Newbie, New Investor Question for Next Properties

[Rachel Kim]

Hello!

I am having difficulties understanding how investors can get more financing after the first or second property. I am not talking about coming up with the downpayment but rather regards to mortgage affordability.

A hypothetical situation when I enter in one of the banks' mortgage affordability calculator:

Annual Household Income: $100,000

Downpayment: $50,000

It says, mortgage amount approved with default insurance is $711,129 with a monthly mortgage of $3,380.

What I don't understand is that, if I wanted to buy a second property of $500,000 with the same household income, how would it work? It seems that a lot of investors are buying a lot of properties with refinancing, but I don't quite comprehend how they can just add more properties (given that they do have the downpayment) with a similar income.

Once I have $700,000 property (3 plex, one of the floors we live and 2 units rented out at $2000x2 = $4000, and the mortgage of $3380) with the same household income, how can one add more properties given that I have the downpayment for the next property (not waiting next 5 years to pay down the equity)?

If would be very appreciated if I can get some clear answers to this. Thank you and happy holidays!

[Andrew Postell]

@Rachel Kim this is a long answer here but I want to communicate here that all banks view investment properties as a riskier investment as compared to PRIMARY homes.  And that is because investment properties foreclose at a higher rate than primary homes.  And if you are a publicly traded bank...your shareholders know that data too.  So we, as investors, target "smaller" lenders because those are more likely to be "investor friendly"...although, it's not guaranteed.

Now, some banks will actually create loans for investors...but other loan types might help us cash flow better.  Generally speaking there are 2 main types of loans for investors: “Conventional” and “Portfolio”

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.

Fannie/Freddie types of loans will be available everywhere and those rules might change SLIGHTLY between lenders. Portfolio loans can run the gambit. Since each lender controls it’s own money you will have to call around to ALL the banks to learn about all the programs. A mortgage broker will help with this some…but even the best mortgage brokers don’t have access to ALL portfolio loans out there.

When you are interviewing potential lenders make sure that you are asking what types of loans they offer.  Also, I did create a list of other questions you should be asking lenders as well:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. When do you start using “After Repair Value” on my property?
3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
5. How many loans can I have with you?
6. Can I change title to my LLC?
7. Do you sell your mortgages?
8. What is your loan minimum?
9. Can you explain to me what your reserve requirements are?

*WHEW*  I hope this lengthy explanation helps but the heart of it is that you can most certainly be approved with cash flowing properties. Thanks!