Rude awakening with Financing a rental?

Question

All,

For some dumb reason I thought I could by an investment property with great credit and 20% down to secure a 30 year term.  I was told by our Credit union that the max term they will loan is 15 years.

Is that true for all of you guys and gals?  I obviously want the lowest payment but the banks want to put the noose around you with this stuff.

Any advice is appreciated!!  What do you all do?

-Marty

Chris Mason · Answer

Keep making phone calls, 30YF on an investment property SFR with 20% down isn't anything special. Your credit union isn't REI-friendly, no biggie, move onto someone who is. Anyone know any lenders in Indiana they can tag?

David Dachtera · Answer

@Marty Summers,

Before you talk about being hung or constrained by a lender, consider ...

You DO understand amortization, correct? For a 30 year loan of $200,000 at 5%, for example, your payments are mostly interest until about payment 195 or so (about 16.25 years, past the halfway point of the loan's lifetime). Then, they're mostly principal. At that point, you've already paid the lender MORE than the original loan amount.

You'll need to make a LOT of payments before you have saleable equity. Until then, you'll likely owe more than the property's FMV if you go to refinance or sell should interest rates rise.

Remember than when interest rates rise the value of income property goes down because of its reduced ability to pay for (capitalize; hence, Cap(italization) rate) itself. Interest rates have been at historic lows since the crash. When interest rates rise and your loan comes due or you wish to sell, you may find you need to bring cash to closing if your amortization exceeds 20 years.

So, they're actually doing you a favor while protecting their own interests.

Michael J. Beasley · Answer

Hey guys, I have a good lender contact in Indiana if your still on the hunt. Shoot me a PM and I will pass along their details to ya. Thanks and have a great 4th.

Marty Summers · Answer

Thanks guys!   Good information... I am thinking Quicken.com will do Non Owner Occupied 30yr loans.  But don't know for sure yet.

Chris Mason · Answer

That is a fascinating tidbit. I'd never heard that before. Can anyone else corroborate?

Eugene Rogachevsky · Answer

@Marty Summers like @Chris Mason mentioned, keep making calls. Typically investment properties will require 20-25% down and give you a 30 year but I was able to get 15% plus small PMI through a lender in Chicago. PM for contact info. Maybe theyll be able to do something similar in Indiana.

David Dachtera · Answer

Only if you actually are accelerating those payoffs beyond the scheduled payment. Otherwise, you're exposing yourself to the risk of foreclosure, bankruptcy or both.

It's not about avoiding interest, it's about avoiding having to cough up a lump sum just to refinance or even to sell because the amount owed lags the property's market value due to interest rates going up.

Remember also that the longer the amortization the higher the percent of your scheduled payment goes to interest initially.

Dan D. · Answer

Hi Marty,  Credit Unions seem to have issues with going beyond 15 years.  Look to other choices for traditional 30 year options on investment properties.  www.interest.com lets you search for rates in your area from a variety of lenders.  Main limitation might be needing to put 25% down.

As you mentioned, (and David), understanding the mortgage amortization is key and that's why I only do 30 year mortgages.  With rates as low as they are, I want to have as much money at those rates while inflation occurs in the coming years.

Make money of debt, hedge against inflation, and improve your monthly cash flow and leverage simultaneously.

Good luck!

Rude awakening with Financing a rental?

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