We're headed down the path to purchasing our first rental property via a well-known turnkey provider. They've recommended a lender to us, and we're at the pre-qualification stage. We're likely to buy 2 properties this year, each in the $90k-$150k range. We had planned to put 25% down on each, but the turnkey operator is suggesting 35-40% is more common. I've been looking for guides to financing rental property and not finding much. Does anyone have any reference material I've somehow missed? Here are some specific questions we have: • How do you evaluate a lender? There are no mentions of this company on Google or BP, which surprises me a bit given the scale of this turnkey provider and their referral. • How important is it to shop around for a loan on a property like this? If it's important, how can we find a few other solid lenders that are familiar with • Should we try to time pre-quals or loan applications within a tight window to minimize hard pulls looking sketchy on our credit report? I'm wary of proceeding with this first lender ASAP without having others lined up to compare them to. • My wife & I each hope to eventually have 10 loans in our personal names as part of our long-term portfolio strategy. Should I leave her out of this loan application process or is it OK to list her as a co-borrower? Appreciate any insight or guidance. Sorry if these are obvious; we actually rent, so this is our first mortgage.

@Keith Anderson I have two different concerns about your situation. Neither of which are "deal-killers," but certainly things to think about: 1. I strongly object to the seller encouraging 35-40% down. All this is doing is making their proforma underwriting look better and better, because the decrease in the debt service is baking in additional cash flow. It will pad their numbers and make them look like they are giving you a better investment than the way it would produce at 20-25% down on a CASH FLOW level. If you understand the cash on cash (CoC%) numbers, you understand that your return is diminishing due to the additional equity you are putting into the investment. 2. Most folks don't realize this, but it is worth saying. When you are buying a turnkey property, you are not only buying a piece of real estate like you would if you simply bought a random property fresh off of the MLS. In buying a turnkey property, the provider has usually gone through weeks if not months of acquisition, rehab, lease-up, and marketing, prior to even encountering you, the end buyer. Not to mention all of the associated costs. Therefore, with a turnkey operation, you are paying a premium in the SERVICE they are providing. It's a hassle-free, headache-free way to jump into real estate investing. And don't get me wrong--most turnkey providers provide an EXCELLENT service for those who want to invest in real estate, but lack either the knowledge, time, or both, to do it themselves. That being said, no excellent service that I know of comes without paying a price for it. The appraisers in the market you are buying in will use comps based off of homes sold on the MLS to local, non-turnkey sellers who have not tacked on their "service fee" to the purchase price. Therefore, I always try to caution people that it MAY end up being more difficult to obtain financing on turn-key properties due to the larger appraised value that is needed to lend on the property. Not a dig on turnkey guys at all. Most I have met are good, and even more of their clients are happy. Just a simple touch on mathematics that may end up changing the way you structure your capital in order to allow for more deals to get done.

• Origination fees + Appraisal/Flood/Credit report • Lender title/Closing charges. Some lender will only use theirs. I allow my borrowers to shop around if they can find a cheaper title company. • What is the max LTV they can give you without mortgage insurance (MI). • Are they charging you any origination points and/or discount point. We don't charge any. • You DON'T want to compare escrow and tax. Some lenders will underestimate escrow and then it will be adjusted up at closing. Hope this helps. Upen Patel

@Keith Anderson network with property managment companies and realtors in the area you are considering purchasing the TK property and get their opinion on market value and rental prices; offer to pay them for their services or suggest a possible working relationship should you end up purchasing properties. Do not just go by the TK provider's words. Trust but verify!

Just PMed you. Happy to share privately with anyone else that has questions. Keith

What turn-key company are you thinking about buying from?

Account Closed I reacted the same way to the suggestion of putting more down. Just felt like a way to create the perception of better monthly cash flow. I PMed you for the lender's info. Thanks! Keith

I concur with @Alexander A. on the 35-40% down comment. Never heard of it. The 2 homes I own in Dallas are 25% down and 20% down and both closed early without issues. Putting that much down just feels like you are forcing cash flow. If the deal really is that good you shouldn't have to do that I would think. I've worked with a total of 3 lenders, one of them we were going to do a refi but we decided to sell half way so that didn't go through, but I wanted to say that be cautious if the lender doesn't give you a chance to say what rate you want/you think you can qualify for because they make extra money by giving you a higher rate and pocketing the extra that was supposed to go back to you. I have a good lender based in Dallas who works with a lot of investors who shows you his entire process and tells you all the fees up front. I got a loan from him a year after my first house and he was able to give me a much lower rate than my first house. PM me if you would like to get his info.

"So I have now been told • 1. that the 35-40% is to help investors improve cash flow (the original answer) and • 2. the 35-40% down is required since the properties won't appraise (which seems more likely)" I would be running for the hills if I had received this as a response. Either one of them. Find a better provider man, you are wasting your time with that company.

So, just an update for everyone. Since I last updated the thread, I toured 2 of this turnkey operator's 3 markets. When I was in-market and meeting with their director of ops (instead of talking to my "Portfolio Relations Manager," I was told that the 35-40% down suggestion is simply because the properties won't appraise. So I have now been told • 1. that the 35-40% is to help investors improve cash flow (the original answer) and • 2. the 35-40% down is required since the properties won't appraise (which seems more likely) I really like this operator's service level and reputation, and one of markets they're in is a good fit for our strategy. But I've also been vetting another large-scale provider, which has no problem financing properties at 20% down and sells properties at or below market value and typically 5-10% below median home values in their neighborhoods. So I shared these concerns with this turnkey operator: And this was their reply: Now, perhaps I'm losing the forest for the trees. But I'm not banking on appreciation, and I'm not looking for major built-in equity upfront. This felt like a deflection, not an answer. I am considering reaching out to one of the principals of this turnkey operator (who is one of the most visible presences on Bigger Pockets) to see if he can clarify. I'd be very happy paying market value and putting 20% (or even 25%) down, which the other turnkey operator is able to deliver. Without a compelling explanation for why it makes more sense to put 35% down and pay above market value, I'm having a difficult time moving forward with this operator.

@William Hochstedler Thanks! That was the last piece of the puzzle.

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Updated over 9 years ago on 09/29/2015. Most recent reply

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Posts: 87
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Keith AndersonPoster

Investor
Cambridge, MA

Private Lending & Conventional Mortgage Advice

Conventional lending on first rental property -- advice?

Keith AndersonPoster

Investor
Cambridge, MA

Posted August 14, 2015 09:37

We're headed down the path to purchasing our first rental property via a well-known turnkey provider. They've recommended a lender to us, and we're at the pre-qualification stage.

We're likely to buy 2 properties this year, each in the $90k-$150k range. We had planned to put 25% down on each, but the turnkey operator is suggesting 35-40% is more common.

I've been looking for guides to financing rental property and not finding much. Does anyone have any reference material I've somehow missed?

Here are some specific questions we have:

How do you evaluate a lender? There are no mentions of this company on Google or BP, which surprises me a bit given the scale of this turnkey provider and their referral.
How important is it to shop around for a loan on a property like this? If it's important, how can we find a few other solid lenders that are familiar with
Should we try to time pre-quals or loan applications within a tight window to minimize hard pulls looking sketchy on our credit report? I'm wary of proceeding with this first lender ASAP without having others lined up to compare them to.
My wife & I each hope to eventually have 10 loans in our personal names as part of our long-term portfolio strategy. Should I leave her out of this loan application process or is it OK to list her as a co-borrower?

Appreciate any insight or guidance. Sorry if these are obvious; we actually rent, so this is our first mortgage.

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Conventional lending on first rental property -- advice?

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