Originally posted by @Tim Roberts:
Good advice from @Amanda G. and @Brent Paul
@Kyle Sprague what is your expertise? What do you do for a living?
Experience is key in becoming a real estate investor and dealing with lenders. A lender makes loans on many different factors. Going big is not necessarily a bad thing but there are specific rules to lending on properties (1-4 units). With the Dodd Frank rules most commercial lenders avoid lending on single properties and would refer you to a residential mortgage lender. The government wants there to be a line between residential and commercial lending if possible.
You can own up to 10 individual financed properties through a residential lender. This is Freddie/Fannie guideline. A residential loan looks at your stability, qualifying income, credit, debt ratio, and loan structure come into play.
Starting in the residential arena is a little easier because if you have stability, good credit, and your debt ratio (45% of income covers your credit debt) then it comes down to the property, appraised value, and down payment (20%-25%). A residential lender can use a factor of market rents to cover your new purchase. That means I can qualify you on someone else making the payment on the investment property. Buying one property is not a bad way to go initially. Then two and three... Yes, it starts small and feels slow but I have investors that I work with that have their 10 properties in 5-7 years. We can talk about how if you are interested...
Once you have one or two individual properties, and you can show a commercial lender you have real estate investment experience you could look to "go big" and buy a portfolio. You still may get push back but what a lender is looking for is if you can qualify for the 10 properties dark. Dark means can your W2 income cover all of your credit debts plus this investment portfolio you want to buy. Commercial lenders still look at the rents and coverage but if you are a new borrower they will want more cash down or shorter terms to limit the lenders risk.
Lending terms on commercial lending are different than residential lending. You usually need 25% down at higher interest rates than residential (maybe 1-1.5% higher) and the amortized payments are cut to 20-25 year terms. Rates are based on 5 year terms, and most often you will have a 10 year balloon. You also will not cash flow as well unless you have a lot of equity in the new purchase.
It really comes down to what your experience is, what you do for a living, and what your investment strategy might be.
How did you come to the decision to become a real estate investor?
Your Friend in the Mortgage Business,
Tim
Hi Tim,
Thanks for all the wonderful insight and time. I am definitely new to the investment side and I would even categorize me as new to property management (to an extent). I'm a hotelier with 17+ years of experience managing properties ranging from 500+ rooms to nearly 2,000 rooms. I assist in overseeing revenues of $200 million+. Although a vastly different world, a lot of similarities, but also so much new landscape to learn, as they're entirely different beasts.
To be honest, I wouldn't be interested in managing the properties, I would outsource that component of it.
I really appreciate the deep dive, it's that much more eye opening as to how much growing I still have in front of me. I am a perfectionist and so getting into this venture, I set a goal these first 12-months of just being a sponge, educating myself and immersing myself in this world as much as possible. Hearing all of the different terminology is scary, but it's also exceptionally educational and inches me closer to my goals and understanding confidently what I'm approaching.
What honestly pushed me the direction to become a future investor is the fact that I've always had an itch at my core. I landed in hospitality the way life took it's course, but I've always been interested in real-estate and just never pursued it. People constantly ask me in my personal life why I'm not in it already and reinforce that I would be great at it, but it honestly scares me to death in the same regard. It's a huge risk if you're not confident in yourself first, which I unfortunately am not. About two months ago, a colleague at work had recommended one of Brandon Turner's books and I'd be lying if I didn't admit it was the catalyst for me to push myself into this world. I don't think I'm anywhere near ready to make a deal, but want to get practice analyzing deals, understanding the language, the roadblocks, the options to resolution, etc. but that's the short-version of how I ended up here. I immediately enrolled to be a Pro so I could dive into the webinars and podcasts and history of this site, a worth-while investment for all of the tools I feel will eventually lead me to actualizing this goal.
Anyway, that's where I'm at. I ponder what I know tend to be basic questions, but it's interesting, as when I search, I'm unable to find answers to what appear to be the obvious sometimes, so thought I would give it a shot with a first post! I can't thank you enough for breaking all of that information down - very helpful! Thank you!
-ks
