Investor · Knoxville, TN · Member since 2014 · 38 posts · 16 votes
My goal is to get into quite a few rental properties so I want to make sure I start right.
As I read how others have acquired rental properties, they almost always mention that investors are stuck with 4 conventional loans before they have to get into some creative financing and so their advice is to buy the most expensive properties early - in those first 4 slots. But, I think they are talking about a Fannie/Freddy restriction which comes into play as they use banks that sell their loans in the secondary market..
I have a friend with 100+ rentals who told me to use a HELOC to purchase and then refi. My community bank (I don't think they sell to secondary market) seems to agree with this strategy and is pursuing it.
Am I going to run into problems with future financing?
If the refis aren't gov't backed, then are there any restrictions that would hold me back?
Am I going to run into other restrictions; debt to income issues?
Will any of this affect the types of properties I should start with?
Thanks for responding, Dawn. A few more questions come to mind:
What is an acceptable Debt to Income ratio to continue getting loans?
Are reserves from the original HELOC ok? In other words, I'll keep drawing from it to buy the next property, then refi to get out of it and then repeat.
Is Home Federal Bank considered a portfolio lender?
Fannie Mae will actually go up to financing 10 property's. After the initial 4, you will need to put down 25% instead of the minimum 15% for a SFR that is required on the first 4 homes. Normally you want to keep your DTI below 45%, however for the first 4 homes Freddie will go up to 50%, maybe higher depending on the profile (but I have not had much luck with that recently).
In terms of the reserves from the HELOC, you can draw from that for the down payment and it probably won't affect your DTI much since the minimum payment due on the new balance is interest only. If you really wanted to use it for reserves you would need to put it in some type of checking/savings/etc account. do you have any type of 401k, IRA, TSP, or life insurance policy with a cash value? It's usually much easier to use them to meet the 6 month's PITI reserve requirement.
Also, if you buy the homes straight from the HELOC you will not be able to recoup any of the money until you have owned the property for at least 6 months. Conventional guidelines say if there is no lien on the home you need to wait 6 months because it is considered cash out, at that time you can get 75% of the appraised value.
Joe - That was very enlightening. I didn't realize that I would be tying up my HELOC if I used it to completely buy a property. I think using it for the down payment only sounds like the way to go. Thanks for the great comment.
If you can get a conventional fixed rate 30-year loan that is great. Portfolio lenders may do 15 year loans or ARMs only.
Correct. After we hit our limit of 5 Helocs and 2 conventional mortgages, we went with a portfolio lender for two ARMs. Helocs are definitely cheaper in the short term, with no closing costs, just an app fee and maybe an annual monthly maintenance fee depending on your bank.
Re: the ARMs, we first borrowed from our IRA to pay cash for the properties, then refi'd one and put back the cash (if you do that within 60 days there is no penalty or taxes), and put a portfolio loan on the other.