Financing question: 15 year only option available?

Question

This is my first investment property-- Under contract on a duplex in Lafayette, IN. I ran the numbers assuming a 30 year note w/ 25% down at 5%. (I was recently under contract in Kansas City with similar terms--so, thought it was a safe bet to use these numbers). I am now pursuing financing and the banks and brokers in that area are telling me that I can only get a 15 year term or 15yr w/ a 30 yr balloon since it is an investment property. Is this correct? It is completely jacking up my numbers and blowing my returns out of the water.

If this matters: excellent credit, own our home, first investment property--no other debt, have cash in bank that would cover full purchase (no, we don't want to pay cash at this point).

Thanks for your input.

Andrew Postell · Answer

@Ashleigh T Lambert I think I can provide some assistance here:With investment property lending there are 2 main loan types: "Conventional" and "Portfolio". I guess there are others too...but these are the MAIN types we have as investors. Conventional - I'll define these as loans that come from Fannie Mae and Freddie Mac (if you recognize those names). These loans are all 30 year fixed rate loans. They have the lowest rates we can find and since they are 30 year fixed...they allow us to cash flow better...which helps us qualify for other loans later. The draw back to these loans is that they are more paperwork heavy than the other "portfolio" types of loans....but if you have ever received a loan on your primary home, it's likely that you will go through the same type of paperwork here with conventional lending. Fannie/Freddie money = Fannie/Freddie rules. NOT the bank's own money.Portfolio - I'll define these loans as loans that come from the bank's own "portfolio" of money. Sometimes referred to as "commercial" loans. These loans are a lot more flexible than "conventional" loans. Bank's money = Bank's rules. If they like you, then maybe they will lend to you. But since there is a limit to how much money the bank has access to....their rate will be higher...and usually a shorter term. The most common portfolio style loan in Texas is a 20 year adjustable rate loan. These loans are easier to get but the terms are different.So really what we need to have you do is find a "conventional" loan. That's it. And there are plenty of lenders who write this loan type....again, as long as you fit within the Fannie/Freddie rules. If you don't fit, then you will have to get portfolio financing. I hope this all makes sense how I am describing this. There is certainly a lot more to this but I hope this explanation helps in some way. Thanks!

Marcus F. · Answer

@Ashleigh. I am currently closing on a duplex in Lafayette. I used First Merchant and it worked out great, 30 year fixed, 25% down @5% for duplex. I'm up to three doors now. The prices for for the smaller single homes, 700-900 Square feet, seem to have jumped about 35k in all neighborhoods just over the summer. Also, Just read in the JC that they approved 500 unit build for the city. Lafayette is growing quick. Good luck.

Ashleigh T Lambert · Answer

Thank you all for your help--it has been a roller coaster with that particular property and we had to cancel the deal due to issues with the seller. But, under contract on another and in negotiations with yet one more!

Marcus F. · Answer

@Ashleigh T Lambert Just spoke with, First Merchants Bank, the local Lafayette branch. They do 30 year fixed, up to 10 investment properties. Janene Groft.Also, I stated above that I would "never" take a balloon loan. I should have stated, I would "avoid" a balloon loan if possible. Never say never.

Anthony Wick · Answer

@Ashleigh T LambertDid you mean they’re offering a 30 year amort with a 15 year balloon? As comparison, my LLC is buying a duplex with 20% down, 25 year amort, 4.7% interest, with a 10 year balloon. No 30 year fixed options under my LLC. But I’m pleased with the terms I’m getting.

Marcus F. · Answer

@Ashleigh,I am hesitant to recommend property management, as this is my first rental, but I'm using Cathy Russel's team. She has been in Lafayette for years, her team is very helpful. As of now everything seems to be going well, they are managing some repairs I requested on my new rental. Cathy has great attitude and has giving me confidence in her team. Nikki Strum runs the management side. Nikki basically told me she would spoon feed me on any issues she comes across with the property. Investing from California is a bit nerve racking, and I am a strong believer in the trust but verify mindset. I fly back at least twice a year and plan on retiring there. Also, if you talk to Cathy she can send you daily listing as soon as she sees them, or when she comes across other opportunities before they are listed. What area is your duplex?Loans: I would never do a balloon rate for buy and hold, especially with the way rates are now. I am currently tracking down a local lender for my next investment property. I will post an update here when I find something.Also, have a look at HELOC's, you can get 30 year term, has the purchase power of cash. If you don't want to hold debt on your residence you can always take mortgage out on the investment property after you purchase it with cash/HELOC and then pay the HELOC/cash back. I'm in the sub 80k market over there, so I'm comfortable with that amount of risk, with cash on hand.

Stephanie P. · Answer

30 year fixed is available. I'd find a different lender.

Ashleigh T Lambert · Answer

@Marcus--yes, crazy market but was able to get (what I think) is a good deal. I did look at PFCU--my boss is actually on their board, so I have a pretty good relationship there. HOWEVER, their loan officer stated that they cannot offer anything about a 15 year loan on investment properties. They do have a 15/30 balloon, but can't do a 30 year conventional--just a head's up! Any recommendations for property management--that's the next time on my list!

Shaun Weekes · Answer

You're not required to use a 15-year fixed for an investment property loan. You can use a 30 year all day. If you need any guidance PM me for a referral.

Marcus F. · Answer

I just purchased my first property in Lafayette as well, single family. I was having issues being competitive due to cash buyers. The market is crazy. I eventually decide to to get a HELOC, and used it for the purchase. Worked out great. However, my next I’m going to go with a conventional loan, try Purdue Credit Union. I’m living in California but I’m originally from Lafayette.