What financing channel to use on a first investment property?

Question

Hi BP!

What would you recommend in terms of financing for a first time rental property investment (buy and hold) and looking to purchase a second rental the year after?

Situation is as follows: funds of 25% purchase price available with only another 5K-10K more for possible rehab, Credit 770+ score, stable salary with no debt, living expenses 50% of net income . No existing equity or mortgage (has not purchased primary residence) and will not be living in the rental.

Would a safe bet be to get into the first rental with a conventional loan due to the existing interest rates? Would it make any sense to look into any other forms of financing or get creative?

Ruben Parra · Answer

One more question about a first loan. Would it be advisable to start out with one of the bigger lending institutions or banks for the first one? Or would it be better to go to a smaller banking institution and develop a relationship with the intent of getting portfolio loans with them in the future (once I get to 4 rentals)?

Ruben Parra · Answer

@Doug McLeod  you make a very good point on the condition of the property being a problem for conventional loans. Being my first venture into buy and hold, I'm looking for something that needs as little rehab work as possible. The hard part will be finding a good deal!

I understand what you are saying about the hard money purchase, rehab, and refinance for less out of pocket. Sounds like a good strategy to keep enough funds for a 2nd property investment.

Ruben Parra · Answer

@Jerry Padilla  Is the PMI on a 15% calculated the same way as on a loan for a Primary Residence?

Doug McLeod · Answer

@Ruben Parra

It depends on the numbers.  Look at your cash out of pocket and your cash on cash return with both hard money and conventional.  If you are getting a property well below ARV and have more than 10k in repairs to get it rent-ready, you will often find that hard money gives you a better cash on cash return with less out of pocket.  The cash flow per month is usually a little less though because you are financing 75-80% of ARV vs. 80% of purchase price.  But if you can get a 15% down conventional and there is little rehab required, that works too.

I got my first deal for 90k (ARV 110k) on a conventional loan and put $6500 into rehab. Not a great deal, but it cash flows. Many of the really good deals have issues that will prevent conventional financing (must have flooring, AC, stove, etc.).

Amber Stevens · Answer

Our first was conventional with 20% down.

Jerry Padilla · Answer

@Ruben Parra  conventional is a great way to go with low interest rates. For investment properties 1-4 with a mortgage you can go as low as 15% down on a SFR and 25% down on a MFR. You are off to a great start!