20 percent down, always? (is it possible to do less?)
Investor · Albany, GA · Member since 2014 · 70 posts · 8 votes
Hello,
Is the 20% down payment guideline a fixed rule across the industry? Or, is it possible to get a mortgage on rental property for a smaller percentage down payment? (maybe 5-10%, or even *gasp* no money down?)
Also, does a lender take into consideration that a property is to be rented, as a factor of repayment? For example if you are obtaining a mortgage on a known rental unit with a proven track record, could a lender factor that into the equation, thereby requiring less down?
Thanks in advance for any insight you can offer me.
If you are getting a loan from a non-portfolio lender and it is non-owner occupied, you will be looking at a max of 75% LTV. Although, I read some guidelines recently indicating that might go down to 70% LTV for non-owner occupied loans.
You could try the smaller banks and if you are credit union member, try that. If you aren't a credit union member, fix that problem today.
You could also look at less formal lending options. Hard money for VERY short term transitional funding, or private debt placement or crowd-sourcing under the new SEC guidelines.
Most lenders will not consider the track record of a rental you are buying. They will consider the rental history of a rental you have owned for more than 2 years and fully document.
If you are getting a loan from a non-portfolio lender and it is non-owner occupied, you will be looking at a max of 75% LTV. Although, I read some guidelines recently indicating that might go down to 70% LTV for non-owner occupied loans.
You could try the smaller banks and if you are credit union member, try that. If you aren't a credit union member, fix that problem today.
You could also look at less formal lending options. Hard money for VERY short term transitional funding, or private debt placement or crowd-sourcing under the new SEC guidelines.
Most lenders will not consider the track record of a rental you are buying. They will consider the rental history of a rental you have owned for more than 2 years and fully document.
@CL Ziegler - I've got one better than that. I once bought a house and walked away from the closing table with a check for $16,000 from the bank. They loaned me extra for the repairs. Of course, it's hard to have good positive cash-flow when you load one up this heavily though. And that happened before the crash, so I don't know if I could pull it off again. Anyway, check with some of your small, local banks in your area. And yes, they will consider the rent as income - at least to some extent. But overall, I would have to say that it will be difficult to get a bank loan for a purchase of investment property with less than 20% down these days - but maybe. Another option is to buy a good fixer with cash or lines of credit, fix it up, and then do a cash-out refi.
In case anyone missed it, credit union, credit union.
If the rental property is rented, the rent can be applied @75% to help Your dti ratio, but I haven't seen that help lower the down stroke.
Your best bet is to shop with out credit pulls, make face to face appointments, sit in the hot seat and follow some of Jimmy Moncrief's podcast suggestions, even though they are about commercial lending, His advice is solid.
John
Depends on several factors and what type of loan you're getting. Secondary market will begin at 75% and go down depending on how many loans you have outstanding.
Portfolio lenders can go to 80% easily for quality properties and borrowers, they will also increase the down payment required as either aspect slides away from being a quality loan.
Rents can be counted after one year with a one year lease, month to month won't fly until you have two years history.
If you have a successful RE management history (years in the business) obtaining a portfolio loan along commercial lines the expected rental income can be used to offset payments.
The only hard and fast rules are in secondary market loans. At a bank or credit union you're looking at what that institution has as a written loan policy, every insured lender has one. They may vary in some respects from one lender to another and depending on other factors they can vary from a policy with compensating factors so long as they stay within the rails of accepted practice.
So, it's important to interview your lender and ask questions. Understand that lenders are selling a product, money, they are in business they aren't there to do favors. Most borrowers, IMO, have the wrong attitude going into a bank, hat-in-hand as if they are begging for a loan. Don't blow smoke at them but consider giving them the opportunity to do business with you! You'll get more out of a lender if they have more respect for you, if you know the game, you know their position and yours, show a win-win that is solid and not on speculation and positive things can happen. It's not so much about the property as it is about you. :)
@Bill Gulley I've heard a lot lately about "Cross Collateralization" where equity in another property is used towards the down payment for another property.
Any possibilty of @CL Ziegler using this angle?
John
I currently have 4 SFR rental properties, I have $0 of my own money invested in any of them, and I have done cash out refi's on every home.
I buy distressed properties with cash from a LOC, rehab them, then get them leased out for 1 year to good tenants. Once I have tenants in place, I hand the bank a copy of the lease along with a loan request for 75%-80% of ARV.
Each of my properties runs at a DSCR of 1.20 or better based on the financing I am requesting from the bank. And 2 of these houses closed last year, so yes it is still possible.
