One of the biggest problems facing real estate investors is finding the money to buy houses. I have been an investor and agent for over 15 years, and with 15 rentals and up to 20 flips going at once, I still find myself looking for more money (doing 20 simultaneous flips could be why I am looking for more funding!). There are many ways to get money for a rental property or a flip, but today, I will talk about the best loans for investment properties. Most people with great credit and verifiable income can get a loan when first buying properties. Once you buy a couple of properties or have multiple mortgages in your name, finding a bank that will lend you money can get tricky. I feel that banks are the best financing source because they offer the lowest rates and the longest terms. If a bank says they will not lend to you, do not give up on banks: find the right bank. There are many different types of banks and lenders who will lend to real estate investors. On this episode of the InvestFourMore Real Estate Podcast, I review the best loans for beginning, intermediate, and advanced investors.
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What kind of loan can you get when you first buy an investment property?
Getting a loan on your first investment property is not terribly difficult if you meet most lenders guidelines, which are:
- A good credit score.
- Good debt-to-income ratio.
- Verifiable income.
- A good job history.
- No recent foreclosures or bankruptcies.
Many people meet a few of these guidelines, but it is not easy to meet all of them. If you buy the most expensive house you can afford to live in, it can make it almost impossible to buy a rental property. If you decide to switch careers or retire, it can also be very difficult to qualify for a loan. If you happen to to meet all of the guidelines most lenders require for investment properties, you can get a loan at a great rate that is fixed for 30 years. Rates are a little higher on investment properties than on owner occupied properties yet still currently come in at less than 5 percent.
In most cases, when you get a loan on an investment property, you will also have to put at least 20 percent down. You will have to pay for closing costs as well, which can be 2 to 4 percent of the loan amount. If you want to get a really good deal, you may have to buy a house that needs repairs. To buy a rental property that costs $100,000, you may need more than $30,000 in cash when getting an investment loan from a bank. It can be expensive to buy a rental property, but they are a great investment.
When you are first buying investment properties and meet all the guidelines I discussed, most big banks will give you a loan. However, big banks are not always great for investment property loans. If you do not have a lot of money, there are other options. It may be possible to buy a future investment property as an owner-occupant and put much less money down. There are also some amazing tax benefits when you buy as an owner occupant.
What loan options are available for investors who have multiple properties?
Once an investor gets a few loans in their name, big banks become much more difficult to work with. Many big banks will say it is impossible for an investor to get more than four loans in their name. I have even had people ask me through email how to get around the law that states no one can have more than four mortgages. There is no law that says you cannot have more than four mortgages in your name. Big banks have many rules and guidelines they require borrowers to adhere to, and they’re not an investor’s only option.
I have used a portfolio lender to finance all 15 of my rentals properties, my personal residence, and many of my flips. A portfolio lender is a local bank that does not sell their loans to the secondary market. Most big banks sell their loans to either another bank or Wall Street. When a local bank does not sell their loans, they can be much more flexible with how they lend money. Many local portfolio lenders do not care how many loans an investor has in their name, what their debt-to-income ratio is, or impose other guidelines that big banks do. Make sure to listen to the podcast to get more details on portfolio lenders!
How can advanced investors get loans on investment properties?
Some big banks will lend on up to 10 properties, but you must have great credit, great debt-to-income ratios, and perfect financials. When you have more than ten mortgages in your name, it becomes almost impossible to get a big-bank loan. It can be tough to get a loan from a portfolio lender with more than ten mortgages as well. There are more options for investors who cannot qualify with a traditional lender. There are national rental property lenders who do not care how many mortgages you have, what your debt-to-income ratio is, or even if you have verifiable income. These lenders only care about the numbers on the property: will it cash flow, what is it worth, and where is it located?
Banks are a great resource for financing properties, but they will want to see stellar financials. Luckily for investors, there are more options available. Portfolio lenders and rental-property lenders can be a great resource. There are also hard-money lenders, BRRRR strategy, and many other options I talk about.
