How do you borrow funds in a down economy?

[Daniel Ditto]

I have heard many people say that a down economy is the time to buy investment property. I also see the benefit of low interest rates in an up economy where lending is prevalent. 

I confess my buy and rent experience only exists from 2013 on and that whole time the economy was growing. In some ways I look forward to a recession for buying potential now because I have several flows of income and I see how those would be even more valuable for purchasing other assets when the economy is down. That said I'm a little confused about where you would go for investment loans when lending tightens in a down economy. Is it mostly based on relationships of trust you build during the good year? Just trying to be forward thinking here.

[Chris Mason]

Originally posted by @Daniel Ditto:

I have heard many people say that a down economy is the time to buy investment property. I also see the benefit of low interest rates in an up economy where lending is prevalent. 

I confess my buy and rent experience only exists from 2013 on and that whole time the economy was growing. In some ways I look forward to a recession for buying potential now because I have several flows of income and I see how those would be even more valuable for purchasing other assets when the economy is down. That said I'm a little confused about where you would go for investment loans when lending tightens in a down economy. Is it mostly based on relationships of trust you build during the good year? Just trying to be forward thinking here.

 I'm also on the younger side (relatively speaking) and our "starting point" is about the same. I can share with you a few Fannie/Freddie guidelines that got looser since I entered the industry (ie, relics of the Great Recession being removed), so you can get an idea of what might be ahead of us. I'll also echo others saying "wait and see," since for all we know the next correction will have minimal/no impact on real estate.

• Before - No more than 4 financed properties per person. Now - up to 10 w/ a 720 FICO.
• Also before - You can have more than 4, but you can't do cash out refinances any more. Now - up to 10, cash out allowed.
• Also before - You can have more than 4, but the down payment requirement will be bumped by 5%. Now - up to 10, same down payment.
• Also before - Required reserves 6 months of PITI per rental. Now - Based on unpaid principal balances (UPB) of all investment properties. 2% up to 4, 4% up to 6, 7 through 10 require 6%.

That last one, the reserve change, actually typically winds up being more conservative than the "before" requirement. 

Here's one that impacted primarily owner occupants, but not only them:

• Before - Can't count departing primary residence rental income unless you have 25% equity. People were doing "buy and bail," where you have an underwater 4/2 in XYZ neighborhood that you owe $500k on, but at the Great Recession prices they could buy a new 4/2 in XYZ neighborhood for $300k, and allow the old one to go to foreclosure. Basically, trashing their credit in exchange for a lower minimum payment and being less in debt. Now - no such requirement. 
• Before - every home purchase needs an appraisal. Now - put 20% down on a primary residence, and get it for a price that our computer says is good, and have good credit with a conservative DTI, and the appraisal might be waived entirely (got a couple "no appraisal" transactions wrapping up at the moment, actually).

Again, no crystal ball, but it's not crazy to think that when they look at where to turn the dial to be more conservative, they start by looking at what they'd done in the past to do that.