How do debt investors work?

[andyr]

I was just reading about how some real estate experts prefer to use debt investors and pay interest rather than doing a traditional 50/50 joint venture deal. I like the sound of that, but I'm confused as to how this would work. To me it seems the mortgage would be 100% financed. 80% from the banks and 20% from the debt investor.



The bank would want a guarantee from the investor and the investor wouldn't want the risk of being on the mortgage and footing the bill.



Can someone please explain to me how this would work?

 

[LotharBriones]

Andy,



One way of benefiting from a loan with high interest (by a hard money investor) to buy a property would be to use the money from the hard loan to pay-off the equity remaining (mortgage) and then having the seller agree on a mortgage between him/her and you (not the bank). Be careful with the terms you agree upon because you will end up paying interests on two loans: the hard loan and the seller mortgage.



Cheers,



Lothar

 

[Sherilynn]

Yes, it could be 100% financed. Most banks don't have a problem with this as long as they are in first position. Some want the sale to close first (so you pay the down payment) and then the second mortgage can be registered afterwards (second mortgage reimburses your down payment).



The banks won't care about the investor because they'll get their money before the investor gets a cent. So there wouldn't be a guarantee required from the investor, and the investor would only be risking the amount he invested.



The main consideration is usually the DCR. For future mortgages the banks will want to see that your income is 1.2 times your expenses, and the second mortgage can really mess with that figure.

 

[Thomas Beyer]

A high risk strategy that works in theory but not necessarily in the real world.



It is hard enough to cash-flow an 80% levered house. With 100% it is almost impossible. Hard money 12%+ loans make sense for short-term turn around assets only .. and only for experienced fixer-upper experts that know what they are doing.

 

[TonyMandrique]

[quote user=ThomasBeyer]It is hard enough to cash-flow an 80% levered house. With 100% it is almost impossible.



Hi Thomas,



Sorry to budge in...but for the sake of discussion, supposing LTV is 90% and there is RRSP mortgage coming in to replace the down payment money, what is the best way to structure the deal? Is it through a JV or straight private financing or is there another way of doing it?



Just curious. Thanks.

 

[johnsu]

You can structure a higher interest rate by a few percentage and pay the interest and principle as a balloon payment. There are many ways to set up the 2nd mortgage.

 

[Tibo]

I have done 2 loans for a 4- plex and tri-plex. The structure was under a promissory note. 6 % intrest for 5 year term, amortized for 6 years 8 months so I can pay them faster. There are thousands of ways to structure the deal. I have a good track record. And they are getting good intrest and fast pay out.

 

[TonyMandrique]

Congratulations. Thanks for sharing.

 

[Thomas Beyer]

RRSP mortgages have to be approved by the trustee (OlympaTrust, B2B, CWT, ...) and most do not go over 80%. Cheapest money is LOC on your home.

 

[TonyMandrique]

Thank you Thomas.

 

[Sherilynn]

Olympia Trust will allow 100% financing (as long as the deal meets their approval). Still doesn't necessarily make it a good idea.



We had an investor interested in this for a one-year lease option deal. In this case we would have had a 95% LTV. We could have used the minimum interest rate acceptable to Olympia, and then had a bigger balloon payment when the tenant-buyers purchased the home. That way our debt service ratio would have been fine and the investor would still get a great return. This is about the only way I would consider such a high LTV (not for a long-term buy-and-hold).

 

[Sherilynn]

[quote user=Sherilynn]This is about the only way I would consider such a high LTV (not for a long-term buy-and-hold).





Actually, that's not exactly true. We bought an up/down duplex with zero down but then completely renovated the lower suite using our own money. Between the value added and the market price increase (bought in February 2007), the LTV was quickly improved. So it can work very well in certain circumstances.

 

[TonyMandrique]

[quote user=Sherilynn]Between the value added and the market price increase (bought in February 2007), the LTV was quickly improved. So it can work very well in certain circumstances.



Very true...and once 'after repair value' is proven by a qualified appraiser, we can refinance and take out the equity for the next purchase.



Thanks for sharing Sherilynn.