How to get a free book from me
If you have been paying attention to the InvestFourMore blog, you know that I have published two new books this year:
- How to Buy a House: What Everyone Should Know Before They Buy or Sell a Home.
- The Book on Negotiating Real Estate: Expert Strategies for Getting the Best Deals When Buying & Selling Investment Property
I am giving away free copies of these books (either a PDF or paperback version). All you have to do is leave a review on Amazon and send me an email on any of my paperback books, and I will send you a free book of your choice. You can find all of my books here: https://www.amazon.com/Mark-Ferguson/e/B00FP1LZ1C. My email is [email protected]
[0:00:13.9] MF: Welcome to the Invest Four More Real Estate Podcast. My name is Mark Ferguson and I am your host. I am a house flipper. I flip 10 to 15 houses a year, I own 13 rental properties with a goal to buy 100 by 2023. I’m also a real estate agent. I’ve been licensed since ’01, I run a team of nine and we sell close to 200 houses a year.
So on this show, we’d like to interview house flippers, landlords and the best real estate agents in the business. So stay tuned for some great shows, if you want more information on my rentals, on the numbers, on how I buy properties, check out investfourmore.com.
[0:00:58.9] MF: Hey everyone, it’s Mark Ferguson with Invest Four More. Welcome to another episode of the Invest Four More real estate podcast. Today, I’m going to talk about the best financing loans for real estate investors. Whether you’re flipping, rental property investor or even for your own personal house which could then later turn into an investment property.
So I’m going to get to that shortly. First, just want to give a quick reminder, my new book, How To Buy A House, is out. It’s been doing great, it was a bestseller, the book I wrote with Jay Scott, The Book On Negotiating Real Estate, is also doing awesome. It is also a bestseller and we’re running a promotion right now where if you leave a review for either of those books or my other books, Build a Rental Property Empire, Fix and Flip Your Way to Financial Freedom, How To Change Your Mindset, and How To Make It Big As An Agent, leave a review for any of those books, I’ll send you a free PDF or even hard copy of one of the other books that you don’t have or we can send you a pdf right away as well.
And then we’re also entering anyone who leaves a review, so if you leave a review on Amazon, we’re entering you into a chance to win A Complete Blueprint for Successful Real Estate Investing. That’s my coaching program, we have calls twice a month, I do email coaching, it’s all with me, no one else is doing it. You get a huge guide mailed to you; audio CD’s or MP3’s, video training, all about rental properties, you know, how to invest property is the best way and then as well, my Fix and Flip course comes with that too, which is a video training series, super in depth on how on flipping houses. I have 20 flips going at once right now, that’s a new record. I am actually am selling two of them today so I will be back down to 18, definitely hit a new record for a while there, little scary, haven’t had that many flips but fun at the same time.
All right, let’s get into this podcast. What are the best real estate investor loans? I’m going to start from the very beginning. For someone who is maybe looking to be an owner occupant, turn that property into a rental or that’s the only way they can invest is to become an owner occupant first or even for any investor who wants an owner occupant loan, I’m going to talk about those and kind of the basics of a mortgage as well just for those who don’t know exactly how they work. Because a lot of people don’t, a lot of people just kind of let their lender figure it out for them or the real estate agent figure it out for them. They tell them a payment and they go with it. They don’t understand how the loan actually works.
So a Mortgage is usually a 15 or 30 year term which means it’s setup to be paid off in 15 years or 30 years and every mortgage payment you make, you pay part interest to the bank for lending you money and part principle which pays down your mortgage slowly over time. In the beginning of the loan, you’re going to pay a lot more money to interest than you are to principle, it’s at a ratio of probably eight or nine to one you’ll be paying interest over principle. Where the bank makes most their money is in the beginning of the loan, they’re just making a ton more interest.
