First Capital Trust Deeds secured the private money loan for a 1031 Exchange in Del Mar, California.
This 1031 Exchange in Del Mar, financed by low-cost private money, is another case of a self-employed real estate investor with excellent credit, cash flowing properties, and great liquidity being turned down for conventional financing because they couldn’t show a high enough Adjusted Gross Income (AGI) on their tax returns. We see this several times each month where a highly qualified borrower comes to us for private money financing after being turned down by 2-3 banks.
From a CPA’s perspective, the self-employed person is doing the prudent thing by reducing their overall income tax exposure and putting their money into tax deferred long-term investments like a SEP IRA, solo 401K, and/or real estate. But from the conventional mortgage world’s viewpoint, the self-employed borrowers are technically not showing that they can service the debt even though they may have a six figure income, a few hundred thousand in retirement accounts, significant liquidity, and perfect credit.
We completely understand both viewpoints. CPA’s are in the business of saving their clients money on their income taxes while conventional lenders are tasked with issuing mortgages that have the highest likelihood of being paid on-time for thirty years (hard to argue with Fannie Mae’s methods since they have data going back to the 1930s showing what borrower profiles work best and what profiles lead to higher delinquency rates). Though we’re still trying to figure out how a first-time home buyer with 3% down is safer than an investor with 32% down?
This private money loan at 68% Loan-To-Value (LTV) was good for the private money trust deed investor who lived one town away from this property and had loaned money in this development in the past.
And for the borrower, the private money loan for 36 months provided enough time to add the new income from this property onto the next two year’s income tax filings. This way, hopefully, the 1031 exchange buyer will be able to refinance into a conventional loan showing the increased income from this property to qualify for a conventional loan in the mid 4.00% range.
Private Money Financing Terms:
- $235,000 Loan Amount (68% LTV)
- 36 Month Term
- 1 Year Prepayment Penalty