First time investor - How to finance two duplexes?

Question

Hi BP,

I’m a first time investor with a pending duplex that’s in contract, but the seller is dragging feet (months) to make required mold repairs in order for that deal to happen. So I’m looking into a second to keep the ball rolling.

I’m pre-approved with my local bank, verbally said I could get a 10-15% down payment with 85-90% mortgage on my first duplex. Local bank. Went back to them and emailed saying “I have another deal I’m looking at, what down payment could I get for this simultaneously?” Bank rep then backpedaled and said they only do 20% down for all investments, especially since I’m a first time investor.

So that put my REI to a screeching halt, as I have about 30k to invest, and planned on doing two duplexes (approx. 90k) at 10k each down payment, which is far below the 20% down mark on both. On my second duplex the seller is asking for pre-approval letter or cash proof, which I currently have neither. I can be approved for somewhere around 350-400k for mortgage based on income and zero debt with high credit score. The total of these two mortgaged duplexes would be 180k. I won’t be living in the duplexes, only for tenants.

So my questions/options:

• Was it foolish that the local bank ever said 10-15, and I should consider that a myth?
• Is PMI/LMI a good route to offer to the bank in order to make the financing happen? It’ll lower my NOI, but it’s worth it if it makes the deal happen right?
• Also deciding how to approach seller financing. He’s a seasoned REI, looking to back out of some of the responsibility of his houses. Unsure if lump sum or monthly payments interest him more.
• I hear banks want to wait years in between financing investments, how does anyone expand and grow having to wait in between investments?

Jeff Dulla · Answer

1. That lender screwed up. There isn't a loan product I know of for residential mortgages that will allow you to put less than 20% down on an investment multi unit. In fact, most will not let do this type of deal without 25% down. I have personally financed my last two had to put down 25% for both to get a Fannie Loan.

2. PMI will not help you because PMI companies are not going to issue you PMI on an investment property unless it is a single unit. You can find PMI on a single family unit or condo, 15% down, but it is expensive.

3. I am curious about this myself and why any seller would want to do this unless they were making a very serious return on doing this for you. That is the whole reason they are trying to sell the property typically.

4. Banks do not need to wait any period of time between loans on different properties, if that is what you are asking. If you are asking how long they need to wait before getting cash out, that is typically six months. Unless you bought the property for cash - then you can do something called delayed financing to pull your money out in less than six months. You are also not maxed at eight loans. You are maxed at a total of ten financed properties and that typically includes your primary residence.

Not to continue to call out any inaccuracies in the other answers but you cannot do FHA on an investment property. You must live in it. Also, residential mortgages only go to four units, not five. Anything more than four units and you are into commercial/portfolio territory. Not residential.

Jeff Dulla · Answer

Even with banks that will sell to Fannie/Freddie, you can get up to ten properties financed. The only thing that  may change is flexibility with down payment and condition of the property that they are OK with. But again, there will be a trade off - less stable loan program, more uncertainty long term, more costs in a variety of ways.

A lot of people seem to want to bank on commercial loans or private loans being an end all be all or some magic solution. But I have had the luck to work with a lot of solid real estate investors. The ultimate goal for everyone of them, aside from properly leveraging and receiving solid cash flow, is for them to end up in a Fannie/Freddie loan. If you plan to hold the loan long term, it is a no-brainer.

Josh Helfer · Answer

Thank you all for the insight,this really helps in my approach to how I'm going to handle this. Looks like bank shopping first, and figuring out how to meet the needs of my seller, assuming it isn't a lump sum up front.

Michael Lee · Answer

Hello and welcome to this website!  Forget about using the bank because all they are concerned about is how much they can make.  They really do not care about the property,  Just care about you and getting your down payment.  There are many lender that are out there  and would do shopping on the loan or get a partner to help you financially and complements you on their services.  The owner financing might the best solution you have.  You, evidently, did get your financing figured out and get a loan letter from the lender before you started making offers.  What made you so confident you would find one later that is easy?

Other lenders look more at the property than you  personally.  Some of them will also lend you for the repairs/renovation.  You just need to sound like you know what you are doing.  I agree with what Jeff said.  Do not start being a borrower to just one place. Shop around a see what is it they will offer.  Be a problem solver with the owners. I do not have any experience so I cannot say you must do anything.

Good luck to you!

Samantha Klein · Answer

@Corina Eufinger Is it normally best to call local banks with say less than 10 branches to find in-house lenders that don't have to conform to Fannie/Freddie?

Ryan Abshear · Answer

Jeff, is right on. Im currently trying to finance 2 deals 1 tri-plex and a 5 unit. I have to put 25% down on the tri-plex. Which hurts the ROI. The commercial loan will finance 80-85% LTV depending on term and type of loan.

Corina Eufinger · Answer

1. I don't think you should consider it a myth.  Its unfortunate they backpedaled.  You may want to continue to shop around with local banks. Avoid Chase, Wells Fargo, etc.  I like to use banklocal.info (I believe that should be a direct address).  It shows you what size banks are around you and if they do loans, etc.

2.  PMI might not help your situation with the bank.  They are concerned with the down payment not your overall ability to pay it sounds like.

3. If he is a seasoned REI he may be more willing to entertain seller financing but you have to understand what his concerns would be and how you could alleviate them.  He is taking a huge risk by accepting seller financing.  From his perspective if you default and don't keep up with the property he could get the property back in worse shape than it was before and be out more money.  One strategy you could approach with is short-term owner financing. Ask for 18-24 month seller financing, use 10% down payment, and give him interest higher than a CD rate, but lower than what the bank may have charged. At the 16 month point, begin the process again to get the bulk financing to pay off the loan to the seller. At this point you will have equity in the property and banks may talk more, as well as require less down.

4. Banks don't want to wait years between loans that is how they make their money. The rule of thumb is a minimum of 12 months between loans, but you are maxed at the number of loans you can get. I believe....8.  You will want to have decent equity in property loan #1 before moving on to #2. If you take the strategy I outlined in answer 3, it would be 2 years before you could get a second loan from a bank.  After you have exhausted conventional mortgages ( or in between loan availability) you start looking for PML and owner financing for long term loans.  So use this time now to build connections so that you aren't limited by number of loans to grow your business.

Some extra pieces of advice.  Have your considered FHA loan? As low as 3.5% down, PMI required. Can be used on rentals 1-4 units in size.  You can only have one FHA loan out a time though. Buying properties that are less than 5 units, the bank is looking at it as  personal loan.  If you venture to 6 units, they begin to look more at the property and less at your credit and you.  But your downpayment may go up because the price tag likely will.

First time investor - How to finance two duplexes?

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