First Rental Property - Financing Strategy

[Ariel Nixon]

Hi All,
I'm in the works of my first SFR deal.. Its a 2bed/1bath home that I plan to add another bedroom to plus a little rehab. I've ran the numbers and they look good (conservatively around $280 monthly cash flow, cash on cash ROI of 13%) however due to the price of the home being lower ($38K plus about $15K remodel costs) i'm having a hard time getting a competitive rate.. Would love to get your thoughts on the following financing options or provide other suggestions..

Options I have received.. 5 year fixed rate (variable after) at an interest rate at 5.75% or 10 year loan at 6.5% interest rate, both have the option to include rehab costs in the loan at 80% of appraisal.. I also have the flexibility to pay for rehab outright if I so chose to do so. Planning to put 20-25% down. 

I wasn't expecting the variable rate, but heard this from two lenders. Is this common for investment properties?

As this deal is time sensitive, quick inputs are appreciated!

[Shane H.]

Originally posted by @Ariel Nixon:

@Ana Marie B., the second bank I talked to said this was standard practice for commercial loans in the market, it could be my "newbie"ness but I'd never heard of this in real estate investments.. My current income and credit score would put me as a very favorable lendee so that wouldn't be the issue.

For commercial this is standard in Wichita.  If you get the loan directly in your name as a non owneroccupy you should be able to get a 30 yr loan - but the fees and the PITA (pain in the a.. ) it is to you it may not be worth it.

Ive heard a couple local banks will lock in your loan (or would a year or two ago) for up to 15-20 years - but I think that was for folks with great looking balance sheets and high w2 income and likely no more than a 70% LTV.

If you go down in LTV as time goes on I'd guess that you could refi out and get longer locked in terms. Just ask for them to put a ceiling on how much the loan can adjust for the life of the loan and how much it can jump each adjustment. That should build in some protection.