“Your network is your net worth.” —Tim Sanders
Step 1: Look for a Lender (And Cast a Wide Net)
One mistake a lot of people make is to only start looking for a lender once they need one. Don’t make this error. Instead, you should start looking for, vetting, and building rapport with lenders early on in the process. This will save you a lot of time when you actually want to get one. And if you have a private or hard money loan on the property while you are doing the repairs, these holding expenses will add up as you scurry around looking for a bank. Furthermore, in the process of looking for a lender and submitting financials, it may highlight problems you have with your credit or income that you need to resolve before pressing forward.
The best way to find a good bank is to ask other real estate investors who they are using. Banks can always add new clients without short-serving their current ones, so people will be happy to give referrals. Indeed, no one has ever turned me down for this request. But you can also just call random banks and say something like, “I am a real estate investor looking to refinance single-family investment properties. Is this something your bank would be interested in?” Usually, you’ll get a quick “No” if it’s not something they’re looking for.
One final word to the wise; make sure to ask about seasoning requirements. Some banks will lend at appraised value as soon as a property has been rehabbed and rented. But many want the property to “season” for a certain period of time — perhaps a year or so. Before then, they’ll only lend on 75 percent of the cost you have into the property.
Step 2: Build Rapport with the Lender (People Like to do Business with People They Like)
Don’t just be all business all the time. It’s OK to be friendly. And it’s more than OK to buy a few lunches for potential lenders. If a banker says they’re interested in doing investment refinance loans, ask him or her to lunch and chitchat a bit. Get to know him or her and be genuinely friendly. People can always spot a fake. Remember that this lender will be your advocate when the loan goes to committee to be voted up or down. You need that person to genuinely advocate for you. And some lenders can approve loans on their own if it’s under a certain dollar amount, so that makes it all the more important to win their trust.
And make sure to buy lunch. There’s something called the Rule of Reciprocity that can work in your favor here.
Step 3: Get Your Financials In Order (a Confused Mind Says No)
I can’t even begin to count the number of times I’ve been looking at properties to buy where the owner’s financials are such a mess I can’t make heads or tails of them. This is the good ole “Ma and Pa” accounting that you need to avoid like the plague.
Make sure to use a reputable accounting program such as Quickbooks or a property management software with a good accounting module like RentManager. And if you aren’t good with accounting, then you need to find someone to take care of it.
Regardless, don’t think of bookkeeping as “just something that needs to get done — or whatever.” It is vitally important to keep good, easy-to-read books. If a lender looks at your financials and can’t make sense of them, she’ll usually just say no. Why bother trying to figure it out if she can move onto a potential loan that’s easy to underwrite? Furthermore, your financials project how organized and professional you are. If your financials are a mess, then the lender will probably think you and your business are as well.
Step 4: Make Your Property Shine (First Impressions as They Say)
Just like with your document submissions, your properties will project to the lender how organized and professional you are. Do you want to come off to this bank as a slum lord?
Remember, this doesn’t mean you need to over-rehab your properties. That is a very common mistake. What you do need to do is make sure that the property is fully functional, looks nice, and impresses. This is important for finding a tenant too. If you rent out a pigsty, you’ll probably find a tenant who will treat it as such.
Step 5: Document Submission (Another Chance at a First Impression)
When you submit your documents, make sure to submit everything you can and in a clear and easy-to-follow way. I try to impress the lender here, too, in order to prove my professionalism and competency. Again, this lender is going to be your advocate. You should try to impress her. I usually submit personal financials, tax returns, property financials, a rent roll, pictures of the property, my resume and business plan, and anything else that makes sense to send. I do this by putting it in a Dropbox folder with several sub folders.
You may want to do this with several banks in case one of them says no — and also to jockey for the best terms. Remember, you can say no to banks, too.