Bank financing or is there a better way

16 Replies

Hi Everyone! I'm looking to complete an application for traditional bank lending this Saturday so I can start putting a deal together on some of the researched investment properties I've found. I hear about all these creative ways to purchase with no money down and or structure a deal with owner financing...I'm so green at this and want to make sure I'm taking the best steps to reduce as much risk as possible. Before I step up for bank financing, please share your advice on your creative strategy and how you landed your first deal. I'm hoping to duplicate your success if it's truly working for you.

If you're relatively new and can qualify, yes, go with bank financing. It also depends on what kind of investment property we're talking about. I presume hold and rent? Most banks will offer you the same terms, but smaller bank and credit unions may have more flexibility on qualifying you. I want to say on an investment property banks require at least 10% down.

Owner financing is something I would consider once you can't get any more traditional loans. They usually have a balloon payment so you'll have to refinance or sell and they generally have a higher interest rate. You'd still need a down payment for owner financing. They're good if your flipping or holding short term.

I currently have 3 duplexes and 5 houses on traditional mortgages. 

I'm on my 5th flip using hard money from a private investor. It's a high interest rate (10%) but by far the most freedom and flexibility. I can close in 10 days, house doesn't need to appraise, no monthly payments, my vendors get paid immediately, etc. Not all hard money is this way, some can be just as restrictive as a traditional mortgage.

Just this week I was approved for a guidance line of credit from a small bank, which is really exciting. Now I can do flips at 5.25% interest. It's more restrictive than hard money, but more flexible than traditional loan.

But here's the thing, I couldn't have gotten the hard money loan or guidance line when I started out. I didn't have the experience and track record. Frankly, if someone had offered them to me 10 years ago or even 3 years ago, I probably would have ended up in trouble. 

Keep it simple for now, gain experience slowly and safely until you're ready to run. Nothing wrong with traditional loans. Also, if down payment is a big hurdle, you can buy a duplex and move into one side and you'll qualify for an FHA loan which is 3.5% down. That's how I started.

I'm just starting out too and am thinking traditional lending is probably the way I'll go too.  I've got the credit score and income to handle it.  It's a process I'm already familiar with with the purchase of my primary residence.  Being a newbie, I find it comfortable to do so.

it all depends on what your goals are- interest rate, low down, speed, flexibility, etc. 

Welcome to BP.

If you go to a local bank, you should be able to obtain great terms and conditions. Try at least 5-10 banks to get the best out of them.

Private / Hard money lenders are pricy.

Medium decent properties logo jpeg  1 James Syed, Decent Properties, LLC | [email protected] | 618‑406‑9775 | http://www.decentproperties.com

Hi Roberta,

It all depends on your situation- conventional loans are working great for us so far!

For an investment loan, you will need to put 20% down on a single family property and 25% down on a 2-4 unit multifamily, unless you live in a unit. Interest rates are typically about .5% higher than the rate for your primary residence. You will need to have decent credit and income as well to qualify. The banks will want your debt to income (DTI) ratio to be less than 43%- the debt includes any mortgage payments, car payments, student loans and other loan payments along with property insurance and taxes- so basically less than 43% of your gross income goes towards paying off debts each year. After a certain amount of time (depends on who is underwriting the loan- Fannie or Freddie) the income from your property will count as income in the DTI calculation and the mortgage payment will no longer be on the debt side. Most banks will allow you to have 4 mortgages including your primary home, others allow up to 10- depends on the underwriting again. If you are married, put each loan in one name or the other, then you can get up to 20 loans before you have to start looking for other sources.

Hope that helps,

Kelly

@Richard Redding : Hi there, thanks for providing details and best practices! I like your idea of keeping things simple. Big bank lenders won't consider my small lending request of $50k so I'm now researching local lenders or potentially an online lender like "elend"...before I officially take the plunge, it's back to the drawing board to determine the best lender. I'm hoping to land my first deal sometime this year so my new mantra: keep things simple!
Thank you again with the ideas you shared.
Originally posted by @Scott McGhee :

I'm just starting out too and am thinking traditional lending is probably the way I'll go too.  I've got the credit score and income to handle it.  It's a process I'm already familiar with with the purchase of my primary residence.  Being a newbie, I find it comfortable to do so.

