Investment Prop. Loan Affect Borrowing Power for Personal Home?

Question

Hi There,

I'm wanting to get starting in RE investing but feel a bit "stumped" with how to get financing for my first property. Here is my situation.

My wife and I are currently renting a home but would like to buy when our lease is up in May of 2017. I would like to purchase an investment property before then, but do not want any loans I apply for to affect my ability to get a good loan for the home that we'd purchase for ourselves.

Like I said, I'm just getting started so I'm fairly unknowledgeable with the process of applying for a home mortgage in general. I fell like if I borrow money for an investment property, won't the bank be wary of allowing me to borrow even more money for a personal home just months later?

Or, from other people's experience, is there a better way to approach financing for someone's first few properties starting out....?

Thanks so much in advance for any insight that can be provided!

Brandon Reed · Answer

Super helpful @Chris Mason and @Tom S.. Thanks so much for your insights!

Tom,

Great tips about the seller finance loan options. The more I dig into my different finance options, the more it looks like a bank loan may be a viable first option (if I want to purchase my first investment property apart from my first primary residence). We'll see. You're right...hard to beat 4% for 30 years!

Chris,

Really great information...thanks so much for those details. It's an interesting concept that your DTI actually improves as you continue to invest (if you invest wisely, of course). Will definitely check out that article on overlays. Thanks again for your help!

Tim Jones · Answer

@Brandon Reed

Just something to consider:

Purchase a MF property (du-, tri-, fourplex) as a primary residence via FHA (3.5% down, 30yr fixed @ 4%ish). Move in for a little while, learn to be a landlord, set up your systems, and THEN start looking for your primary residence...

Best of luck to you!

TJ

Tom S. · Answer

@Brandon Reed The mortgage brokers on BP can chime in with their requirements but speaking from a personal point of view, where I have purchased both primary residence and investment properties quickly: depends a lot on your income, credit, and savings. For sure, buying the investment property will change your DTI numbers. Some lenders may require 2 years tax returns with the numbers on it (Sch E) because they'll count the rental income. Others may not (small local banks may have more flexibility).

Obviously the better the rental property and the lower price of your potential primary residence, the better. You could at least start reaching out to lenders and run potential to see what you qualify for.

Hope that helps and good luck!

- Tom

Obviously the better the rental property and the lower price of your potential primary residence, the better.  You could at least start reaching out to lenders and run potential to see what you qualify for.

Hope that helps and good luck!

- Tom

Brandon Reed · Answer

@Tim Jones, @Patsy Waldron,

Thanks so much for your replies guys. That was really helpful information to read through. I had heard/read from a few different sources about the idea of using your first primary residence as your first investment property. It's not something that my wife and I really have thought through up until the point, to share a living space like that. But it seems there are a lot of benefits with taking that approach. I'll have to read up some more. Thanks for putting that back on my radar!

Chris Mason · Answer

@Brandon Reed,

A variation of what you asked is a common question around here.

Here's the short version of the answer:

• Rental income is mortgage qualifying income. 
• If you are buying solid cash-flow positive properties, and being honest with the IRS about your income, your DTI should improve as your investing career progresses. 
• [Rent * 75% - PITI] is the calculation that will be used before you've owned it long enough for it to appear on tax returns.
• Once it's on tax returns, that's what we go off of. I'll spare you that math, but TLDR is to be honest with the IRS about your income, and if you've got one-time rehab expenses then keep all receipts/invoices. 
• Neither Fannie nor Freddie require that you wait for two years of tax returns. Some lenders have overlays, negating part or all of everything I just wrote. How overlays kill deals, and why REI should work with REI friendly lenders.

Tom S. · Answer

@Brandon Reed  In resposne to your questions: my preference is always bank loans, as you'll get the lowest rates and longest terms.  4% for 30 years - can't beat it!

When I first started I used partnerships or seller finance loans often.  In retrospect SF loans can be a good way to get started, but risky.  Looking back, I probably overpaid slightly, as the seller will not require an appraisal like a bank will (tip - pay for your own appraisal if going that route).

Also most SF loans require a balloon payment, 5 years is typical.  Well, 5 years goes quick and lots of things can happen.  I remember having perfect W2 income and credit and preparing for the required refinance at 5 years, then the 2008 crash happened.  The banks I had relationships with all said "sorry we're just not doing these loans right now".  Luckily I was able to negotiate extensions, but could have faced foreclosure otherwise.  Doing a standard 15 or 30 year mortgage removes a lot of that risk.

Hope that helps,

- Tom

Patsy Waldron · Answer

Well, TJ beat me to it... But yes, it is a great idea to buy a primary AND investment property in 1! If you buy a 2 to 4-unit, you will still qualify for an owner-occupant loan, which has the best terms all around- low down payment requirement, low interest rates, longest amortization periods (30 years). If you buy a duplex, you can apparently count part of the actual/potential rent from the other side right out the gate to increase the income you can show on your loan application for that first property, which can qualify you for a higher loan amount (thus enabling you to buy a larger duplex or in a nicer neighbourhood). Then, after a year or two, you can buy another property, either another 2 to 4-unit to repeat the same process, or- if you are ready for some privacy and distance from your tenants- a single-family home. By that point, the rental income will show up on your tax return, which makes the process of qualifying for financing for investment properties much, much easier. Banks want to minimize their risk, so if you show them that you are successful at the landlording thing, they will enthusiastically lend to you for 2, 3, 4 properties thereafter.

Investment Prop. Loan Affect Borrowing Power for Personal Home?

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