Financing as starter

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Financing as starter

S Zengin
Member since 2022 · 2 posts · 0 votes

Hi everyone

I am a new member on this forum, I joined to learn new things about real estate an am excited to get to know you all!

I am currently preparing to start out my real estate journey and am planning to buy my first property this year. I have learned a lot about real estate in the recent months, from leveraging to types of mortgages etc. I am really excited to begin my journey. However, recently when I was beginning to finally start I came across an unexpected problem.

In my country(the Netherlands) there seems to be some sort of a rule in which real estate beginners can't 'just' get a loan quickly because lenders fear that the borrower wont pay back because of lack of experience. Normally, when someone applies for a loan to finance a property, the lender would primarily look at the property which is being financed and the revenue it can generate instead of looking at the financial situation individual itself. But in my case, because I am a beginner, they will look at me too. Or to be more precise, they will check my monthly income too.

So here is the problem: I am currently still a student and unemployed. I have however, through crypto investments, made good money. So I do have the means to make lets say a down payment of 20-30% on a property worth 200k. But I just cant get a loan.

A more experienced professional who owns lets say 2 to 3 properties can much easier apply for a loan because they look more ‘trustworthy’ for a lender. But in order to be a professional real estate investor I need to get some loans to help me out in the beginning in order to reach the level of a professional in the first place. So I am kind of stuck.

They have told me that one way for me to still get a loan is through private investors. So what they could do is link my project to other investors and ask them to lend out money to me. In general this is not a bad idea, but the only problem is that they ask for much higher interest rates(4-6%) than the usual 2-3%. This kind of ruins my cash flow I calculated.

I am wondering what I should do next. I really dont want to stop at this point because I really want to continue my journey, but on the other hand my loan applications have been rejected a couple of times. Is there a way for me to get a loan despite being unemployed? Thank you.

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  • Randy Bloch
    Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
    4y

    Your challenge is not just in your country, this quite common practice in the US as well and even if you were to go for portfolio loan (based on property financials vs your personal financials) rates are going  5% in the US vesrsus a traditional mortgage.  I would check your assumption on rates being the usual 2-3%, rates have risen significantly in the last 90 days so not sure this is so typical anymore.

    I think your options are get a job so you can get a mortgage based on personal financials, get a partner that can get a mortgage, or go with private lender. The latter two will obviously impact your ROI. I would definitely take a 2nd look at your cash flow model as if you are factoring 2-3% interest this is likely not possible. Rates will only rise more as central banks look to raise rates to tame inflation.

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  • S Zengin
    OP
    Member since 2022 · 2 posts · 0 votes
    4y
    Quote from @Randy Bloch:

    Your challenge is not just in your country, this quite common practice in the US as well and even if you were to go for portfolio loan (based on property financials vs your personal financials) rates are going  5% in the US vesrsus a traditional mortgage.  I would check your assumption on rates being the usual 2-3%, rates have risen significantly in the last 90 days so not sure this is so typical anymore.

    I think your options are get a job so you can get a mortgage based on personal financials, get a partner that can get a mortgage, or go with private lender. The latter two will obviously impact your ROI. I would definitely take a 2nd look at your cash flow model as if you are factoring 2-3% interest this is likely not possible. Rates will only rise more as central banks look to raise rates to tame inflation.


     Hi Randy, thanks for your reply. Appreciate it.

    I understand where you are coming from. I think interest rates are going up too, but to me it seems kind of scary to take a loan with higher interest rate than 'usual'. I have people in my environment who took out loans with much lower interest rates, therefor I was looking for lower ones too. Also, the loans which were basically offered to me were with a fixed-rate period of just 5 years. If I take a loan with lets say 5% interest rate and after fixed-rate period the rates gets increased to lets say 8%, them I am kinda stuck. Therefor I am also looking for longer term fixed-rate periods of lets say 15 years.

    May I ask you how you dealt with this?

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  • Randy Bloch
    Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
    4y

    well, when you say take mortgage rates are higher than "usual" this is not really accurate statement. The low interest rate of last 5-10yr is an anomoly if look you back historically.  Mortgage rates in 4-7% range are much more common than 2-3%

    There are two nuiance here I would say.  

    1) if you take porfolio loan (based property financials) then you will not be able to fix it for very long.  This is just how those loans work

    2) In US, we have traditional loans that are fixed for 30yr so it is safest way to deal with interest rate risk.  All my mortgage are locked into fixed debt for 30yrs which is good situation in high inflation environment we are in now which will likely cause rising rents

    We are quite late in the real estate cycle and are now are entering a rising interest rate environment as well.  With higher interest rates and higher real estate prices, investors will be forced to take out variable short fixation period loans in order to get a low enough interest rate that will generate the cash flow they require.  This is indeed risky as you have also realized.

    This usually end with people doing just as I described above then rates adjust to say 8% as you have described and they cannot make the payments and they lose the property to the bank. This is where savvy investors swoop back in and buy the property from the bank at deep discount and the cycle starts all over from the beginning. 

    Your options are wait for the cycle to correct or be exteremely picky and only look for property that pencils out at higher rate.  The latter is still a bit risky as you dont know how rates will go.

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  • Doug Spence
    Investor · San Diego, CA · Member since 2016 · 1k+ posts · 975 votes
    4y

    @S Zengin Welcome to Bigger Pockets! This is common in the United States as well. I would absolutely partner with someone who has the experience so you can 1. Get a loan for the property, 2. Gain some experience yourself in the lender's eyes (and gain practical experience!), 3. Gain a possible mentor in the person you partner with! There are lots of people out there with the capital and the experience, but don't have the time or desire to do all the work - that's where you come in!

    Best of luck and keep us all updated on your progress.

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