But, one nice thing about that, whether you’re an owner occupant or you’re an investor is that interest you’re paying is tax deductible, at least for the time being. Hopefully that doesn’t change but for right now, all that interest you pay is tax deductible, the principle is not. You cannot deduct a principle but you can, the interest. Always talk to an accountant for specific questions, but that interest is deductible, which is a huge advantage of buying a house, whether you’re going to live in it or use it as an investment property.
So you’re paying that interest in the beginning, over time, it kind of shifts, you slowly pay more and more towards principle and less and less towards interest.
A lot of people think, it’s a really good idea to pay down your loan early because you start paying more and more principle and less and less interest faster. You do that, that is true and you will pay off your loan sooner if you do that, however, you know, mortgages are so cheap right now, four, 5%, it’s just an incredibly low interest rate, even though rates have gone up a little bit lately, they’re still historically at record lows.
I don’t pay off any of my mortgages early. I feel like I can make a much better return investing that money into more houses or my flipping business than I can paying off a 4% interest rate. To me, it’s a no brainer, to other people, they have a lot of different factors for why they may or may not pay off their loan, maybe it makes sense for you but for me, it makes more sense to invest the extra money and I think it’s safer too.
You know, I would rather have $20,000 of cash sitting in my bank account than $20,000 paying off a loan. Sure, I’ll pay a little bit more in interest, my loan will take a little lone to pay off but if something happens, if there’s an emergency, if for some reason you can’t work, you have medical bills, it’s difficult to get money out of a house, you either have to sell the house or refinance it to get that money back after you pay down a mortgage.
You can’t just bump the principle back up to where it should have been, you’ve got to refinance or sell the property to get that money back. That can take 30, 45 days to refinance the property. Can take a lot longer to sell it, depending on your job situation, you may not even be able to refinance. You might have to sell your property to get that money back out. And then you’re also paying selling cost you know? Real estate agent commissions, title insurance, if there’s attorney’s in your state you have to use, if you have to make new repairs to sell the house.
It’s much better to have cash on hand in my opinion than to pay off loans that are 15 or 30 years long with super low interest rates. If you have credit card bills, other short term loans have a higher rate, a much shorter term. That’s a completely different story. It might make sense to pay that off. For me, a mortgage on a house is not worth paying off at least in the growth period that I’m in and I think most people are in when they’re trying to buy properties, invest in properties, that’s my opinion on that.
Moving on. Along with the mortgage, you’re paying interest, you’re paying principle, you’ll usually pay property taxes in your mortgage payment, you’ll usually pay homeowner’s insurance in your mortgage payment, those are things you have to have, the lender will require you to have insurance and pay property taxes.
They don’t want the house to burn down or lose a property to a tax sale. They make you have those and they include them in your payment. Interest rates like I said are from four to 5% right now for most owner occupant loans and then you’ll also have closing cost, when you first get the loan, you’ll have to pay an origination fee.
Which is basically a fee to your lender to get the loan, it’s like a commission for the lender, the mortgage broker, whoever you’re using, they can range from 1% to one and a half percent is pretty typical for an owner occupant loans, sometimes you can find a half a percent origination fee.
You’ll probably have to get an appraisal on the home which shows what the house is worth, that can be from 400 to $800 depending on where you’re at and how much appraisals cost, you might have to pay for recording fees to get all the documents recorded.There’s loan dock preparation fees, closing company fee, sometimes it’s a lock rate fee, flood insurance fees, a lot of those fees can add up and you’re probably going to pay about 3% of the purchase price of the home you’re buying in loan cost, in closing cost.
Remember, you have your down payment which maybe is 3% but on top of that, you’ll have closing cost which might be another 3%. On a hundred thousand dollar house, if you’re buying as an owner occupant, you’ll probably need to bring six, $8,000 of cash to buy the property, assuming you’re using a low down payment loan.
Now, there are down payment assistance programs available, Colorado has some great ones that allow you to put even less money down in some cases, you can put a thousand dollars down to buy a house. VA, USDA which is the rural development loan, those have zero percent down payments in some cases. Really great loans but they’re only available in certain areas or for certain people if it’s VA. Okay, the most common loans most owner occupants are going to use is FHA or conventional.
