What's the low down on investment financing?

Question

I was curious if people could just give me an idea of what it is like getting financing in today's market. Many of the books out there make references to getting financing, but you can tell how dated they are by the interest rates they mention, and the deals they put together.

Someone recently told me that you pretty much had to have %25 down to get financing on an investment property. Is that in stone? I was just curious about what possibilities are out there, so as I begin trying to learn how to put deals together, I'll have a realistic idea of what is possible.

Maybe if someone could just lay out a few options, that'd be a big help. I've read enough books to know what I "could" do, but I have no idea what 2011's economy is actually providing. Interest rates, down payments, other factors. I mean, would a bank not loan me 80k on a house appraised at 500k if I didn't have a 20k down payment? That's totally hypothetical, but it was meant to serve as an extreme illustration...

Jeffrey K. · Answer

If you are not going to be investing for a few years this really does not matter. Lending conditions change by the day. You should just save as much cash as you can and keep you credit clean and your bills paid off. I have never purchased a property with financing. I always pay cash and then refi when it is stable and the rehab is done my way. I am maxed out on residential loans and have those locked in for 30 years in the low to mid 5s. Those were at 80% LTV. I own two properties free and clear. One duplex that I bought for 57k and rents for $1300 and a four family that I bought for 125k and rents for $2600. I might refi the duplex with citimortgage this summer, but I dont really need the money right now and I think the fees might make it not make sense. The rest of my property is financed with commercial REFIs. These are 7 year commercial loans at 80% LTV or 90% of what I have into them (the banks takes the lower of the two). I am closing on 17 unit refi Monday at a rate of 5.625%. As my company grows and I change my plan (I want to buy 40 units a year now), I will have to change the way I buy. I have two lines of credit and cash sitting around but not enough to do a huge deal. On the big deals (5mm+) I would want to do an FHA 35yr fixed loan. I have never done one and I know you have to hire a broker and the local girl charges 1-2% on loans under 20mm. I could always go with the local bank but with the 7yr notes you pay more interest and you are on the note personally.

Joe Edwards-Hoff · Answer

I will say that it is not 100% true that I don't plan to invest for a few years, but I don't really plan on getting aggressive until then. I'm a school teacher and my wife is finishing up nursing school. We've got some students loans to pay off and hope to get that taken care of before investing. I have considered shopping around for a place as if i were investing, and then moving in myself. I figure I can live there for a couple years and then rent it once I move. So saying that I won't do any buying in the next few years is an understatement. Though I don't plan on buying as much as possible until after I get settled. I agree that the lending market will change a lot over the next few years, but I think that researching will still be beneficial. I feel like most of the real estate investing material I have gone through talks about lining up deals, but then completely avoids the financing part. And I don't want to be able to locate and structure a great deal, only to not be able to obtain it...

Joe Edwards-Hoff · Answer

Well, since everything I am asking is hypothetical, then there really isn't a bottom line. I don't plan on investing for a few years, but the time to learn is now. Obviously having money to put down is a big deal, which is why a few of my questions revolve around it. I think I am going to try to locate a few local mortgage brokers to discuss things. Can anyone add to/correct this list of significant factors in obtaining financing- DTI ratio Down payment Credit Cash Reserves (once you own a few) LTV I guess I am now going compile a list that I can then hit each part one at a time and try to get a better understanding. Again, I have no properties in mind right now, nor am I ready to start looking, but when the time comes I want to have my ducks in a row. And I don't know what that may be. Maybe I'll be short on the down payment if I find a really nice small apartment complex, or maybe I'll find my DTI ratio to not fit the mold once I have 3 properties that I haven't been renting long enough to count their income. I think if I were buying a house every two years it woulnd't be so hard, but if I want to start buying multiple properties a year, I'll need to make sure I can get financing. @Jeff- What are you doing to get financing on your goal of obtaining 10 properties a year from here until 2015? Do you have large reserves, or are you getting investors? How does your DTI play into it? Maybe your example can help me visualize what is needed to invest aggressively. My goal is to be able to buy as many properties as I can, as fast as I can, as long as they fit my mold, but this won't be for about 5 years, give or take. If anyone else would like answer my question for Jeff, please do so. The more examples the better.

Jeffrey K. · Answer

Is the bottom line that you dont have money to put down?

Joe Edwards-Hoff · Answer

Second thought- The one property that I have been involved with, my dad purchased as an investment when I was in college. I know that he only put down 10% on it, as an investment property, but they also jacked up his rate by a couple percent... Are deals like that common? He didn't have to put down 25%, but he had an increased interest rate...

Joe Edwards-Hoff · Answer

Thanks Jon, I always take your advise seriously. Yeah, I am working on just research right now. Obviously things have changed over the last 30 years, and they are continuing to change. At another board member's suggestion I started listening to the Weekend Millionaire program. I have listened to many other programs before, but something I have began to notice is that most everything I listen to is over 5 years old, if not 10 or 15. And it is apparent that a lot has changed in that time. Another question, if one started a real estate investment corporation, and eventually the corporation could obtain financing, would the DTI be based of the corporation? So many thoughts... What are you guys doing for financing that have 6-12 properties?

Jon Holdman · Answer

For conventional investor loans, 25% is the norm for properties one through four, 30% for five through 10. There are also cash reserves requirements. Six months PITIA (A=anything else like HOA dues) for the property being financed plus two months for all other properties. If you're above four, then its six months for all properties. Value is the lower of the appraisal or the purchase price. Rental income won't count toward your income until you've had the property two years. If you want conventional (i.e., low rate), 30 year fixed loans, those are the rules. The Homepath financing Paul mentions is another option. Seller financing of some sort is yet another option.

Joe Edwards-Hoff · Answer

I have another minute to elaborate. Right now I am researching what the roadblocks are going to be in obtaining financing. I a perfect world, people would just give me money because I have a good deal. Since that world doesn't exist, I am trying to research each potential thing that could hold me back, and ways that I can work around them. For instance, DTI ratio, down payments, etc... Maybe I find a great deal on an apartment complex, since it is over 5 units, won't financing be different? What if I have a great deal on a SFR, but I don't have the right DTI, do I just need a huge down payment to get things leveled out. How does the owner holding the note, or part of the mortgage, effect financing? Just researching...

Joe Edwards-Hoff · Answer

On the 16%LTV, I wasn't necessarily saying 0% down. Just mainly, would you still need 20-25% with that LTV DTI is another thing I am curious about how flexible it is. I'm really just researching in order to plan and learn how to form deals.

Jeffrey K. · Answer

I see your name is GI Joe. Have you been in the service? VA loans have less money down. Also, the best way to feel out the mortgage market it to call a few local mortgage brokers and ask them about the products they offer.