Financing first rental

[Jasmine G.]

I am looking to purchase my first rental property. I currently own my primary residence where I am responsible for the mortgage. My husband on the other hand is not tied to the mortgage and has the ability to obtain a conventional l

loan as a first time homebuyer. However, we’d like to purchase the next property as a single-family or single-family townhome. I’m struggling to find ways to find low money down with average interest rates to purchase the rental home. When I speak to finance institutions, I am only offered non-conventional loans for investment properties which require high down payments and significantly higher interest rates. Right now the market isn’t that great but I could see us looking to purchase a multifamily duplex however, in the current market, I’m finding it difficult to be able to have one tenant cover the cost for that property to break even.

[Robin Simon]

Quote from @Jasmine G.:

I am looking to purchase my first rental property. I currently own my primary residence where I am responsible for the mortgage. My husband on the other hand is not tied to the mortgage and has the ability to obtain a conventional l

loan as a first time homebuyer. However, we’d like to purchase the next property as a single-family or single-family townhome. I’m struggling to find ways to find low money down with average interest rates to purchase the rental home. When I speak to finance institutions, I am only offered non-conventional loans for investment properties which require high down payments and significantly higher interest rates. Right now the market isn’t that great but I could see us looking to purchase a multifamily duplex however, in the current market, I’m finding it difficult to be able to have one tenant cover the cost for that property to break even.

 Definitely understand - its a challenging market right now for rates and getting purchases to cash flow

What kind of down payment are you looking at? You can probably find a 20% down DSCR Loan pretty easily, are you more trying to find something even less than that?

[Jaycee Greene]

Hi @Jasmine G.! I concur with Robin's comment about the DSCR loan, but it can be an intimidating process. I'm curious as to the "financial institutions" you've talking to, were they banks? credit unions? HMLs? Also, what type of "non-conventional loans" did they offer?

[Nicholas L.]

@Jasmine G.

i think you've analyzed the market correctly.  most LTRs just don't cash flow right now, and the less you put down, the less chance you have at them cash flowing.  especially if you're looking on market.

[Jasmine G.]

@Jaycee Greene I’ve contacted big banks small local banks and I haven’t quite tried credit unions although I have 2 credit unions for which I have accounts (but my experience is that they aren’t offering that much better terms). I haven’t tried hard money or private money lenders either. So I’m trying to get a feel for what’s out there. I will keep trying to find something tho!

[Jasmine G.]

@Robin Simon I’m looking to put at least 5% down in a loan and use a larger portion of my capital to buy down the interest rate to take off a couple of points. Additionally I want to keep reserves for small cosmetic Renovations as needed. I’m trying to buy with as little money down as I reasonably can with enough to use towards bringing down that interest rate and keep cash reserves. Additionally I don’t want to dip into my personal primary residence rainy day fund. I have my separate allocation of funds exclusively for investment property. I could have easily gotten a home with what I have now back in 2021 :(. But the struggle is real right now…

[Robin Simon]

Quote from @Jasmine G.:

@Robin Simon I’m looking to put at least 5% down in a loan and use a larger portion of my capital to buy down the interest rate to take off a couple of points. Additionally I want to keep reserves for small cosmetic Renovations as needed. I’m trying to buy with as little money down as I reasonably can with enough to use towards bringing down that interest rate and keep cash reserves. Additionally I don’t want to dip into my personal primary residence rainy day fund. I have my separate allocation of funds exclusively for investment property. I could have easily gotten a home with what I have now back in 2021 :(. But the struggle is real right now…

 Yes, understandable.  I think rates will eventually come down (likely next year), so just have to be patient (but right thing to do)

[Chris Seveney]

Quote from @Jasmine G.:

@Robin Simon I’m looking to put at least 5% down in a loan and use a larger portion of my capital to buy down the interest rate to take off a couple of points. Additionally I want to keep reserves for small cosmetic Renovations as needed. I’m trying to buy with as little money down as I reasonably can with enough to use towards bringing down that interest rate and keep cash reserves. Additionally I don’t want to dip into my personal primary residence rainy day fund. I have my separate allocation of funds exclusively for investment property. I could have easily gotten a home with what I have now back in 2021 :(. But the struggle is real right now…

 It will be challenging to find banks that will lend with less than 20% down. If rates do go down significantly, it will be more of a sign of economic instability.

I recommend continuing to save monies until you come up with enough for a decent down payment. The last thing you want to do is have a rental go bad and then lose your primary residence due to a deficiency judgment because of a bad rental property.

[Frank Harrington]

And why isn't an FHA 3% loan available to her? I know conventional would be cheaper cost wise, but isn't her husband eligible?

[Lindsay Davis]

@Jasmine G.,

If you’re constrained by equity, it's going to be tough to find deals that pencil out in this environment. Cash flowing at 5% down was possible about 3 years ago—but that ship may have since sailed.

Now, you’re left with two options: you can either pony up more cash per deal, or you can potentially look out of state for markets with more favorable rent-to-price ratios.

Or…you can wait for rates to decline, but I don’t know how much a 100 or 150 basis point rate cut in the next year will really move the needle.

That said, some firms (usually new construction companies, turnkey providers, etc.) will enter into forward commitments with lenders at institutional rates and then pass cost interest rate savings onto end buyers to entice them to purchase a property. For example, if the prevailing interest rate is 7.5%, a builder could offer buyers a 5.5% rate as a way to make the purchase more affordable. If high rates are your primary concern, you could potentially look around for a similar arrangement.