My question is about the 20% down for obtaining my second investment property. I have the cash, but I don't believe it to be wise to put down 20% if I am purchasing a property that already has 20% equity.
My current investment property is financed through WF at around 4% as investment property. Refinanced with them without having to put down 20%, appraisal was $150k and note was a little under $120k.
I have roughly $60k in equity between my investment property and my PR. I also have about $30k in cash. The property I am looking at was appraised for $89k and I would pay no more than $70. My credit is about 740 and my current property cash flows over $350 a month.
Do I have any leverage when working with a lender? I spoke to a WF consultant last night and she said "pretty much" there was no way around the 20% down rule? She didn't sound very intelligent or willing to help so I didn't bother asking her what "pretty much" means. So that's why I'm here. What do you say?
you typically need 25-25% down when buying investment property. they want some skin in the game.
now you can go 6 months later & try & do a cash out refi - some lenders do that - if it appraises.
She is following lending guidelines. Banks like wells have stricter guidelines then a mortgage brokerage. As an investment she is right,20% down is a must.Probably they will ask you for 6 months reserve per property.
When you did the refi did you pull any money out.(cash out refi )that could have been your 20% down for the other property.
with todays rates being so low if i would qualify i would buy as many properties as i can using the banks money.
you can also buy it fix it and if it has equity you can refi again after a year or so.
I didn't pull any money out when I did the refi.
I did ask her what the difference is in financing my last property without an additional 20% down, simply 20% equity, and this new property I am looking at. She said that a refi is different than a new mortgage. But I asked how, because they didn't hold the original note on that property, it was all new to them.
I tend to be a smart*** when I don't like a company's policies.
Maybe I should tell them I just want to refinance this property and change the name to mine. Maybe that'll work..
@Ryan R. . loan originators( including me )work on commission. A lot off times we get a person on the phone asking us all bunch off questions about their personal issues.
A lot off times they ask questions that we can not answer because off lending laws and sometimes we don't answer because off a person not being nice.
In my town i work with investors all the time.(some off them nice and some not) a lot off times i get asked questions that will get me in trouble with the law. unless you know the person very well he or she will just brush you off and wont give you an advice to help you with your situation.
Create a relationship with your mortgage broker. (they know the ins and outs off the lending industry ) you will always need money
That makes total sense Altin. Although I didn't share much personal info with her, I try to keep it professional.
I've worked on commission so I understand what you mean now. When she said "pretty much" there is no way around the 20% down rule, she meant that she won't make as much money if she does the loan at 0% down.
So now I have to find a loan originator who is willing to make less on the deal for the same amount of work; or I have to find alternative means of compensating said originator through means which may be considered outside traditional boundaries..
@Ryan R. I went through the exact same scenario as you and struggled to find a lender who would do anything less than 20%. On my first investment property I took the bank's word for it and at my second property I became wise to the fact that most regional and large banks (especially mortgage banks like Quicken) only interpret Fannie Mae and Freddie Mac lending requirements and operate based on their interpretation.
As I started talking with smaller and smaller banks, I found they are much more willing to lend based on their own decisions rather than interpretation from Fannie or Freddie. My rental properties are in the range of $175-$250k, so getting the funding was more problematic for me due to debt-to-income limitations, however my asset base was more than adequate. The smaller banks I met with were able to overcome this, however the larger banks stuck to the Fannie guidelines and I just kept spinning my wheels with them.
Although I have not seen anyone do less than 20% EVER, if you are going to try, I would give it a shot with a small bank.
@Callum K. So you have never seen anyone do less than 20% ever? That's a little discouraging to me.
What do you think about my property that I refinanced without putting down any cash other than closing costs? Why would they be willing to assume an investment property note with only 20% equity and no cash, but not assume a note as a new purchase? It seems the risk is the same, especially since the property I am trying to acquire was previously a rental property.
Side note: The owner did an owner finance with the last tenant. They defaulted after 2 years. She said she is willing to owner finance but I am timid about that. I know that logically there is no difference between the two.
Refinancing and new purchases are totally different in terms of lending guidelines. The bank does not care what the equity of the property is upon purchase in regards to the 20 percent down requirement. If you want to get in with less out of pocket money, you could get a hard money loan and then refinance, but given the amount you lose in equity due to the increased financing costs...you might as well just make life more simple and less risky and put the 20 percent down. Later you could refinance and pull money out if you want I suppose.
