Buy & Hold Using Traditional Lenders

Is there any other way to finance a buy and hold real estate investment besides using traditional bank financing? There are some other options that come with shorter terms and higher rates or require you to have a more sizable portfolio (>$500,000 loan amount and/or at least 5 underlying properties) but the best rates and terms still come from a traditional bank.

Where Do I Start?

We bought our first out of state investment property in 2007. We took a long break and did not buy our next property until early 2013. We had to jump through a lot of hoops and supply a ton of documentation but obtaining financing for our second and third investment properties was not that difficult. We had to put 25% down but there were no shortage of lenders willing to lend for the two properties we were purchasing. We now had mortgages on three investment properties and our primary residence. I did a fair amount of research before going this route and had read that FNMA would guarantee up to 10 mortgages, so I figured we should be fine buying 3-4 unit buildings for the near term. We had cash for down payments and good credit, so what could go wrong?

Mortgage #5

In anticipation of our next deal, I started making some calls to lenders to check out rates and the programs that the different lenders offered. Everything was good when I described the building we were going to make an offer on until I mentioned we already had four mortgages. That ended almost every conversation. "Sorry we will only lend to someone with less than four mortgages". I believe I talked to at least 10 national or regional lenders and received the same response. I finally got a positive response from a large national lender that they did make this type of loan. So we started filling out paperwork and submitting documents as our offer had been accepted for a 4 unit building. Problem solved.

Your Loan Is...

DENIED. Everything appeared to be in order and our loan had been submitted to underwriting and then we got a call from our mortgage rep saying that underwriting denied the loan. He was as surprised as we were and had not seen this before. Apparently this bank has an additional overlay they apply to those with more than four mortgages. He had never seen it and said the underwriters would not even tell him what specifically we failed to meet. He apologized and we moved on after wasting two weeks.

Now What?

With our time until closing getting shorter everyday, we really needed to find a mortgage. Everyone always suggests trying to work with local banks that keep loans in their own portfolio. Unfortunately, being out of state precluded us from using most of the local banks we spoke to. They required the borrower to be in their region or community. We did find a couple banks that would lend using a 1- or 3-year ARM and another that would lend for a 20-year term. Both options would have worked but neither were as good from a cash flow perspective as a 30-year fixed rate mortgage. I made one last attempt by calling a mortgage broker I found on Zillow. I explained our situation and he promptly got to work. He called back a day or two later and said he had one lender out of the 13 he worked with that would lend to someone with more than four mortgages for a 30-year fixed rate mortgage with 30% down (notice the down payment went from 25% to 30%).

Takeaways

• With good credit and cash for a down payment (and a lot of patience) traditional lending is a very cost effective way to build a real estate investment portfolio. We just got a 30-year mortgage with a 5% rate for a 4 unit building.
• Mortgages 1-4 are a lot easier to find than mortgages 5-10.
• The rates and down payment requirements are lower on mortgages 1-4.
• The lending environment is constantly changing (who will lend, requirements, regulations, rates, etc) so looking for lenders is an ongoing process.
• A good mortgage broker can be very helpful. Ours found a lender when we could not. He actually found a second lender for our situation that was cheaper than the one we previously used.