Trying to get a loan to buy the second rental property

[Bobert M.]

I think this is the right category, if not, I'm sure it will get moved.  I was told, "Buying your first rental property will the hardest, the rest will come easy."  Well, for me, buying the first took no effort, and now I'm struggling to figure out how to keep moving forward.

I'm new here, and have spent weeks reading on here, so thanks to all those who contribute their knowledge.  

My question is one that I've read some on, but circumstances vary here and there so I thought I'd post my exact circumstances and see if someone could point me in the right direction.  If we screwed something up, also would love to hear it.  We learn as we go and we have to start somewhere.

1.  My partner and I took out HELOCs on our personal homes and bought a house for 60k.  We fixed it up with 15k and its probably worth about 95 to 100k, so it has about 20k equity (based on what we owe vs rehab costs).  The house on paper is free and clear.

2. The house was bought to be a rental, so it was put into a business name.  We were told by others to do that to avoid liability.

3. Now, we just rented it out, and we want to buy another. This is the hard part. The first one was easy, cash deal, out the door, done and done. A business LOC would be low, in the 20k range if approved, but won't buy a house. Our business credit card if we need it to, will cover rehabbing another house, but not the purchase. I can't get the bank (or any of the 4 I've called, including BIG banks like chase and WF to local credit unions) to give me a pointer as to how to get money to make another home purchase. I was told I can't do a reverse mortgage either because its not a primary residence or its in the business name (can't remember which was the determining factor). And I can't do just regular mortgage because it would be an investment property, so it falls back to the business loans dept.

My last contact with the bank I was told if I found a property I liked and made an offer to purchase, I may (again pending approval) may be able to get a "secured amortized note" for 25 years with rates of 4.25 to 7.85 (hopefully the former), but the balloon would come due every 3 or 5. 

Is a secured amortized note my best bet?  In most books or publications, there are always these creative ways to finance, however I don't see any that apply to me, I don't know anyone with money, no rich friends or investing groups and I live far away from big cities so those types of connections are hard to come by.  I've also heard that you always use OPM (Other People's Money) when possible, which is why I'm stuck on using the bank.   I know banks have to make money, and maybe there are options out there that I have to specifically ask for, so any tips or tricks are welcome.  

[Peter K.]

Hi @Bobert M..  An understanding of what makes a loan commercial vs. residential will help clarify how to get your next property financed.

When most people think of a mortgage, they are thinking of a loan they take out to buy their own home.  Most of these loans are underwritten to meet Fannie and Freddie criteria, and the debt is sold to Fannie or Freddie with servicing rights (cashing your check and being the company who answers the phone when you call, in exchange for a portion of the interest collected) retained by the bank.  That means that the bank puts their own money on the table at the purchase closing to get you the property.  They then transfer the loan to Fannie or Freddie where it is bundled up with a bunch of other loans with similar credit/debt to income/loan to value characteristics and sold to institutional investors as a bond (mortgage backed securities).  We call these conventional or conforming loans.  They "conform" to the standard underwriting guidelines.  The bonds can be sold and resold on the secondary market without any change to the terms of the underlying mortgages, so there is always going to be a market for this debt, though the value to those institutional investors will be determined by future market conditions, just like any other asset.

Typically when we think about commercial loans, it is a loan that the bank or credit union is making out of their own funds--deposits received from customers of the bank--and they do not sell the debt.  This is why underwriting and product offerings can vary so much from bank to bank, they all develop their own loan products to serve their market and make money while limiting risk.  This is also why commercial loans will have a balloon or adjustable rate--a bank doesn't want to commit to anything for 30 years.

Fannie and Freddie were created to enable affordable home ownership.  As such, they only buy loans which were made to people, not companies.  For reasons I don't know, they also buy loans for second homes and rental properties, while still requiring that the borrower is a person and not a legal entity.  Any one borrower can have up to ten properties with mortgages and still qualify for a conventional loan--but not all lenders allow this, many limiting that number to four financed properties.  This includes the borrowers primary residence.

To cash out of your current rental, you are going to have to find a bank which lends to an investor like you.  The issue I see for that is you don't have a proven record making money on rental properties.  Typically two years of tax returns showing the profitability of your investment is required.  There are certainly lenders which will lend to someone in your situation, but you will probably need to call around for a local or regional bank in your area for one with an appetite for that type of loan.  

One option would be to title the house in your name and then take out a conventional loan, and you could do a cash out loan for up to 75% of the value of the property.  There may be some additional restrictions on loan amount since it sounds like  you haven't owned the property very long, but if it has been a year you could do 75%.  There is also something called delayed financing, where if you paid cash for the purchase and improvements (which technically you have) you can then finance up to the LESSER of  the original purchase price of the property or 75% of the current appraised value.

For your next property, you could buy it in your own name, with a conventional mortgage (30 year fixed etc.) qualifying with income from your day job, without any issue.  You would need 20% down payment.

Your mileage may vary, lenders may have additional restrictions, all that jazz.  I didn't even sleep at a Holiday Inn last night.

That turned out longer than I intended...  Let me know if any clarification would be helpful.  I lend (conventional, not commercial) in Wisconsin and would be happy to be resource for you whether you are a client or not.  I love this stuff!