Lines of Credit. What, Why, and How.
What is a
Line of Credit?
A Line of Credit (LOC) is a revolving loan that allows you to access money as you need it up to a specific limit. You can pull money from the loan, pay it off, and repeat. It’s very similar to a credit card but with lower interest rates and without the points/perks.
Why use a
Line of Credit?
We use LOCs to tape into property equity without refinancing. We like having access to the capital without paying interest unless we use the funds. The LOC lets me be my own hard money lender, and I use it for deals with a quick exit, like renovations before a sale.
How to Get a
Line of Credit
Here is everything I did for our business line of credit.
Found a bank that offered LOCs on investment properties.
Identified which properties made sense for the LOC, given their assumed equity.
Prepared loan documents and completed loan applications.
Coordinated property appraisals.
Reviewed loan documents and closed.
Found a bank that offered Lines of Credit (LOC) on investment properties.
I contacted lenders at seven banks and asked them: “Do you offer lines of credit on investment properties with first-position mortgages?”
If they said yes, I asked:
What’s your max loan to value for the second position mortgage?
What are included in closing costs, and do you have a ballpark?
What does closing look like, and how long does it normally take?
What interest rates are you currently seeing for these loans?
What should I expect for loan terms and repayment?
2. Identified which properties made sense for the LOC given based on their assumed equity.
I looked at my properties in the area and calculated my current loan-to-value (LTV) by dividing the property’s assumed value by how much I owe on the property.
You can use Zillow’s Zestimate because you don’t need to be highly accurate at this point. If you are sitting at 60-75% LTV, I would refine your value estimate by creating a comparable property report of similar houses sold within the year. You have plenty of equity if you are sitting at less than 60% LTV.
3. Prepared loan documents and completed loan applications.
I like to inundate lenders with an organized wave of documents. It shows that I’m serious and reduces back-and-forth requests for documents. Here is what you will need:
Personal Financial Statement showing your assets and liabilities. Here is an example template, but feel free to make your own.
2-3 years of tax returns
Mortgage statements showing the mortgage balance of all properties
Rent rolls and leases for all properties
Year-to-Date Profit and Loss Statements. Your bookkeeping software should be able to do this easily.
Operating agreement for your company.
4. Coordinated property appraisals.
The appraisal dictates how much money you will get from the LOC, so it pays to present the property in the best light. If you’re local, consider doing a walkthrough before the appraisal. You can tell tenants you are doing your annual inspection, which typically leads them to clean up.
If you’ve renovated, provide the appraiser with a list of improvements, including when they were completed.
5. Reviewed loan documents and closed.
The bank will provide a copy of the appraisal and notify you how much you can borrow. Ask the bank for an estimated closing statement. Compare the cost of the LOC with how much you are borrowing and decide if it makes sense. Now is a good time for you to determine if you want to wrap the cost of the loan into the loan as well and to reconfirm the loan terms (payment schedule, interest rates, payment due date, etc.).
If everything looks good, you’re all set!