Most people kind of think of FHA as the best owner occupant loan, low down payment, the government ensures it to help banks keep cost down, you don’t have to have a perfect credit score to get a loan. But conventional loans, which are not backed by the government are a better choice if you can qualify for them. With FHA, you’re probably going to put 3.5% down, you can have mortgage insurance which last the entire life of the loan and what mortgage insurance is, it’s basically a fee that either the government charges or a private company charges to allow a low down payment.
To get that 3% down payment, that 3.5% down payment, it cost you more money every month, it’s kind of like insurance in case you default. That insurance helps pay for the default, the bank doesn’t keep that money, it’s another company. You can pay a hundred or $200 a month on $100,000 loan in mortgage insurance. With FHA you also pay upfront mortgage insurance, which means you might pay another thousand to $1,500 upfront for that mortgage insurance. The upfront insurance can be financed into your loan.
You have to bring in this cash but it still increases the amount of your loan. One really cool thing about conventional mortgages is you will have mortgage insurance as well, if you’re putting less than 20% down but with many conventional loans, you can remove that insurance after two or three years. You need to talk to your lender and make sure what kind of loan you’re getting because not every conventional mortgage can have that mortgage insurance removed but many can. So if you buy a house for $100,000, you’ve got a 3% down loan or 5% down loan. As soon as your loan devalue hits 80% or 75%, whatever your loan says it needs to hit, you can get the mortgage insurance removed if you’ve been there the two or three years as required.
You might have to get an appraisal or BPO sometimes is all they need to decide what the value is, and that’s a huge benefit for conventional loans is getting that mortgage insurance removed at some point. The fees on conventional loans are usually lower as well because you don’t have that upfront mortgage insurance. A lot of times rates are actually a little lower with a conventional mortgages.
Really is an overall, it’s just a better loan but there are some advantages to FHA. The biggest thing with FHA is if you have poor credit, not say poor but not as great credit, you can qualify for FHA, easier than you can for conventional. You will need a higher credit score to get a conventional loan.
The debt to income ratios are also higher with FHA than conventional. Sol a debt to income ratio is, what are your monthly debt, all the payments you make on your car, on your house, if you financed a TV, whatever you finance and have a monthly mortgage payment on compared to what your monthly income is.
That’s your debt to income ratio and you can have a higher debt to income ratio with FHA than conventional which means you can afford more house, buy more expensive house if you’re going that route. To me, I think most people who want to invest in real estate should be going for a conventional loans because eventually you can remove that mortgage insurance.
You probably don’t want to be maxing out the absolute most you can afford on a house anyway so hopefully debt to income ration isn’t as important for you and you should have decent credit. I mean, that should be something any real estate investor should be working on is getting decent credit and building that up.
Now, if FHA is the only route you can go, great. But conventional is a little better if you can swing it. Now, not to contradict everything I just said but there is one case where FHA can be a much better loan and that’s if you are buying properties that need a lot of repairs. When you get a loan as an owner occupant, even when you’re getting a loan as an investor, you’re using the big banks even some smaller banks, almost all of them will require a house to be in a certain condition to get a loan on it. They want to be in “livable condition”, which means, the roof is good, the electrical system is safe, the plumbing system works.
The flooring, it doesn’t have to have flooring but you kind of have holes in the sub floor, you can’t have holes in the dry wall, the windows aren’t broken, the heating system works, there’s no mold, no fire damage of course. Basically you can move in to it right now, safely live there and all the systems will work.
It doesn’t mean the carpet has to be new or it has to have new paint or the kitchen has to be updated, it just has to be in livable condition. When you’re an investor and you’re buying properties that are great deals, a lot of times they need work and that can make it tough if you want to buy as an owner occupant and live there for a while.
Or if you want to buy as a rental and the house needs a new furnace, it’s got some broken windows, you know, it’s got plumbing leaks. You can’t fix those items, the sellers don’t want to fix them, the bank won’t give you a loan because it’s got all this problems and it’s not in livable condition. How do you buy the house?
