(New member) My friend's, who is an investor, used a CD for financing...typical?

[Faceplant]

I am new to this forum and would like to introduce my self. I am 25 and have less than a year left for my BA in Business Administration. I am in Louisville, Kentucky and due to my previous job I have come to know several Contractors and Investors. I will be joining an investors association in Kentucky soon but I was curious about my friends financing arrangement. He is an accomplished investor, by my standards and has a portfolio of about 7 commercial & industrial properties and several apartment buildings. Ill call him "Beaver" for the sake of privacy. Beaver and I had a business relationship and he would share his insights about real estate with me when he came to do business with my employer, I became his sales representative and when I had the chance I would ask him about real estate.

Beaver shared with me one of his financing arrangements because I was curious if money down correlated with profitability of an investment. He explained to me that for his purchase of a "lighthouse by the ocean" that cost around $400,000, he worked with the bank to establish a lien on a CD that he created with an amount of $100,000. The CD was collateral for the loan of almost %100 financing(if I remember correctly), when the investment loan on the "Lighthouse" was repaid by %25 the lien was taken off the CD.

Is this a common way to finance investments? Or was he able to do this because of his previous success in real estate? Any thoughts on utilizing this method?

Thank You
Jonathan

[Gold River]

Hi,

    The bank held his cash CD therefore they agreed to temporarily except the $100k CD as the down payment (25%) as cross collaterolization rather than force your friend to actually cash the CD early and create penalties and lost interest!

The bank still holds a regular 75% mortgage on the property! This can be done by anyone with a track record and record working with their local bank!
This is what experience will get you and a desire to find creative solutions!

This would not be common as it took years of establishing a Reputation and track record!


                               GR

[Faceplant]

Do you think (GR) the bank that helped him finance the property was the same bank who issued him the CD? Who do you think took the interest while he was paying back the first %25? The bank assumed the CD as downpayment then basically give it back to him? Have you heard of this financing structure before?

I wonder if this can be done on a smaller scale.

Thank You GR

[d1beard]

Hi, this is no great innovation.  The borrower has give the lender 1.25 worth of collateral for a 1.00 loan.  It's very common to give a lender additional collateral to make a deal work.  This is hardly 100% financing, or some financial wizardry.  He's collecting 2% on his CD, and paying the bank probably 6% on the loan he's getting against that CD, so there's a net drag.  Heck, you can place 100k in a CD at any bank, and they'll be happy to lend you the money at 1.00% over the CD rate, which would be a better deal then borrowing at 6% and using the CD.

[d1beard]

Hey, didn't mean to be curt.  Welcome to real estate investing, and best of luck.  I also live in the Louisville area, but mostly invest in southwest Iowa (Cincinnati area).  Having some connections will be invaluable to get you off to a fast start.  Do you plan to flip, buy&hold, or some of both?

[Faceplant]

d1beard, im not sure I follow your "1.25..." he gave him 1.00 for every 4.00 dollars? To me there is an advantage to utilizing a CD. He gets his "down payment" back and has a 1/4 of his investment paid off. He has a descent return on the new investment and ~%2 from his CD. I know a couple of contractors that I can do business with, if a flip is comes my way but my plan is to buy and hold.

d1beard are you a member of KREIA?

Thank You D1beard