and I’ll be back on REI Classroom again soon. Thank you.
Mike: HomeVestors, the We Buy Ugly Houses folks, is a franchise system of hundreds of real estate investors that have purchased over 65,000 houses. If you’d like to learn more about the most powerful real estate investing system in existence whether you’re a pro looking to take your business to the next level or whether you have no experience at all but a burning passion to be successful in real estate investing, please visit flipnerd.com/ugly to learn more.
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