Well, if you’re buying as an owner occupant, FHA 203(k) loan is a fantastic option. Now, you can only use FHA if you’re an owner occupant, you can’t use it as an investor. This is only if you’re going to live in a home for at least one year. After that year is up, you can rent it, sell it, a lot of different options but you have to live there at least one year.
With the FHA, 203(k) loan, you can finance just about any repair you want. There’s what they call a streamline loan which I believe is $35,000 in repairs or less, has certain limits to what you can do but it’s much easier to get done than a regular FHA 203(k) loan which takes you know, two appraisals, you need an appraisal for as its value now and what it will be worth after you fix it up.
You need bids from all the contractors if we’re going to do the work and they have to be approved to do 203(k) loans. There’s extra fees that takes longer to get the loan approved but you can buy a house for $100,000. If you can qualify for it, you’re going to have to qualify for the additional loan amount, you can make $100,000 in repair to that house and finance it all within FHA loan. It can be a fantastic option to buy houses that need a lot of repairs when you don’t have any other financing options. That’s one time when FHA can be really good loan is if you’re doing repairs, going that route.
All right, moving on to investors. We just talked about a lot of the loans for owner occupants, changing it into an investment property at some time or even just living there. What if you’re an investor? You want to buy a rental property, you’re never going to live there, you’re not going to live there for a year, you’re going to make it a rental straight from the beginning, what kind of loans are available? Now, before the housing crisis, the loans weren’t that different than owner occupants, you can have 5% down, state an income loans, it was pretty easy for investors to finance properties.
Now it’s much more difficult, you’re probably going to have to put at least 20% down as an investor. As an owner occupant, when you’re spending maybe five, $6,000 to get into a property, maybe less with certain loans, as an investor, you know, you’re spending $25,000 to get into that property and if you need to make repairs, you got to add that on to it as well, there’s a quite a bit to think about as far as how much money you need when you’re buying as an investor, that’s why sometimes I think it’s a great route to get started as an owner occupant.
You know, even if you don’t turn the property into a rental or a flip after one year, you live there a couple of years, getting into a house, getting a great deal, fixing it up can be just an amazing way to start your investing career and give you some extra money for the future. Because it takes a while to save up money if you’re going straight into an investor loan, trying to put 25,000 into a $100,000 house. That’s assuming you can find a $100,000 house. Much more if your prices are higher but if you can do it, awesome, the big banks aren’t a bad choice when you’re first starting out as an investor.
The chase, the Wells Fargo, the Bank of America, they have no problem loaning to investors up until an investor has four mortgages. They’ll do 20% down, really competitive rates, rates are usually a little higher for investors but not half a point, a point higher for investors usually. Not a huge amount but definitely a little cheaper if you’re an owner occupant. 20% down, origination fees are probably similar, 1% give or take half a percent and it’s not too difficult to qualify for those loans either but once you get over 4 loans then it gets much tougher, the big banks will not want to finance you. So that’s when you’ve got to look for some other options. Before we get there, there is a few things I wanted to talk about with investor loans and it also touches on owner occupant loans as well.
That is 15 versus 30 on mortgage, which one is better? Many, many people say they want a 15 year mortgage, they will pay it off sooner, they will be in a better position financially, I completely disagree. I think a 30 year mortgage is much more beneficial to just about everyone. Yes it takes you longer to pay off the loan and yes the interest rate is slightly higher on a 30 year loan. The last I checked I think a 15 year loan was half a percent interest rate lower than a 30 year loan.
So you can pay off the 15 year loan sooner but your payment is going to be much higher on a 15 year loan and because your payment is much higher, it really restricts investors. Like I said, debt to income ratio is very important to banks when they are trying to figure out how much to lend to investors if they can get a loan, if they can qualify and the debt to income ratio is calculated based on monthly expenses and monthly income.
