Hello panda1-ga,
This is an interesting question, but before I provide you with a
response it is important to note thta Google Answers is not meant to
substitute professional advice (financial in this case). See the Terms
of Service for more information.
Since your question is fairly generic, I will attempt to keep my
answer relatively high-level.
The simple answer to your question is that the amount of money you
request alone is rarely enough of a reason for a banker to accept or
reject your request (assuming that you are dealing with an institution
that has that amount to lend).
This does not mean, however, that you should approach the matter of
obtaining a loan for millions of dollars the same way as you would for
a smaller amount of a few hundred thousand. The reasoning for this is:
1. Loan services agents are not always authorized to approve requests
of that magnitude. In some establishments, there is a seperate "tier"
of service for large-scale borrowers.
2. You are likely to draw the attention of bank managers, or possibly
people higher up the chain of command.
So what does this mean for someone like yourself who is trying to
obtain a very large loan?
1. Establish contact with decision makers who routinely serve the
"upper tier" of borrowers. This can be done by obtaining the
information from people in your personal network who have gone through
the same process, or by stepping over the run-of-the-mill agent (who
will meet you at the door). Explain your needs briefly and indicate
that you prefer to deal with a senior loan officer.
2. You need to prove yourself as a good credit risk. Depending on the
purpose of your loan request (ie. starting or growing a business), you
should have a well-formed business plan with financial projections.
Most importantly, you need to demonstrate that you will be able to
service the debt you are asking to take on.
3. History of servicing loans of this magnitude always help the
scenario. If you haven't done this before, leveraging your
relationships with institutions you have had positive dealings with in
the past is a good strategy.
4. You need to sell yourself - dress professionally and answer
questions concisely and with confidence.
If you've ever borrowed money before, the information above will
appear fairly standard to you (it should). The "cap" you referenced in
your question does exist, but rather than being applied to everyone,
it is specific to each individual or business. It is possible that a
banker may determine that lending the requested amount to you is too
risky (based on your personal balance sheet), but a company with a
focused direction and potentially partners willing to put up
collateral to back the loan may change that decision.
Remember that true "banks" are very rarely willing to lend more than:
1. The amount of collateral you are able to put up against the loan
2. The amount you prove you are capable of servicing based on your
current cash flows
Based on these principles, an educated borrower will know whether or
not the loan he is seeking will be approved. If you crunch the numbers
on your own and see either a collateral or affordability gap, the
banker will see the same. If this is the case (and you are investing
for business purposes), you may be better off pursuing angel investors
(friends/family) or venture capitalists. These two groups have
different criteria and processes for determining whether or not they
should lend money to you.
I hope my answer has provided you with an understanding of how loan
decisions are made at a high level. Do post a clarification if any of
the information above is unclear.
Thank you for using Google Answers :)
Cheers,
answerguru-ga |
Request for Answer Clarification by
panda1-ga
on
09 Nov 2006 11:12 PST
Thanks answerguru for the very informative answer. I would like to ask
a question regarding your answer. If you can answer this I will be
happy to give an extra 15.00 in tip. If not I will be happy to pay and
rate your answer as is.
I asked the above question because my plan is to invest in real estate
properties and after a year or so take out a *business line of credit*
and invest that loan back into real estate.
So, say I borrow 500k based (assuming I have the collateral to cover
the loan) on my equity in rental property and use all or some of my
property as collateral.
THEN I take the 500k, invest it in MORE rental property creating MORE
equity and collateral and borrow against ALL or some of my collateral
again to further grow my business.
How many times can I do this and is it possible to do it in a short
period of time? Just how much leverage do I have with my collateral?
The goal is to use a *snow ball effect* to turn a few hundred k into
millions in a short time frame.
Perhaps you have other suggestions to make this work?
Thanks!
|
Request for Answer Clarification by
panda1-ga
on
09 Nov 2006 13:57 PST
ok. Maybe I pressed the wrong button or something . Its still telling
me "needs attention". In any case I will wait until tomorrow afternoon
and If I havn't heard back I will assume the second question invalid
and rate the first.
Thanks
|
Clarification of Answer by
answerguru-ga
on
09 Nov 2006 14:00 PST
Hi again panda1-ga,
In response to your follow-up question:
Now this is a business I would like to get involved in! Too bad it
doesn't quite work as easily as you described :)
Here is why you will not be able to achieve what you have proposed. If
you start out with $500K of your own money and zero debt, then the
maximum any bank would lend you is $500K. The reason is clear -
because if you default on the loan they can come after YOUR $500K.
They would not risk any more than that.
