First Rental Property - Financing Strategy

9 Replies

Hi All,
I'm in the works of my first SFR deal.. Its a 2bed/1bath home that I plan to add another bedroom to plus a little rehab. I've ran the numbers and they look good (conservatively around $280 monthly cash flow, cash on cash ROI of 13%) however due to the price of the home being lower ($38K plus about $15K remodel costs) i'm having a hard time getting a competitive rate.. Would love to get your thoughts on the following financing options or provide other suggestions..

Options I have received.. 5 year fixed rate (variable after) at an interest rate at 5.75% or 10 year loan at 6.5% interest rate, both have the option to include rehab costs in the loan at 80% of appraisal.. I also have the flexibility to pay for rehab outright if I so chose to do so. Planning to put 20-25% down. 

I wasn't expecting the variable rate, but heard this from two lenders. Is this common for investment properties?

As this deal is time sensitive, quick inputs are appreciated!

Yep, the variable rate is super common for commercial lending on investment properties. A lot of the local banks around me will do either a 3 or 5 year fixed rate with adjustments after that. Some will offer fixed rates if you will go conventional and purchase with your personal name instead of an LLC, but not many in my market will offer fixed rates if you are using an LLC.

@Ariel Nixon - To answer your question -- being offered solely variable rate loans is not common for investment properties.  All of my rentals are on 30-year fixed rate loans. 


I would try contacting other banks/entities to see what fixed rate options they provide.  If they don't offer you fixed rate options, then ask for reasons why and what you can do to obtain said terms.  Perhaps it's due to the relatively small cost ($38k) or maybe it has to do with your credit, income, etc.?  Anyhow, wishing you all the best with your first purchase.

@Ana Marie B. , the second bank I talked to said this was standard practice for commercial loans in the market, it could be my "newbie"ness but I'd never heard of this in real estate investments.. My current income and credit score would put me as a very favorable lendee so that wouldn't be the issue.

Oh I see, @Ariel Nixon . I missed the part that you are seeking a commercial loan. I guess I got confused because you are seeking a 2bd/1ba home. Any particular reason why you need or prefer a commercial loan vs. a residential loan? Are you purchasing via an LLC?

Originally posted by @Ariel Nixon :
@Ana Marie B., the second bank I talked to said this was standard practice for commercial loans in the market, it could be my "newbie"ness but I'd never heard of this in real estate investments.. My current income and credit score would put me as a very favorable lendee so that wouldn't be the issue.

For commercial this is standard in Wichita.  If you get the loan directly in your name as a non owneroccupy you should be able to get a 30 yr loan - but the fees and the PITA (pain in the a.. ) it is to you it may not be worth it.

Ive heard a couple local banks will lock in your loan (or would a year or two ago) for up to 15-20 years - but I think that was for folks with great looking balance sheets and high w2 income and likely no more than a 70% LTV.

If you go down in LTV as time goes on I'd guess that you could refi out and get longer locked in terms. Just ask for them to put a ceiling on how much the loan can adjust for the life of the loan and how much it can jump each adjustment. That should build in some protection.

I agree with you, there Shane! The fee estimates I have received have been extremely higher than anticipated.. I hadn't had a chance to develop a relationship with a local back since I moved to Wichita almost a year ago so I'm working to grow with one to improve this process in the future.. Still looking for "THE" bank, prior experience in banking has made me extra particular in the qualities I prefer in my lenders.

Thankfully I am under contract so I've used this time to think strategy some more. I am leaning towards purchasing with cash on hand and acquiring a loan for the remodel. Once completed, refinancing into a traditional mortgage (still determining the which/time/rate on that piece).. BRRR with all money down is a thing, right? lol.

@Ariel Nixon , Do you know Josh Williams? 

Anyways, I think that a 20 year at about 6% is what I do my SFH at.

i usually pay cash then do a refinance and try to recoup all my investment. Its the BRRR strategy they talk about here on bigger pockets.

This might work for you since you are doing some remodeling to your properties.

_Derek Blades

_In the market for hard money lenders