So even though you are paying off that loan faster, your higher payment is going to make your debt to income ratio worse and make it much harder to qualify for new loans. I think if you want to pay off your loan faster, get a 30 year loan, make extra payments to it. You’ll pay a little more in interest but over 15 years, you might pay another year, a year and a half is what you’re going to pay extra by getting a 30 year loan.
You have so much more flexibility, you can qualify for more properties because your payments are lower and if something happens again, a 30 year loan is going to have a much lower payment. If you have medical expenses, if you lose your source of income, you can stop paying extra to the 30 year loan and pay that lower payment until things get better. With a 15 year loan, you’re stuck with that high payment until that loan is gone, until it’s paid off.
So my thought is get a 30 year loan, it’s easier to qualify, your cash flow is better. To me, it’s just a much better choice for the 30 year loan. Maybe if you have absolutely no self-discipline. You can’t save money, you know you are just going to spend it if you have it the 15 year loan could be a good way to force yourself to save money but again, paying off the loan isn’t a huge advantage to me because interest rates are so low.
I can make so much more money in other investments and you really don’t see the advantage of paying down a loan until you either pay the loan off completely, you sell the property or you refinance it. So to me, a 30 year loan is the best option. The other big choice to make is whether to get a 30 year fixed loan or an adjustable rate mortgage.
Adjustable rate mortgages had a horrible name in the housing crisis. A lot of people blamed the housing crisis on it, people that get low payments to start with. In a few years, interest rates jumped up, their payments doubled, all of a sudden they couldn’t afford their house payments, they went to foreclosure and it just happened over and over and over again. It caused the housing crisis, the ARM is a horrible loan.
There are many different types of ARM’s. I use ARM’s on almost all of my rental property loans either a five one or a seven one ARM and what that means is the loan has a 30 year term. So there’s no balloon payment with my bank. I can have that loan for 30 years, I can’t call it due but for the first five years, my interest rate is fixed and on the sixth year it can go up a little bit. On the seventh year it can go up a little more.
On the eighth year it can go a little bit more but there is a cap to how far it can go up. So if my rate is 4.5% now, the most it can ever go up in one year I think is 2% and it can’t go above 8% or something like that or maybe at 7.5%. It’s not like the rate could jump to 20% and some of the loans that were foreclosed during the housing crisis were crazy ARM’s. Those were not smart loans, it’s like a six month ARM where you have 1% interest rate the first six months of the loan.
Then after that, it jumped to an 8% interest rate and your payments did double and a lot of those loans were fraudulent. People that understand what they were getting they didn’t know the loans would jump up. It was not the same kind of ARM that I am getting that most people would consider. It was just fraud is what it was. So don’t just assume ARM’s are horrible because of what you have heard about them, do the math.
Figure out if it’s a decent loan for you because one of the awesome advantages of an ARM is that the interest rate is lower than a 30 year fixed loan. So the first five years you have it while that rate is fixed, your rate is going to be a half a percent maybe a little bit more lower than the 30 year fixed rate loan. It might even be close to that 15 year loan interest rate and yes, the rate can go up after the sixth or seven year.
But because you are paying a lower interest rate for that first five years, if you calculate it out, you really don’t start paying more money into that loan until about year seven or eight. So if you take a 30 year fixed rate loan compared to a 30 year ARM, the 30 year fixed rate loan does not become cheaper until about year eight or nine. Most people never hold a mortgage that long. Very few people have a mortgage that long. Even real estate investors who planned the whole properties forever, many times will refinance them, will sell them for who knows what reason but there is a very small chance you are going to have that same mortgage for eight or nine years and on top of that for it to become more expensive, rates have to go up. So you know there is a good chance that rates could go up in the future.
But if they don’t go up, you are still paying a much lower rate than the fixed loan. So think about ARM’s. Think about if it makes sense. To me having that extra cash flow, extra money in the beginning to help grow, have more reserves, to have more cash available is more important than having the same interest rate for 30 years to me. So of course part of my plan I can afford if my rate does go up, I still have enough cash flow to pay that.
