If you are considering using bank financing for your next rehab project, here are some things to consider:

WHICH BANK SHOULD YOU APPROACH?

Most people automatically see large banks as the way to go because of all their marketing  or the fact that they may already have an account with them. They tend to think “Oh, they will more likely work with me and give me better rates because I’ve had an account with them for years”. This is not always the case. In fact, when it comes to investors, smaller local banks or regional banks are the route to take. You will become frustrated when working with larger banks because many of them will not lend on the types of projects we typically do.
Smaller banks are easier to work with because for one, they can personally assess your risk. When you apply for a loan with a larger bank, you will most likely speak to a loan officer and they will gather standard information from you. They will submit these forms to their underwriters and the underwriters will make a decision based off standard information without ever meeting you in person. It will be very hard to change their minds or persuade them otherwise if they decline your application.
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When you are searching for small local banks, you want to look for portfolio lenders.

Investopedia defines a portfolio lender as a company that not only originates mortgage loans, but also holds a portfolio of their loans instead of selling them off in the secondary market. A portfolio lender makes money off the fees for originating the mortgages and also seeks to make profits off the spread (difference) between interests-earning assets and the interest paid on deposits in their mortgage portfolio.

Most small banks are portfolio lenders and will keep the loan instead of selling it, which is better for you. Portfolio lenders have less rules when it comes to underwriting and they are much more flexible than larger banks because their loans are kept in-house. Their interest rates are naturally lower than banks who sell their loans to other financial institutions and you are more likely to obtain the loan that you need with a portfolio lender.

When approaching smaller banks, you can ask to speak with the president or vice president of commercial loans and actually sit down face to face with the decision maker and explain to them what you are doing, how you will do it, who you will do it with, and make them feel better about the risk they are taking if they lend you money.

Make sure you talk with someone in commercial lending. Residential loan officers will not be able to help you with investment rehab loans, and might even turn you away prematurely.

Before you approach someone at the bank, you will want to have your act together. Prepare a credibility kit or a business plan and show them that you know what you are doing. Be sure to include whatever investment training you’ve had and coaching you might be part of.

PROS AND CONS OF BANK FINANCING

Now that we have established that smaller banks and portfolio lenders are the way to go instead of using larger banks…lets discuss the pros and cons of using bank loans.

PROS
• Most bank loans have low interest rates from 5-7% and with 1 point.
• Banks will have favorable loan terms and will give you a longer time frame to complete the rehab. They will also have options to convert the loan into permanent financing if you ever decide to keep the house that you rehabbed.
• Many banks will award a line of credit. This will help in deciding your next project.
• Banks will require their own appraisal which will allow you to know the value of your property.
• Banks will often times lend up to 80% if the After Repair Value. (Other types of loans often lend up to 65% of the ARV.)

CONS
• Most banks will require a 20% deposit or more of the purchase price of your project.
• You will need a good credit score in order to obtain the loan. Usually a score of 660-700 or above will suffice.
• It will take the bank all of 30 days or more to go to closing. There will be no quick closes when working with banks.
• Banks will pull your credit for each deal you bring them. There is no one-time credit check. They will pull your credit each and every time you bring a new deal to the table to obtain financing whether you have a line of credit or not.
• Banks can call the loan due at any time and for any reason.
• You will need proof of a strong verifiable income. Unless you have steady rehab projects and a bank account that shows at least 1 year worth of income from previous projects, working with banks is easier if you have a full time income from a job or elsewhere. Another way to verify income is to have a partner or a co-signer that has income to present to the bank.

Bank financing can be an important part of your funding strategy. However, because of the 20% down most banks require it cannot be the only strategy you use. You will find out that the 20% down per deal adds up quickly, depleting your working capital and limiting the number of deals you can buy. It’s best to use it along with other strategies, like private lenders and hard money. That way you can take advantage of the low interest and flexible terms without using up your capital. Also, if your goal is to rehab houses full time, once you finally get to the point where you can quit your job, you will find that banks will no longer be as willing to lend to you without the verifiable income. So it’s best to not get overly reliant on bank financing your rehab business.

 

Michael Moreno has been investing in real estate since 2008. He completed a year of real estate training at Investors United School of Real Estate where he was inducted into the President’s Club. He has attended numerous real estate seminars around the country including David Lindahl’s Apartment House Riches Bootcamp and Syndication Bootcamp, and Robyn Thompson’s Ugly House Renovation Bootcamp, among others. He is a member of the Mid-Atlantic Real Estate Investor’s Association, the Baltimore Real Estate Investors Association, and Steve Cook’s Lifeonaire FlipVIPs mastermind group. He has completed 50+ and counting single family renovation projects in and around Baltimore, and currently holds and manages rental houses in Northern Virginia and Baltimore City.

 

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