Things may be going great between you and your bank. Maybe you’ve attained several mortgages from them already, and you’ve been buying up real estate left and right, building your portfolio.
You might not see it coming, but once you own a set number of mortgages in your own name, the traditional bank will likely cut you off, refusing to lend you another cent. Although the limit can vary, I believe it’s now around 10 mortgages. Of course, this number depends on many factors.
So, why would the bank do this, especially when you’ve shown them repeatedly that you’re good for the money? Maybe you even have a perfect credit score or enough cash in reserves to buy the property outright if you really wanted to. That’s great—it’s not what the bank is concerned about.
Just as we investors like to diversify between multiple investment types, sometimes the traditional bank likes to spread out their risk among many different borrowers, not lending over a certain amount to any one person, for example.
This, however, does not actually mean that your situation is too risky or that you have done anything wrong. It’s the bank’s policy. Or, in other words: It’s not you, it’s them.
To avoid being blindsided, a good practice is to every now and again take a banker to lunch (i.e. pick his or her brain). Ask them what they’re lending on these days or what kind of deals they’re looking for.
If you’re already to the point where you’ve hit a roadblock with your neighborhood bank, no matter how many lunches you buy, don’t lose hope.
Over the years, I’ve borrowed at least 50 mortgages, including refinances and HELOCs (home equity lines of credit), and of course, not all of them were acquired from traditional lenders. There are other options out there.
5 Ways to Get Deals After the Traditional Bank Cuts You Off
1. Find an investor-friendly bank or mortgage broker.
When I hit that first roadblock, I decided to join a local real estate club to network with other real estate investors. Through rubbing elbows with more experienced investors, I was able to add more tools (or strategies) to my arsenal.
I also met others who had hit the same roadblocks I was currently trying to bypass. Little did I know that there were investor-friendly private lenders out there looking for deals.
Although hiring a mortgage broker does require you to pay more than if you had found the financing on your own (i.e. maybe he’ll make a few points), there are still benefits. Mortgage brokers are well-versed on what lenders are looking for, and they may be able to find you financing that you wouldn’t have otherwise known about. If the numbers still work and you get the deal you wanted, it just might be worth it.
2. Go commercial.
When you create an LLC for your real estate business, you are usually required to attain commercial financing for any properties purchased by the LLC. That said, the bank will treat the LLC as a separate borrower, allowing you to obtain more financing that’s not necessarily limited.
Personally, I’m not a huge fan of commercial loans that require me to personally sign or that are eligible to recast in, say, five, seven, or 10 years, since now my other assets are at risk in a default (not just the property loaned against) or I may not qualify for the loan to continue if there was a dramatic change in property value or in my personal income or credit.
3. Don’t use the bank at all.
There are also ways to get the deal without the bank. For example, you could do a subject-to deal, a lease-option, or have the seller provide owner financing.
Better yet, you could find a money partner who would either put up all the money for the deal or sign on the loan. Using OPM (other people’s money) is a great way to acquire deals, while sharing both the risk and the return.
4. Use private or hard money.
My favorite type of OPM is private money, which I also learned about through joining the local real estate club.
There’s also what is commonly referred to as “hard money,” the difference being that hard money is typically more expensive with stricter terms and is often released on a draw schedule, in accordance with the work that’s being completed on the property.
5. Become the bank.
At some point, possibly after you’ve grown your real estate portfolio, you may start thinking about becoming the lender, as opposed to the borrower. When you have capital to deploy, lending private money or purchasing performing notes allows you to participate in a real estate deal on the financing side. It’s also much more passive.
Personally, I worked my way through each of these five strategies, and each one of them helped me to build more wealth.
Although it may be tempting to jump ahead to commercial financing or some of these other strategies, I’m a big believer in utilizing the bank’s money while you can. When you’re just starting out, you can get financing with very low down payments, especially when buying owner-occupied or as a first-time homebuyer. Why not take advantage of it?