And I plan to keep refinancing properties or pay them off eventually. We’ll see what happens if rates do get that high but to me the advantages of an ARM outweigh the advantages of a fix mortgage just for the simple fact that most people won’t have the mortgage long enough to take advantage of the fixed rate so it’s something to think about.
All right, so moving on to more experienced methods, investors who have been around for a while, what are some of the more advanced ways to finance properties? I think a lot of you heard of the buy-rent-refinance-repeat-repair process. The BRRR method, I think I mixed up the words there but the basic idea is you buy a property either with cash or private money. You repair the property fix it up and you refinance it.
Hopefully the property is worth much more than you bought it for and the repairs you add into it. Take all of your money back out, repeat the process, keep doing it over and over again. That’s a really cool strategy. It worked really well, you have to make sure you have a great lender who is willing to refinance those properties for you. You need cash or private money in the beginning though to make it work right which can be tough.
But if you have those sources though, it could be a really good way to get started with rentals, buy over and over and over again without dumping a whole lot of money into the properties with down payments, with repair costs out of pocket. Now if you don’t have private money, a bunch of cash laying around to start that process, you could possibly use a hard money loan to do that process as well and how that works is instead of buying with cash, you buy with a hard money loan.
Hard money is usually used for fix and flip properties. You are paying 10%, well sometimes lower. I’d say eight to 12% are pretty common rates right now for hard money. Super experienced investors are getting around eight, newer investors are getting 12 maybe a little more. I used hard money in one of my recent flips and I paid 8.75%. I was able to finance 90, it was 85% of the purchase price and a 100% of the repairs on a flip. A pretty good deal.
I have to pay two points on that but again, I am very experienced. I get a better deal than most people and if you are curious about that hard money lender, shoot me an email. I can introduce you to them. I will try to have a link in the show notes here as well to different lenders I know but what you do with that hard money is you buy the property with a hard money, you put your 15% down.
Sometimes you can put a little less down, make repairs to the property. So maybe you are repairing and spending $20,000 on repairs, all of that is financed by the hard money lender as well. Now let’s say you’ve got a loan for a $115,000, after the repairs are done you can go to a lender, refinance the property. Hopefully that appraises for high enough that you can pay back all the hard money you just borrowed maybe you can get a little bit of cash back from the deal.
Then you can start the BRRR method a little more and more with extra money but hard money is one resource to start that rental property purchase plan without as much cash. But it is going to cost you more interest, more fees because you’re getting two loans of hard money and the refinance. The hard money is going to be more expensive. So it is definitely going to cost you more money and interest and fees but sometimes it’s worth it to put less cash into a deal so you can buy more and more properties.
All right, some other problems like I said, investors run into four mortgages all of a sudden the big banks say, “Nope we’re not going to lend to you anymore. You can’t have any more mortgages” some banks will even tell investors, “Sorry you can only have four mortgages,” and I’ve had investors ask me, “How do you get around the law that says you can only have four mortgages to your name?”
There is no law, there is no government rule that says you can’t have more than four mortgages. That is just the policy of many big banks. Now some banks will allow you to have from four to 10 mortgages that are conventional. You will have to put 25% down, your credit score has to be higher. You can’t do a cash out refinance with those loans and there’s some other restrictions as well. However, I don’t like those loans very much.
One thing that has been awesome for my business is finding a portfolio lender and what that is, is a local lender that gives loans out using their own money. So most banks, most mortgage companies, most big banks when you take a mortgage out with them as soon as you close the deal, they’ll try and sell it on the secondary market and because of that, they have all these guidelines that you have to go by.
Credit scores, loan to value, down payment, all these different guidelines they have to adhere to in order to sell that loan to a secondary market. Well a lot of portfolio lenders won’t sell their loans. They’ll keep them in house, which means they’re lending their own money. They’re not going to sell them, they’re going to keep that loan forever. That means they have much more leniency on how they finance properties, what their terms are, their rates, how many properties they’ll finance.
