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Attaining a Line of Credit on Owned Property

June 4, 2011

I needed one more decent sized line of credit that would allow me plenty of capital for future purchases. I have had some luck with unsecured lines at smaller banks and credit unions, but was looking for a larger line secured by one of the properties I own outright. Just six months ago, it seemed almost impossible to borrow off of an investment property. I think some of the lending is finally starting to thaw out. The bank I am working with says they can do this and promised to have it funded in less than 30 days. I was pleasantly surprised that they did get it done and the process went quite smooth.

Key points to help get what you want with the banks.

Establish a long-term relationship with a bank. Ideally you already have a long-term relationship with more than one bank. I treat them like baseball cards. I try and have a relationship with as many banks as I can. Find the ones that are more willing to lend and send them more of your business. Take out a few loans and pay them back. Open an unsecured line of credit. Establish a good lending history with them. I find the small banks and credit unions are more open to investors and sometimes they keep their loans in-house.

Go into the branch – don’t try to do this over the phone or through the web.  Bring your paperwork in and have it all organized and ready. Make copies up-front and have a complete package for the bank.

Shop around until you find a banker that knows what they are doing.  You need someone that understands loans, investments, and what you are trying to do. I probably walked into 10-15 branches of my primary bank. I can usually spend 10 minutes with someone in the investment or loan division and determine if they have the experience I am looking for. These banks have a lot of loan products but their bankers don’t know about them or just don’t know how to sell them.

I explain it to them as I want a partner, not just some banker. I want someone that will work with me, move me up on their priority list, go the extra mile, get it done, etc. The guy I finally found is young, but I can tell he knows his stuff. I asked him to tell me about something he has done for an investor. He went on about some coin operated car wash investor and another lady that leased out beauty parlor seats. I knew he was my guy.

Don’t tell them how much you paid for the property.  My banker asked and I responded by saying, “I want you to lend on what the property is worth, not what I paid for it”.  They already limited me to 70% of the value.  They asked me what I thought it should be valued at and I just showed them my overstated tax value($100k). I actually paid $55k for the property and put another $4k into rehab.

Plan ahead to get your line at the right time. I got this line at the ideal time. It was about 8 months after purchasing the property, but before I had a chance to challenge the taxes. It appears one of the sources they use to value the property is the tax assessed value. Try and get your line approved before you challenge your property taxes and they reduce your tax assessed value. As you might have seen from my other post on this subject, I was able to get the tax assessed value down almost $40k based on my purchase price of this property. I applied for and was approved on this line two days before I challenged the tax value.

Know the line amount you want. They will usually just ask you what you are looking for. Give them a number that is reasonable and you can backup. I used my grossly overstated tax value and took 20-30% off.

Some of the specifics of the line I attained:

  • $70k line of credit
  • No appraisal, title policy, none of that. Zero cost to open the line.
  • Interest rate at 5.49% (variable, but only 2.5% over the prime rate)
  • Good for 10 years, then bank can re-evaluate
  • $500 early payment penalty (this is a penalty if you close the line within 2 years)
  • $75 annual fee (no fee in year one and then waived under certain conditions such as large balances within your accounts)
  • If you pull more than 50% of your line, then repayment is on a 15 year schedule
  • Must take at least $4k at any one time (just a technicality, you could take and payback if you needed less)

The documentation they wanted to establish the line included:

  • Last 2 years tax returns including Schedule E’s (Note: Officially required one year of rental history, but were ok with my 8 months)
  • Last 2 paystubs
  • Proof of insurance on the property
  • Credit pull (not sure what score they were looking for – I am around 750-780)

These lines are great with no closing costs, competitive rates, minimal paperwork, and quick to fund. The way I purchase and pay off properties, I actually prefer a line of credit vs a loan. This allows me to click a mouse button and move funds around. I can pay ALL CASH for properties and really keep closing costs down while getting the best discounts.

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From → Buying

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