Question regarding 20% down on rental?

8 Replies

Hi BP!

May have just found a perfect rental in my area but had a quick question regarding the financing (am calling my mortgage specialist tomorrow!).

Long story short....purchase price is 135k and is a short sale. I have 25% down payment in my savings BUT am curious if I will be able to secure a loan if the remaining amount (108k) doesn't work w/ my DTI ratios.

Could a put a lease agreement in place to secure the financing or would it have to work w/ my DTI?

Thanks!

Almost forgot the details!

4bd/3bath build in 06. Is a short sale @ 135. Market rent for this area is $1250. Thanks again for the help!

any help is appreciated!

  1. You'll get a much better interest rate with 25% down vs 20% down on investment property.
  2. DTI must be under 50%. This includes your current house PITI, your payments on your credit report like cars and credit cards AND the new subject property PITI. For example if you make 10k per month and all these payments add up to $4900 you would be at a 49% DTI.
  3. To use the rents from the subject property you must have 2 years landlord experience as evidenced on your schedule E from your federal returns. If you have two years landlord experience then you will be able to use 75% of the gross rents. The underwriter will ask for a copy of the lease and may ask for a paper-trail of the tenants deposit. And of course it must be arms-length tenant meaning not a relative.

In addition to what Ed stated, the numbers you provided look like they could put you in the red on a monthly basis, or only break even.

Have you factored in taxes, vacancy allotments, insurance, repair allotments, and (if applicable) HOA dues? Typically, with all of these factored in, your monthly rent should be a minimum of 1% of the total purchase price. This is just a general rule of thumb, but with all of the potential properties I've run numbers against, this rule has held true.

Originally posted by @Robert G. :
Almost forgot the details!

4bd/3bath build in 06. Is a short sale @ 135. Market rent for this area is $1250. Thanks again for the help!

It's not going to be a profitable rental. You're putting all that cash down and you'll probably end up with almost no cash flow every month.

Let's say you borrowed $108,000 at 5.5%. Your monthly payment would be $613.21. If you figure 50% of your gross expected rent going to expenses (vacancy, management, repairs, capital reserves, taxes and insurance) then that leaves you with $625 before you pay your mortgage and $12.79 after you pay it.

Plus being a short sale it probably needs a bunch of repairs and you'll be the one putting the additional money into it for those repairs.

@Robert

Everyone gave you great answers and like they said this deal doesn't make much sense from a Cash Flow perspective. Plus have you ever purchased a Short Sale? These deals can take 90+ days and depending on the bank and agents involved. can fall through at anytime.

Notwithstanding this particular deal...

I would talk to your loan officer about it. I would make sure that your loan officer is Very experienced in doing investment loans. If not i'd suggest finding someone experienced through a local investment group. Get pre-approved with your lender which will involve submitting your paperwork, income docs, w2's, bank statements, etc. It shouldn't take very long for an experienced lender to tell you firmly if you're approved or not. If not then you would need to look for other options. I would also make sure you talk to a lender that's a portfolio lender. This means that the lender is able to finance and hold their own mortgages and doesn't intend to sell them to other fannie mae lenders. This means they have much more flexibility than other lenders on ratios and other loan terms. If you're still not approved then maybe you can convince the seller to do owner financing.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here