I have walked away from the closing table for each home with;
House 1 $7.5k
House 2 $18k
House 3 $16k
House 4 $12k
Each of the above homes still provide me a monthly cash flow between $200 - $250/ month
Don't get your hopes up tho this is very hard to do. I have a long history with the bank I use. I have 20 years construction experience and do the majority of the rehab myself. And its very tough to find homes to purchase that have enough room in them to do this.
But if you have the ability to purchase distressed properties and rehab them yourself, you should at least be able to get loans for 75-80% of ARV and have little to no money invested, much less than 20%.
I use a small community bank and have never put money down. I would reccomend others to find a small community bank and explain to them your needs and goals and they will work with you as a partner.
Absolutely, my comments above were limited to the conventional approach, we can certainly get creative. Getting a bank to go there isn't easy for those new in the business as Chris mentioned.
Creative financing is the use of assets and in some cases your abilities and experience in facilitating an acceptable financing arrangement in a transaction.
Several ways to lower your entry expenses, seller financing, assumptions, obtaining rights to profit from a contractual interest, cross-collateralization, trading properties, sweat equity from construction or management contracts, acquiring liens, partnerships.....commercial opens other avenues and the list goes on.
Great point John! :)
@Chris Adams , good strategy. You're a genius to get cash out of closing in today's tough financing market.
I started out with 15% down on my first 2 properties. My 5th was only 5% down. So it definitely pays to have a history with the bank. By the time I bought my 5th one I also had a history of 4 years of on-time payments. so anything is possible, it all depends on your circumstances. Just based on the fact that you are asking this question, you are probably looking at 20% down (give or take 5%) if you go through a traditional bank until you build history. There are other options besides a typical bank (hard money, seller financing, etc) that can get you up to 0% down.
So, you're saying you got a 95% LTV on a non-owner occupied loan without other collateral injection on your 5th property out of an insured lender, a bank?
That's pretty hard to comprehend seeing that anything over 80% needs to be insured and usually not available at 95% on a non-owner occupied property, that will be a first in about 30 years.
Where in the world did you get that loan? :)
So, you're saying you got a 95% LTV on a non-owner occupied loan without other collateral injection on your 5th property out of an insured lender, a bank?
That's pretty hard to comprehend seeing that anything over 80% needs to be insured and usually not available at 95% on a non-owner occupied property, that will be a first in about 30 years.
Where in the world did you get that loan? :)
That's exactly what I'm saying. The key is I'm not getting a mortgage. They are loaning the money as an in-house business loan using the property as collateral. No insurance needed. These are sub-$100k SFR's. I'm sure if I was getting a million dollar loan for a huge MF I would probably be looking at 20% down or more. I assume he was asking more about SFR's than bigger MF's.
Also this is the same bank that my entire family has gotten personal mortgages, car loans, etc through for the past 20-30 years. My Father and Brother still use them as their bank (I can't anymore because I moved away and they aren't in my area but I did until I moved away and they did 2 car loans for me in the past). We've done a lot of business with them and they know us well and for a long time.
I don't want to put the name of the bank out their publicly as I don't want people calling them up going "Hey, I hear your giving out 5% down loans on investment properties!". In the beginning they did require 15% down for my first 2 even with that relationship. I also don't have any unrealistic expectations that I can get a 5% down loan anytime I want it. It can change at any time. We also prepare analysis for the bank to look at for each property we purchase to show that we can easily float such a loan. I'm sure if I was showing them a break even plan, I wouldn't have gotten 5%. My expectation though is 10-15% whenever I need it with a decent plan. We also got 5% because we asked for it and low and behold they said yes. To be honest, we were surprised but it never hurts to ask.
I buy distressed properties with cash from a LOC, rehab them, then get them leased out for 1 year to good tenants. Once I have tenants in place, I hand the bank a copy of the lease along with a loan request for 75%-80% of ARV.
Each of my properties runs at a DSCR of 1.20 or better based on the financing I am requesting from the bank. And 2 of these houses closed last year, so yes it is still possible.
I have walked away from the closing table for each home with;
House 1 $7.5k
House 2 $18k
House 3 $16k
House 4 $12k
Each of the above homes still provide me a monthly cash flow between $200 - $250/ month
Don't get your hopes up tho this is very hard to do. I have a long history with the bank I use. I have 20 years construction experience and do the majority of the rehab myself. And its very tough to find homes to purchase that have enough room in them to do this.
But if you have the ability to purchase distressed properties and rehab them yourself, you should at least be able to get loans for 75-80% of ARV and have little to no money invested, much less than 20%.
Chris ... this looks very familiar ... you been reading our business plan? ;-)
Other than market conditions and prices in our areas are such that we are not getting all of our initial down-payment back out these days - we are still in 8-10% - this approach has worked well for us also.
Thanks for clearing that up, your initial post implied getting a real estate loan at 95% LTV, that's what threw us off. Absolutely you can borrow unsecured.