So you take out a loan for that amount and now you have $1.0M of
capital, half of which is borrowed. You purchase your RE for $1.0M,
and over the next year, you collect income from your rental
properties. The bulk of this I assume will go directly to servicing
your mortgage. The rest is in your pocket, after paying associated
costs of owning this RE.
Remember now that your mortgage is composed of a principal and
interest component (unless it is something exotic which I wouldn't
recommend anyways). The equity you have built up at the end of the
year is the sum of:
1. The principal portion of the mortgage payments
2. The "in your pocket money" (this could very well be negative if the
rent you receive is less than the total cost ownership)
3. The appreciation in property value (this could also be negative
depending on the Re market during that year)
So now your total equity is $500K + (the sources above).
But remember that you had taken out a loan for $500K. Over the year,
that loan has gotten smaller (but probably not significantly).
Subtract this remaining loan amount from the total equity. This is the
amount that you can leverage (ie. borrow against with a new loan or
line of credit).
Remember that you can only put something up as collateral if:
1. You own it ouright (not jointly with anyone)
2. It has not already been used as collateral on a previous loan
So while it is true that you can "snow-ball", it is limited by the
restrictions mentioned above.
Hopefully that answers your follow-up question.
Thanks for using Google Answers :)
answerguru-ga
|
Request for Answer Clarification by
panda1-ga
on
09 Nov 2006 14:45 PST
Thanks again answerguru.
I think you may have misunderstood My question. Then again perhaps I
wasn't very clear. that happens sometimes too. In any case You said:
"Remember that you can only put something up as collateral if:
1. You own it outright (not jointly with anyone)
2. It has not already been used as collateral on a previous loan"
I understand that.
As I said before My system was this:
1. "Say I borrow 500k (assuming I **ALREADY** have the collateral to cover
the loan."
2. THEN I take the 500k, invest it in MORE rental property (I now ow
this additional property outright).
3. THEN I take out a loan on the the collateral from example number 2
and invest it back into rental properties in which i simply keep
repeating the process.
Thanks again!
|
Clarification of Answer by
answerguru-ga
on
09 Nov 2006 15:14 PST
Hi - let me see if I understand now. You said:
1. "Say I borrow 500k (assuming I **ALREADY** have the collateral to cover
the loan."
2. THEN I take the 500k, invest it in MORE rental property (I now ow
this additional property outright).
--> In step 2, the $500K you have borrowed is used to buy additional
property outright. However, you do not actually own this new property
as an outright asset - even though it may be in your name. How can you
tell? Try theoretically selling it - will you now hold the full cash
value of the sale in your hand without any associated debt? No, you
will need to pay off the remaining loan. Whatever may be left is your
profit.
3. THEN I take out a loan on the the collateral from example number 2
and invest it back into rental properties in which i simply keep
repeating the process.
--> In step 3, you attempt to take out a loan, stating that it is
backed by collateral from the properties you purchased in step 2. The
bank says NO, that is not valid collateral because the properties
(although they are bought outright) were bought with borrowed money.
This still violates the rule I had originally stated about
collaterral:
"You own it ouright (not jointly with anyone)."
Having associated debt counts as owning something jointly. This is
true regardless of whether you have a mortgage outstanding or not. So
the result is the same.
Hopefully that clears things up.
answerguru-ga
|
Request for Answer Clarification by
panda1-ga
on
09 Nov 2006 16:17 PST
Yes it does clear things up and it now brings about more questions. I
am willing to pay an additional 15.00 tip if you can answer this next
question bringing my total to 55.00. If that is not ok with you then
please tell me how I can ask another question directly to *you*. At
that point I will rate your answer and open up a new question to you.
My next question is:
Basicly I'm looking for an example of the possibilities and also
*probability's* using debt to owner financing.
As a corporation I'm not interested in selling equity or shares but
might (at a later date) be interested in paying a high interest rate
using a *business line of credit*.
That being said, how fast can I snowball these properties using debt
to owner financing and how high is high?
I know this depends on a lot of factors but once again, I'm simply
asking for the possibilities that may be probable under the right
circumstances.
So far from what I have gathered I simply have to take out one loan at
a time and I cannot take out another big loan until the previous loans
are paid off. Is this correct?
thanks again
|
Clarification of Answer by
answerguru-ga
on
09 Nov 2006 16:49 PST
Hi,
You said: "So far from what I have gathered I simply have to take out
one loan at a time and I cannot take out another big loan until the
previous loans
are paid off. Is this correct?"
Yes, essentially that is the rule of thumb.
Regarding what is now your third question, this one will take more
time to answer fully so perhaps you can break that into a new $30
question. If you'd like me to answer it (as you indicated), just put
"(for answerguru-ga)" after the subject.
Feel free to rate this question and add the appropriate tip amount as agreed.
Thanks,
answerguru-ga
|
