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Financing Your First Investment Property

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Financing Your First Investment Property

When it comes to buying a real estate investment property, the first deal is the hardest. I know this from personal experience. I kept talking about buying a rental property for several years until my husband finally took the initiative, found a property, and made me buy it. From a hotel room in Texas, where I was staying on business, I nervously signed a contract and committed myself to buying a “bread and butter” house in Florida. Thanks to rising real estate values, the house has appreciated substantially…leaving me to wish I had bought ten more!

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I know that financing your first investment property can be daunting. It scared me — and I have a mortgage broker’s license, for heaven’s sake! But as they say, it’s usually the things we don’t do that we regret later in life. So if concerns about financing your first property are stopping you from getting started, here are some tips:

Check your credit early for mistakes and items you may need to address. Once you review your credit report, do not take any drastic action without first consulting with an expert. In particular, don’t close old accounts or pay off collection accounts right before trying to get a loan. Either action may hurt your credit score rather than help it.

If you are not eligible for a loan based on your credit or other qualifications, look for an investor partner to go in on the property with you. There are many others out there wishing they owned more real estate who lack the time and/or expertise to find and buy property. There are also “hard money” or private loans for good deals. The interest rates are high but can be worth it if you can refinance or sell the property in a relatively short period of time.

Decide What You Are Buying

All things being equal, second homes may offer better financing, but it will depend on where the property is located and what you intend to do with it. Talk with your tax advisor about how you plan to use the property to decide whether it would be better to buy a second home or an investment property. I am not a fan of stretching the truth on applications. If you are buying an investment property, call it what it is. Whatever you do, don’t buy a property where someone talks you into saying you will live in it when you won’t. There are illegal scams that solicit “straw buyers,” and these can get you into hot water.

Understand the Numbers

Investors have different goals. Some want to buy a rehab property, fix it up, and sell it quickly for a big profit. Others specialize in pre-construction, which means they put a contract on a home or condo in a development before it is built and then sell it for a profit, sometimes before they complete the purchase! Others will buy a home they can rent out, and are happy to break even or make just a little money each month, expecting appreciation to be the pay off. Still others want to buy a vacation home in an area they want to visit. They may use it from time to time and rent it out the rest of the year for a profit. Whichever approach you decide to take, make sure you understand the numbers, including the cost of financing, a down payment, advisor fees, repairs, etc. Be realistic about whether you can afford to make the mortgage payments for as long as it may take to find a buyer or a tenant.

Now that you see the possibilities, here are the steps you will want to take to make things move smoothly:

1. Gather Your Paperwork

Be prepared to provide copies of: two month’s worth of your bank statements, investment account, and retirement account statements (all pages; not Internet statements); the last two pay stubs if you have a regular paycheck job; driver’s license and Social Security card; and bankruptcy, divorce or separation papers, if applicable. If you are self-employed, you may be asked for some or all of the following: business license or occupational license, letter from your CPA establishing two years’ self-employment, last two year’s tax returns, business bank statements, and/or business financial statements.

2. Assemble Your Team

You will want an accountant who understands investment property tax strategies; a realtor or real estate attorney who can help you make sure you use the properly worded contract and include the right contingencies; a mortgage professional with experience in investment properties; an attorney who understands asset protection to help you form the right structure for holding your investment property (often a limited liability company or LLC); and an experienced insurance agent. I strongly believe all of these professionals should invest in real estate themselves since investment property transactions have special nuances.

Advisors with investment property experience can help identify potential problems before they happen. One of the big ones: holding investment property in your own name, warns Rich Dad Advisor Garrett Sutton, an attorney and author of Own Your Own Corporation (Warner) How to Use Limited Liability Companies and Limited Partnerships (SuccessDNA). By doing so, you expose your real estate and personal assets if a lawsuit arises.

3. Get Pre-Approved

Before you start house-hunting, get pre-approved for a loan through a mortgage broker or lender, and request it in writing. That piece of paper can be very helpful when you negotiate the purchase of a property since it gives the buyer greater assurance that you won’t tie up the deal and not qualify.

Now it’s time to dive in! You’ve heard of “analysis paralysis?” It’s a disease I, and many other would-be investors, suffer from. Fortunately, I have a spouse who drags me out of it from time to time. While you don’t want to dive in blindly, if you have done your homework and have found a good deal, at some point you have to just go for it. If you can’t seem to take the plunge, ask financial advisors to help you make progress, get involved with your local real estate investment club, or find an investor who can act as a sounding board.

“The biggest deadly deal disaster of all is hiding behind analysis because you are afraid to pull the trigger on the deal,” warns Peter Conti, author of The Real Estate Fast Track: How to Build a $5,000 to $50,000 per Month Real Estate Cash Flow. “At a certain point as an investor you will need to step forward in the deal and commit.”

To learn more about mortgages and the home-buying and financing process, read more from our experts by visiting our Mortgage Learning Center.

