I thought it would be helpful to have a discussion with a knowledgeable lender abut the current state of investor financing as well as upcoming changes.
Caeli Ridge is a direct lender out of Oregon and has been my preferred lender for the last few years. She is one of the few lenders out there that really knows and understands investor financing and consistently closes transactions for our investors.
I’ve asked her to answer a few financing related questions that I think many investors will find helpful:
What do you see as the biggest challenges to non-owner occupied financing right now?
I’d say the biggest issue facing investors of residential type properties, as it relates to the financing, is lack of knowledge. What you don’t know can hurt you- in fact it can entirely preclude you from reaching your RE goals if they include conventional financing.
Let me begin by saying I don’t want to elicit ‘the deer in the heads lights’ by getting too technical with my answer.
Let’s just say, the crucial need is for education regarding the financing piece of the puzzle of real estate investing. Having an understanding of what underwriters and lenders look for to base their decisions, and then identifying how that algorithm applies to you and your specific qualifications (and needs) is paramount to utilizing the highest leveraging tool at the lowest fixed rate terms ~ literally!
Knowledge of these details could actually realize tens of thousands of dollars in gains (per property). When you take the time to become educated about the fundamental lending rules and guidelines that apply specifically to NOO (non-owner occupied) type loans, you will create more wealth.
How have new Dodd Frank regulations changed things for investor financing?
I believe you are speaking specifically about the new QM (stands for qualified mortgage) rules (aka 2014’s industry freak out J) these new regulatory changes will have zero impact in the investor world of conventional financing- they simply won’t apply.
What do you think interest rates are going to do in 2014?
Ahh my favorite question. In simple terms, rates will almost certainly continue to increase- however let me quantify this further. We have seen rates climb slowly over the course of the last 12-18 months and we expect much of the same going into 2014-15. But with that, it’s important to mention a few details; with rate movement comes rent movement- now granted they aren’t hand in hand, rent increases follow suit typically within a 6-8 month (sometimes longer depending on the market), but as a long term buy and hold strategy you know you’ll level out at least within a year’s time (again give or take) where the rents will catch up to the rates.
Also, and probably more compelling, because I have a unique perspective in this explanation, being an investor myself and a lender I get to see the weighted average of monthly cash flows around the country (average cash flow nationwide after PITI and PM fee (principle, interest, taxes, ins and Property Management) is currently $337/mo. *this data comes from a sampling of 100 closed loans in 2013 from 14 different markets- SFR) coupled with knowing that for every increase in rate of .25%, it will yield an increase in payment of approx $20/mo. (this is based on loan amts of 150k or less- the lower the loan amount the lower the monthly increase), that tells us that even if rates were to increase a full 1.5% of what they are currently and based on the above assumptions, cash flow would still be over $200/mo. Coming off of a RE cycle where there was no such thing as cash flow, even a $200/mo. positive on a long term hold investment is substantial. *note that an increase of 1.5% in rate in a calendar year would be extremely unlikely.
So in closing my official answer is rates will go up in 2014. However keep that in perspective and expect real estate as an investment to continue to cash flow very nicely for quite some time!
What kind of changes in the lending environment do you expect in 2014?
I am expecting largely favorable changes for the year 2014. Keep in mind that lending guidelines are a moving target, and often feel like 2 steps forward and 3 steps back. But here is what I can tell you as of today, January 28.
· Investors now have the ability to leverage up to 85% LTV (only accessible for those individuals with less than 4 financed properties).
· This announcement not made official yet but there is strong indication that we will break the conventional 10 limit glass ceiling with a combination of additional Fannie Mae spots and portfolio products (regarding the portfolio, very competitive terms, though not as attractive as conventional, certainly not as restrictive as private/hard money) that would takes all the way up to 20 dependent on individual qualification.
· Lastly we expect to see a true stated income back on the market some time in first quarter 2014- this will be exclusively for the self-employed individual, w-2 wage earners will not be applicable to this loan program.