 Yes, that is exactly what I was thinking too. I feel I'll get more creative as I go, but starting out maybe traditional financing might be the way to get my feet wet.

Originally posted by @Pete T. :

it all depends on what your goals are- interest rate, low down, speed, flexibility, etc. 

 Single family rentals to start and eventually wholesaling...I honestly would love to retire within 5 years and invest in real estate full time. I love my current job, but love the idea of financial freedom even more!

Originally posted by @James Syed:

Welcome to BP.

If you go to a local bank, you should be able to obtain great terms and conditions. Try at least 5-10 banks to get the best out of them.

Private / Hard money lenders are pricy.

 Great advice! Just now seeing your post!!! I tried a few big bank names and the amount I was requesting was too low for them to consider. So over the next couple of weeks I plan to scout out and apply with a local lender. Thanks for the idea of checking out 5 - 10 lenders since I would've stopped at 2 or 3...

Originally posted by @Kelly N. :

Hi Roberta,

It all depends on your situation- conventional loans are working great for us so far!

For an investment loan, you will need to put 20% down on a single family property and 25% down on a 2-4 unit multifamily, unless you live in a unit. Interest rates are typically about .5% higher than the rate for your primary residence. You will need to have decent credit and income as well to qualify. The banks will want your debt to income (DTI) ratio to be less than 43%- the debt includes any mortgage payments, car payments, student loans and other loan payments along with property insurance and taxes- so basically less than 43% of your gross income goes towards paying off debts each year. After a certain amount of time (depends on who is underwriting the loan- Fannie or Freddie) the income from your property will count as income in the DTI calculation and the mortgage payment will no longer be on the debt side. Most banks will allow you to have 4 mortgages including your primary home, others allow up to 10- depends on the underwriting again. If you are married, put each loan in one name or the other, then you can get up to 20 loans before you have to start looking for other sources.

Hope that helps,

Kelly

 Wow Kelly! That definitely does help! I was unaware of the creative structure you just described!!! I am prepared with the 20% down plus closing costs since I can find SFHs in my area ranging between $30 to $50k. I'm now turning to local lenders since the big banks won't finance such a low amount. I really appreciate your post and the best practices you shared!!!

@Roberta James - glad to help!  One other thing to be aware of, the banks may not lend on something with less than a $50k purchase price, at least that's what my previous lender (Chase) said.  I haven't asked my MB Financial guys since at the moment a house that cheap isn't in the plans.  Before you purchase one, do a search on "Pigs" on this forum- there are some cautionary tales about buying an investment home for something in that price range.  Scared me away from that type of investment!

I don't think Sfh rentals is the way to retire in 5 years, but it has happened before.  Beyond all of the great advice you received numerous members here have discussed strategies to have the seller finance part of the downpayment 

@Roberta James @ Kelly N

Traditional financing has worked for me as well. All the tips Kelly mentioned play an integral part in obtaining that "sweet, sweet" below 4.5%, 30 yr fixed interest rate. I just entered into contract on my 5th brand new SFR yesterday with a 4.375% rate (the highest rate so far on any of my properties) and hope to close in about 2-3 weeks. I carefully study and choose hot rental & purchase markets and I have always had tenants in place before I close. One is on a 2 year lease. I invest out of state in areas that I am familiar with and so far I am happy with the appreciation (in excess of 12.5% for the first six months of this year) and net positive cash flows above 12% on my down payment + CCs. I think that's a decent dividend check each month. I agree with Kelly -- be careful of "PIGS." They are very tempting, but research the market very carefully in terms of crime, schools, vandalism, etc. This will give you a feel for what you are investing in other than numbers alone.

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