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  • SW

    I have 3 out of state single family rentals I bought at a “Buying Summit” and overpaid for them. I am nearing the end of a 12% interest only bridge loans on all 3. It has been a hard road but all 3 are now repaired and rented. (Long story). Bottom line: where can I get a decent long term mortgage for these rentals? My FICO is 788 but my job income is low. Any referrals / guidance is truly appreciated. I MUST NOT default and need to refi before December.

    • ScottSheldonLoans

      I’d talk to 3 or 4 lenders, ask them about the rental income to help you qualify in conjunction with possibly paying the the principle balances to meet any lender specific debt to income ratio guidelines. Usually its a 45 max debt to income ratio on loans these days. Send these lenders tax returns, w2’s pay stubs and bank statements so they can properly asses your file. This article is likely most relevant to your situation

  • Gerri Detweiler

    Thanks for the comment. That information was from an older version of the article and we have updated it. You are right that lenders are now largely requiring down payments on investment properties unless you can find one with seller financing.

  • ScottSheldonLoans

    Balu, would love to help, not sure I understand what you are asking. The rate lock based on the home occupancy. You should decide this upfront or rather asap though as once the loan is underwritten, they likely will not allow you to change the occupancy.

    • Balu

      Hi Scott
      Thanks for the reply. Yes, I am going to decide upfront what the occupancy is.
      However what I have heard (and it may well be wrong) is that if I declare the occupancy as primary and let’s say due to my job situation, the loan gets rejected (after underwriting), I can walk away from the contract.
      However if I declare it as investment property and the loan gets rejected, I now have to come up with the money for the property.
      Is that true or am I misunderstanding what I heard.

      • ScottSheldonLoans

        It’s my opinion you are reading too much into this. The loan officer you’re working with should work with you to determine how to best structure of the loan. The loan with the same lender more than likely is not going to be able to be changed after the underwriter reviews the initial package meaning you would have to go to another bank if you guys decide to restructure mid-process. Without being intimately familiar with your financial situation there is no real way to give you a definitive one way or the other. Now this is in California that the different story and I can help but if not, you should definitely work with the loan officer to best figure out the scenario for the best outcome.

        • Balu

          Thanks Scott, appreciate your help with this.

  • never by more than you can aff

    I ahve to say anyone buying a 165,000 dollar home making only 43,000 a year needs to get financial advice unless you have a hell of a lot more than 20% down – a rule of thumb is never buy more home that two years income! your setting yourself up for failure if you do!!


      In Hawaii market, most buyers make just north of 100k combined income but the average house is 600k. people still swing it. I never heard your rule of thumb but I did hear of 40% of a months salary. but now it’s acceptable to go higher than that. maybe that rule is a little outdated, when the interest rates were a lot higher? 40% of a months salary @ $43k/yr or 3583/month = $1,433/m – taxes (.15) =$1,218. If in the 90’s when the rates were 6.5-8.5 on the norm, @ 8% it would be $1,210 which is still doable. Hard, but not setting up for failure. AND… I have to say, you’re not helping the OP by making comments that have no solution to her problem. your reply should have been: OP, is the property investment? Is the property qualify for USDA? Not 6 months later on top of it. trolls…

      • John

        I think “never by more than you can aff” was just telling Denise to stay on the safe side, which it’s true if that rule is followed. But, if Denis is making 43k a year and is aiming for a house of about 86k only then Denise will be living in the ghetto. Rule of thumb is to manage your money well. You should know how much you can personally afford. Don’t believe the pre-approval letter. The pre-approval letter is only accounts for bills that are shown in your credit report. It does not take into account your daily expense such as gas, cell phones, life insurance, food/drinks, etc… Rule of thumb is if the pre-approval letter states that you’re qualified for a 200k mortgage, tell the banker/lender to do a goodfaith estimate on your actual monhtly payment including taxes and insurance at $200k. Use that total and add $200 on top of it. The $200 should cover your sewer, water, eletrictiy bills (if you live by yourself and it really depends on where you live) then add an estimate of your personal expenses such as gas, food, leisure, and cell phone bills to it then minus the total by your income to see if you’re comfortable with what you have left. If you still have a few hundreds on hand, don’t be affraid to go for it. We’re human, we always learn to adjust to life.

  • Kali Geldis

    Hi Kelley —

    Here’s a great article we wrote recently on that topic, hope it can answer some of your questions. Your mortgage officer may be able to answer some of your questions as well, since they can be highly specific to how your current investment properties are held and how they were purchased.

    Hope this helps!

  • Sue Graham

    I have friends who bought a house for 40,000 on auction. They used their own personnel money for purchasing the home and have worked to fix it up. They now want to take out a mortgage on the home. It is probably worth 100,000 now. What steps should they take? Should they put the home in their companies name? Should they get it appraised before going to a mortgage lender.

    • Gerri Detweiler

      I would suggest they meet with a trusted lender who regularly finances investment properties and who can guide them through the process.

  • Cathy

    Trying to find a lender that will finance a manufactured home as rental property. Any suggestions?

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