How To Tap Banks For Real Estate Loans

By Cassandra Toroian | May 13, 2010 AAA
How To Tap Banks For Real Estate Loans

We're probably past the "catching the falling knife" phase in residential real estate, so it's a good time to consider long-term investments in rental homes. But how can you buy when the banks aren't lending? (For background reading, see Simple Ways To Invest In Real Estate.)

Right now, holders of cash are royalty. Some banks simply aren't financing scrappy but cash-poor real estate entrepreneurs, even if they

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find great deals and their credit is perfect. Some banks will lend, but only if the borrower puts down 30% or 40% and can prove the property is gushing cash. And construction loans? Forget them. It's especially tough in heavily distressed markets with some of the best real estate opportunities: Florida, California and Las Vegas. They also have some of the heaviest concentrations of problem banks.

So anybody who wants to play has to put up a lot of cash now and hope bank lending loosens up later. If by then their investment properties are producing plenty of surplus income, they can withdraw the cash they've put at risk by refinancing.

The lending problem, in large part, arises because the ultimate suppliers of loans to landlords are usually Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). The turmoil at Fannie and Freddie over the past two years has greatly altered their standards. Say you own real estate free and clear, but recently abandoned a plan to sell it and now wish to borrow against it instead. Fannie and Freddie will not loan you money using that property as collateral if they know it was listed for sale anytime within the past six months. If you want to trade low-quality cash-flow-positive properties for top-shelf investment properties, this can be a frustrating time.

The good news is that, unlike the past decade or so, the conservative cash-rich investor can be king. Alas, if you're sitting on a cash hoard, perhaps you're hesitant to sell super-safe investment grade bonds or CDs to take a flier on distressed real estate. Here's an alternative: Use a cash-collateralized loan or a personal loan. You'll still have the psychological boost of keeping money in a bank or brokerage account (maybe in investment grade bonds or CDs) earning a modest amount of interest.

Yes, if your real estate deal sours later and you can't make the loan payments, your lender will have a claim on your cash. But this method of purchasing investment property should have some appeal to investors with either high current income or cash flows from other real estate properties. It is a strategy that I personally like a great deal, especially if I know there's another property that will be liquidated in the relatively near future in order to pay off that cash collateralized loan. Some banks are willing to offer this type of loan with interest rates as low as 5% and amortization schedules of up to 30 years (in some cases interest-only). Those are great terms if you can get them.
What I know for sure is that when there is a will, there is a way. Don't let these new rules and new economy slow you down from reaching your goals.

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