I’ve personally used local Oklahoma City banks to finance the purchase of most of the rental real estate that I own.
This article is about how these loans work. It’s about how you can use them to grow your rental real estate holdings in the most efficient way.
The purpose of bank financing is to minimize the cash you have invested into the property, create at least a break-even cash flow, and have a low enough interest rate so that the debt pays off in 15 years or less.
What is a “Local Bank”?
A local bank is a bank that are locally owned. They do business in the OKC metro, and are not a national chain. Their life blood is making good real estate loans, so they are looking to do business with people who they trust will pay them back.
Chase, Arvest, and Bank of America are not locally owned. The are good banking institutions, but they aren’t a good target for this type of financing.
National chains tend to offer loan products through mortgage brokers. These can be good loans under certain conditions. I have written an article about financing the purchase of OKC rental real estate using a mortgage broker.
Some example of local banks include Sooner State Bank, First Enterprise Bank, and The First State Bank. If you don’t live in Oklahoma City, you probably don’t recognize those names.
When to use a Local Bank.
You have to have excellent credit to work with a local bank. You may have to live in the community. And, you may have to have a track record as a landlord.
You might not be able to work with a small local bank right out of the gate. It took 3 years of operating in the business before a local bank was willing to work with me. I needed to establish a track record before they would write loans to me.
The commercial loans you will get from a small local bank are written for a 3- to 5-year time frame. You will normally do a loan renewal for the loan when the loan matures at the end of that time frame.
These loans are typically amortized over 10 to 15 years. That means the payments are set such that for a loan that is amortized over 10 years will be completely paid off in 10 years.
The biggest advantages of these loans are the very good interest rates (i.e., 5% to 7% during times of moderate interest rates), low lending fees (i.e., normally less than 1 point, the cost of a title report, and an in expensive appraisal), and the lenders will agree to an amortization schedule that makes the property cash flow.
Examples of using a local OKC bank for financing.
There are many ways to use bank financing. Here are some example:
- Using Bank financing to fund 70%-80% of a purchase. This makes the most sense when you have a property that doesn’t need a ton of renovation work. Renovation dollars are locked up in the property unless you refinance it.
- Refinancing an existing loan. This might make sense to get a better interest rate. Or, if you want to take some cash out of a property.
- Establishing a line of credit. One great way to use banks is to set up a line of credit. You can use the line of credit to purchase properties and pay for the renovations. When the property is renovated, put a loan on the property in the amount of the purchase plus renovation cost. Then use that money to pay back the line of credit. Then, do it over again.
Limitations of Financing from Small Banks.
You will need to put 20% to 25% down when you do a purchase. If you want to get that down payment back, you can refinance a property. Typically, you need to have owned the property for a least a year before they will allow you to refinance it.
Local banks will have a limit on the number of properties they finance for you. They don’t want too much exposure from any single investor. What is that limit? It depends on the bank. But don’t worry, once you hit that limit, you can just go to another bank.
Local banks will require you to sign personally for the loan.
Three Biggest mistakes real estate investors make when trying to locate a local banker to work with.
- Ignorance about which banks do these types of loans. Learn who the small banks are in your community. You want to find out which ones are the most aggressive. These are the ones you will want to target.
- Not having the right paperwork to show a banker. Once you have purchased a few properties, start putting a financial statement together for the local banks you will target. Make your packet as impressive as possible and be persistent with your contact at the bank.
- Not having a referral from a current customer. Get a current customer of the banker you want to work with to refer you to the lender. This adds to your credibility. I’ve always had success when I’ve gotten banking referrals from other real estate investors.