I have a down payment for a investment property what now???

Question

I have a friend that is willing to lend me money for a down payment for my first investment property.  My strategy is to buy a house through a short sale, rent it out for two years, then sell the house.  I have no idea what to expect as far as the financing goes.  My main questions (for now) are...

should I use a mortgage broker to get the house financed or should I deal directly with a bank?  If dealing directly with the bank who do I contact at the bank?

what kind of mortgage rates can I expect to get on an investment property?

what down payment percentage will likely be required?

Thanks for all your help!  This community is an amazing tool for beginning investors.

Also,  I am looking for a mentor to help me work through my first deal let me know if anyone is interested.  Thanks again.

Jon Holdman · Answer

20-30% down, rates in the high sixes.

You can try just calling banks and asking if they do investment real estate loans.  They will direct you to the correct person.

They're not going to let you borrow the down payment.   So, if you're going to have your friend do a second mortgage at the same closing, they will balk.  They will want to see them money present in your accounts for three months prior to making the loan.  You may be better off establishing a partnership or LLC, though that will make getting the loan trickier.

Scott Hubbard · Answer

If your friend trusts you, put the money into a separate savings account in your name for at least two months. Then qualify for a loan, after the two months have passed, giving evidence to the monies through bank statements.  Banks usually will only check for the latest two months of bank statements.  So, this will get around the banks requirements for indirect funding.
          
          While you are making arrangements with your friend, draw up a partnership or an operating agreement noting that the monies your friend is providing is a loan and describe ways that your friend can get his money back.  This is best done through an attorney and is highly recommended because friends and business never mix well.  
          
          Just as Jon said, borrowing money through a partnership makes the transaction more complicated because there are more conditions with which things can go wrong.  Having a well thought out agreement which addresses all the "what if" scenario's can help with getting funding.  
          
          Another method, is to secure hard money loan (HML), at a higher interest expense, until both the ownership has seasoned and you have a tenant performing.  In my experience, you will get a better rate if you have done all the necessary repairs, secured a tenant, and seasoned the loan.  Usually you can do this for 6 months and simply refinance the loan through a lender who does income property lending.
          
          Ultimately, using hard money does save you money because you can avoid the 20 to 30 percent Downpayment requirements. 
          
          For instance, say you secure a mortgage for a purchase of a house.  Much of the time, you will need 20 percent down payment which could exhaust your entire capital reserve (down payment loan for your friend).
          
          Contrarily, you can secure a hard money (HML) loan which will likely still require a downpayment.  The difference is, when using the HML, you can under certain circumstances, be required to use less of a DP.
          
          Why HML?
          
          Often times, you may be able to leverage the fact you are purchasing the home under fair market value and will have to put less down.  Contrarily, traditional investor terms are a flat percentage of the purchase price usually 20 percent or more.
          
          Price of the short sale house is $100K.  You have a $20K in capital.  The fair market value (FMV) of the property is $135K.
          
          Under the conventional loan scenario:
          You secure a $80k mortgage with a required $20K downpayment.
          
          Under a HML, the lender may lend up to 65% of FMV with a minimum DP of $10K.  (This is the program I use.)
          
          Since the purchase price is $80K and the HML will lend up to 65% of fair market value or $87750 which is more than 100% of purchae price, then you will only be required to put down $10K.
          
          With traditional bank financing you have zero money left for repairs or capitalization.  Under the HML program you would have $10K still left to do repairs or invest in another property.
          
          Under both programs, you could refinance in six months and cash out some equity.  The major difference in my opinion is the lower downpayment possibility leaving more money in your pocket for further property acquisition or renovation.
          
          Another reason to use HML's are usually much easier and quicker to fund which is important if your doing a short sale.
          
          HML will cost you more in terms of interest and points, but since I only use them short-term and all these expenses are tax-deductible, I am able to take the capital saving to secure more properties.

Whichever you decide to do, shop around for rates especially local lenders who cater to investors.  I also recommend joining a REIA in your area if you have one.  They are great source of information and advice.

Happy Hunting!

Scott Hubbard · Answer

Costs will vary depending on your market, property type, credit score, financials, etc.  I pay 3 pts @ 12% per annum with 65% LTV and I will expect you to pay a little more since you do not have a track record.

You can definitely talk to local banks and mortgage brokers in your area for loan costs and rates.  It is definitely worthwhile to shop around.  You will pay a higher rate as an investor regardless and if  you can get two properties as opposed to one, the extra costs are worth it.

I look for lenders who will require the least down payment  so I can rehab and rent or flip.  Capital Preservation is the name of the game.  Many pro-investor mortgage brokers utilize private money (individual investors) as a source for investment capital.  They do not mind short term loans.  I would start there.

A warning though:  You need to be careful about terms especially prepayment penalties and performance clauses.  You also need to keep your credit squared away since you will need to refinance.

Good Luck

Dustin Phillips · Answer

With HML it depends but 3-8 points upfront and 12% over 6months to 2 years with ballon at the end can be expected...

Another option is to call local or regional banks that can create portfolio loans or in house loans. The banks create the guidlines and do not go off fannie mae or freddie mac's criteria for underwriting a loan. So you walk in and say Hi I want to find out more about your portfolio loan programs. You tell them what your looking for and they can often blend what they have with what you need. This will allow you to get the purchase money, rehab money, and sometimes roll closing cost and points... Also its much cheaper than HML's...

But you need to find small banks or credit unions...

Jon Holdman · Answer

Because you'll have to get a commercial loan vs. a "conforming" fannie mae type loan that you could get in your own name.  You may pay a slightly higher rate and get a shorter term with a commercial loan.

If your buddy is willing to give you the money now, you can let it set in your bank account for three months.  If you're just starting now, you'll need to have some good luck to buy a short sale within three months in any case.

Klyde Waggsdale · Answer

Wow! Scott thanks for the info.  Its funny because the home prices that you used were VERY close to the deal that I am looking at.  A couple question for you concerning hard money lending...

What are some examples of terms for a hard money loan?

At what point in time do you convert your hard money loan into a traditional loan, and what is that process like?

Thanks!!!

Klyde Waggsdale · Answer

Thanks for your quick response!!!

So I would most likely need to form an limited partnership with my friend, have him put money into the lp, and then apply for the loan through the lp.

Would that be a good way to go about it?

Why would having a partnership make getting the loan trickier?

I have a down payment for a investment property what now???

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