I have 15 loans with my portfolio lender on rental properties. 15 mortgages so obviously they don’t have a limit of four. They don’t have a limit of 10 as long as they can qualify for them, they’re still comfortable with me I can keep getting loans with that lender for mortgages and they have some draw backs. They only offer ARM’s which I’m okay with as I’ve already said but they have 30 year terms. Their rates are super competitive like I said 4.5% I think was my last loan. I have to check for sure.
Down payment’s 20% down, you’re not putting 25% down, that’s really nice and what you’ll find is each portfolio lender kind of has slightly different terms, slightly different rates, my origination fee is 1%, maybe some are one and a half, maybe some are a half. If I want to do a cash out refinance, my lender does have a one year seasoning period which means if I refinance a property within one year of buying it, they’ll refinance it for the lesser of the appraised value or what I bought it for.
You can’t really do a cash out refinance in the first year. A lot of other portfolio lenders will have six months using the period, some will have no seasoning periods, really hard to find, they’re an awesome resource if you can find them. Really relationship based with portfolio lenders, I know them very well, they do a bunch of my fix and flip loans too, great resource, I had to move all my accounts over to them, really show them I’m serious before I got my first loan with them.
They are so much easier to work with than a big bank. I got my first rental property I bought with a Bank of America loan and it was a nightmare. It took me forever to get it approved, I think I had to extend closing twice because the bank just kept asking for more and more things. Once I moved for a portfolio lender, it was like nine days, it was so nice it was so easy and everything happened so fast. Even as a beginning investor, even if you don’t need that portfolio lender yet, start looking for them, amazing resource, if you plan to buy a lot of properties.
Find that portfolio lender who can help you really build your business and build a relationship with them. They can be an amazing resource. Something else that can be also an amazing resource for investors are some of the national lenders popping in.
There’s quite a few lenders popping up across the country who lend in almost every state who specialize in lending to flippers and rental property owners. A lot of times, they don’t even care about debt to income ratios. Debt to income ratios doesn’t matter, you don’t’ have to have verified income, what they care about is the property, does it cash flow, did you get a good deal on it, where is it located, is it rented?
If you have a good rental property, there’s a good chance they’ll refinance it for you or give you a new loan on it. A lot of this rental property companies have evolved quite a bit over the years, rates are coming down to last I checked, below 7%. Very competitive.
Points are very competitive as well, one or two points usually and this lenders can be a great resource for investors, they have no limit on how many properties you want either or how many mortgages you can have in your name.
And another advantage to those national lenders, portfolio lenders, a lot of times they don’t care if you have your property in an LLC. All of my properties are in their own LLC, my lenders don’t care, the big banks, they will care, they don’t want them in LLC, they want in your personal name. If you switch it, sell the property from yourself to an LLC, they can call the note due if they want to.
It’s rare, it doesn’t happen often but it can happen when they call a note due, you have to pay it off or sell the properties somehow, figure out a way to payoff that loan. With the rental property lenders, they actually want properties in an LLC and many portfolio lenders won’t care if it’s in an LLC or your personal name, that’s another advantage of finding those lenders and really cultivating relationships as soon as you can.
All right, I think we went over just about everything I wanted to talk about, money you need, owner occupant versus investors, big banks, portfolio lenders, some of these rental property lenders, there’s also hard money, which I talked about briefly, great resource for fix and flippers. I’ll add some notes and links to some hard money lenders as well in the show notes, as well as the rental property lenders.
I mean, financing properties for investors is getting easier, it was really tough a few years ago just after the housing crisis, lenders were super strict but there’s more options now, more lenders, little easier for investors to start buying properties.
Just focus on getting really good deals, the cash flow, and there should be an option to be able to finance it. If you look hard enough and know the right places to look. All right, thank you for listening, I appreciate it, everybody could take time to leave me a review on iTunes, that would be awesome, that helps me out or to rate me I iTunes, that helps.
Yeah, if you have any questions, I’m always available, [email protected]. Thanks a lot, have a great week.