Back in June I wrote about how Stripe is out competing PayPal in just about every way imaginable. But the post primarily focused on their new “Advance” product which is now re-branded as “Capital”. It’s a fantastically competitive offering for businesses looking to borrow money.
Turns out, LightStream is similarly competitive in the world of personal loans.
After my most recent rental property buying spree, I found myself a bit low on cash. We had enough in the bank to do some cosmetic improvements on maybe one house, but that’d leave five properties that I wouldn’t be able to rehab any time soon unless I did one of two things:
My first thought was to get a private loan from what is referred to as a “hard money” lender. This is essentially just a person that has extra capital to loan to flippers. These loans are short-term in nature, usually only 6-12 months because the idea is that you use the money to rehab the property and then either sell it or refinance out of it, paying back the loan when the transaction completes.
The problem is these loans are very expensive, usually 12% – 15% interest or higher. I spoke with a fellow investor that also loans, and he actually suggested I do not take hard money for several reasons. He cited the high cost and the added pressure of getting a rehab done quickly when I was also attempting to juggle so many others.
Going the delayed financing route
So I considered my second option. The five houses that need significant rehab were all purchased in the last five weeks. To get a conventional loan that allows me to pull out maximum value I’d need to wait a six-month seasoning period. But if I wanted to put a loan on any of the properties now, I could. I’d simply be restricted to a loan that is equal to the purchase price plus closing costs (assuming it appraised for enough to do that). This is referred to as delayed financing.
It’s easier to see as an example.
Let’s say I purchased a home for $37,000. I know if I put $45,000 into rehabbing it it’d be worth $115,000. So I decide to do just that, and I complete my rehab in two-months.
Great! Now let’s get a mortgage on it and get that cash out.
The house appraises as expected and I’d get a loan for $86,250… $4,250 more than I put into the house. Fantastic!
The only problem here is that I’d need to wait four more months to do this. It’s simply the regulations tied to conventional loans. And remember, if I’m using hard money to get this done I’m paying an extremely high interest rate while I wait, eating into my profits.
But let’s say I decide I don’t want to wait six months. I could take the loan right after rehabbing it and pull out my initial purchase price of $37,000. This is called delayed financing, and it’s not ideal in a situation where you put a bunch of money into rehab.
That said, it could be advantageous in my current situation. Let’s say I do absolutely nothing to this house and it appraises for $50,000. This isn’t out of the question considering I purchased it off-market and surrounding homes have sold for $110k – $125k. A bank would loan 75% of that value, or $37,500, but I’d only be able to pull out $37,000 because that was my initial purchase price.
The problem here is I’d still be left having to rehab the house, sinking another $45,000 into it that I wouldn’t be able to get out for six-months (assuming it’s worth the cost to refi it again). But it would give me some working capital to get to the rehab on the other four properties.
Exploring a personal loan
But there was potentially one more option: a personal loan through a more traditional lender. A friend had just told me about requesting a $25,000 loan from LightStream to put toward renovation expenses on a fourplex he recently purchased. They actually approved him for $50,000 at a 6.89% interest rate on a 144 month term. That’s fantastic.
So I figured I’d give it a shot. The application was insanely quick, taking me just a few minutes. The next day they sent a request for some documents via email. I uploaded them in another few minutes and waited. I had an answer that same day… the exact same terms my friend was granted.
It’s hard to say no to terms like that. When the next best alternative is a sacrificial delayed financing on one of the properties or an expensive hard money loan, it becomes extremely attractive.
It will be interesting to see if more real estate investors start leaning on LightStream (or similar products) for short term funding. The terms are hard to match. LightStream is apparently a division of SunTrust Bank, but something tells me the product was likely acquired rather than built internally. But I haven’t dug into that.
Regardless, props to a bank (I hate banks) for making a move into this space and creating such a seamless experience. I never even had to speak with a human, and that’s always a plus in my book 🙂