I can put a house on a credit card, that's not a mortgage but that loan would then have no bearing on any loan-to-value or to any down payment either, it would simply be borrowing money to buy a property.
Roy, I believe you posted your business plan before, that's a good way to go! :)
Not sure where people are getting the 75% LTV as the max, I've gotten 80% LTV (20% down) on every property I've bought. All non owner occupied, straight up investment properties.
You'll have to get creative to get something less than 20% down though. It won't come from normal mortgage lenders unless you buy a multi and live in one unit.
I can put a house on a credit card, that's not a mortgage but that loan would then have no bearing on any loan-to-value or to any down payment either, it would simply be borrowing money to buy a property.
It's not unsecure. It's secured by the property (and by us personally). If I default on the loan, the property goes to the bank (or they can come after me personally for the payment). And this doesn't compare to a credit card at all (which is unsecured and generally at high interest). It's at the same interest rate as if it was a mortgage and amortized over the same length as well. Just don't want people thinking this is anything like a credit card or hard money. It's a collateralized loan with a bank (regardless of the terminology you use).
And again to clarify, this *is* a real estate loan (a loan for the purchase of real estate), it's just not a "mortgage".
I'm sorry, but you're contradicting yourself, if any loan is secured by real estate with a perfect security interest, it is a mortgage.
Banks do not make non-owner occupied mortgages at 95% to God or any mortal. What they can do is "book" 80% to the real estate loan side and 15% as unsecured loans and probably making you believe you're a very special customer, actually, you would be to get that. But you didn't get 95% LTV secured on the real estate as they booked the loan.
And yes, if you default, they will take the property to foreclosure, if they get all their money owed from you from that sale, you're good to go, if not, they can come after you for any deficiency.
Actually terms matter, especially in real estate financing, don't want folks thinking some bank makes 95% LTV non-owner occupied loan on the street, that's the issue Justin. :)
I'm sorry, but you're contradicting yourself, if any loan is secured by real estate with a perfect security interest, it is a mortgage.
Banks do not make non-owner occupied mortgages at 95% to God or any mortal. What they can do is "book" 80% to the real estate loan side and 15% as unsecured loans and probably making you believe you're a very special customer, actually, you would be to get that. But you didn't get 95% LTV secured on the real estate as they booked the loan.
And yes, if you default, they will take the property to foreclosure, if they get all their money owed from you from that sale, you're good to go, if not, they can come after you for any deficiency.
Actually terms matter, especially in real estate financing, don't want folks thinking some bank makes 95% LTV non-owner occupied loan on the street, that's the issue Justin. :)
Fair enough, but to be honest, I don't care what the banks do on their back end (or even what they call it) to make it all jive for their purposes. All I know is I have 5 loans (regardless of what you want to call them) that I use to purchase real estate (2 at 15% down, 2 at 10% down, and 1 at 5% down). These loans are in my entity's name (not mine) but I do personally guarantee them so yes I understand they can come after me for any deficiency. I'm ok with that. These loans are from a normal bank. I'm not super special and yes I do have a relationship with the bank but not one that's so special that others can't achieve. And regardless of my relationship, if I stop paying they will treat me like anyone else that stops paying :). And by no means did I say it's easy or that 95% LTV loans are abundant or the norm, but they do exist. I got one. So take that for what you will. And according to others in this post, 0% down (with cash back at closing) exists as well. I haven't gotten one yet but I know they are out there. In the meantime, I'm perfectly happy with what I've gotten so far :)
I was just pitched today on a business loan from my bank when I was opening a new account for my new LLC.
Up to $100,000
Fixed or Variable: Prime + 2.5% - 3.75%
Fee is $250 annual for Line of Credit or $250 for origination if term.
Not sure if its secured with property or personal guarantee. I did see a clause on prepayment penalty for the term loans.
Up to $100,000
Fixed or Variable: Prime + 2.5% - 3.75%
Fee is $250 annual for Line of Credit or $250 for origination if term.
Not sure if its secured with property or personal guarantee. I did see a clause on prepayment penalty for the term loans.
George:
Prime +2.5 ... here that would be the rate on an unsecured LoC (though some are lower ... our corporate LoC is Prime +1).
@Roy N. I did not read your business plan, but someone once said great minds think alike !
Actually my model came from my new construction background and understanding the workings of spec home financing, which I transferred into a market full of distressed properties.
I just happen to be my best client right now.
@Chris Adams Do you have some sort of portfolio loan with your lender that allows you to cash out refi @80%LTV shortly after getting a lease ? I love your strategy!
Thanks @Roy N. for sharing. I was thinking of using it to do some small flips this year. I mostly focus on MFH in my area.