Being a smart *** and assuming other people or company policies are dumb, whether true or not, will only make life more difficult for you and them - especially if they are policies that the lending officers can't change. You'll have a lot more success helping people help you than being advesarial. Who wants to help you more: someone who lost to you in a debate, or someone who likes you?
The mortgage company is going to write the loan at 80% of the lessor of the purchase price or the appraised value. Really, the only way around that is to buy the property from a relative and have them "gift" you the equity but that doesn't usually go over so well. You could also get a loan agreement with a commercial banker to take all your properties as collateral so you can use the equity from each property and turn it into a mini mutual fund of investment properties. Thats fairly tricky and you will have to catch a business banker on a really good day to get somewhere with that idea.
Brian Hoyt Brian I appreciate your response. I think I may have given the wrong impression when I said that I sometimes tend to be a smart*** when I don't agree with their response/policy.
I'm not acting like an **hole or belittling the person I am speaking with; rather I am asking questions that are outside the box. Sort of like when your kids turn questions back on you that you cant logically answer and cause you to think. My last intention is to be rude or arrogant. In fact, I consider myself a gentleman in what is becoming a disrespectful society. I digress.
I've spent some time on these forums trying to learn from y'all and what I have learned thus far is that the truly successful individuals have always asked "why" or come up with ways to get around problems.
As a new investor, wouldn't you be more worried that I would just accept someones advice over the phone about a large sum of money before consulting with pro's, you guys, and asking questions to try and circumvent this 20% down rule?
Yeah, there's nothing wrong with asking questions. Getting around the down payment is the age old question. Once you have a couple properties, coming up with 20% will be much easier as you can use a portion of the positive cash flows untill it snowballs into a really profitable situation.
Is moving into the property an option so you can do owner occupied financing? Some people do this 5 or 6 times to get their RE portfolio going.
Thanks Zachary Dosch i've actually considered that too. My target market is middle to lower middle class, so the properties I have in mind will sometimes be borderline acceptable for my wife and kids.
What is the penalty if I purchase as OO and rent it out before 1 year?
Asking multiple sources multiple questions is almost always the best policy. There is nothing in my response indicating that you shouldn't ask questions.
You stated how you tend to be when you don't like a company's policy...It's hard for me to imagine being that way in a vacuum. I guess I don't understand the context in how you meant it - but still, I am only offering a perspective on how to get the most help from people. I hope you find financing that you desire.
Thanks Brian Hoyt. May I ask how you went about acquiring your properties? Did you put down 20% on each one? OO purchases? Owner Finance? Mix of each?
I know that it will be much easier, emotionally, for me to put down 20% if I know that it's the norm. My assumption, apparently wrong, was that the pro's had some simple techniques to get around this.
@Ryan R. if the owner does owner finance ....i dont understand what the problem is. there you go you can structure it the way you want it.If there is equity you can refi after with a conventional lender.
As far as getting around the 20% and getting advice from someone over the phone that,s where creating a relationship with a mortgage broker comes in place.
Once we know that you mean business and you wont waste anyones time we will give you ton off advice. sometimes free too :)
You're right @Altin Velaj . I guess I'm just scared about doing my first owner finance deal.
@Ryan R. FIND a title company and they will structure it the way you want it. also that could be you next post. there is a lot off topics about that.
I have a brain freeze but owner finance might not even show on your credit report and that might be a plus. the good fellas off bigger pockets could correct if im wrong.
Like you, I have one property and am looking to get a second. I paid cash for mine - no mortgage. My plan is to convert my residence to a rental and upgrade my primary. Then I can do the OO 3-5% down on the new property, although I may still opt to put 20% down to avoid the PMI and extra monthly expense and DTI burden of the higher mortgage payment induced with a smaller down payment.
Like I suggested earlier, the only way around the 20 percent down I have found thus far (and I have looked a lot) is to acquire with hard money and then refinance. But the points on the HML and the monthly interest paid until gettting refinanced eat out more equity than its worth (for me, at least). For example, using hard money, you may be able to get into a 100K property for 10K out of pocket rather than 20K, but then, about 10K of fees will get rolled into the final mortgage, thus creating a loss of about 10K in equity.
It kind of comes out as a wash after you consider lost equity, decreased opportunity costs, etc. But there is inherent risk using the hard money that makes it ultimately unattractive. At any rate, you usually can't find a deal to make hard money-to-refi work that doesn't require a rehab to add value.
I have read on these forums that you can get a loan from a portfolio lender who may not require as much down, but the interest rates are usually higher, loan terms shorter (often in the form of an ARM), and this lender, even with less desireable terms, still has been a white unicorn to me in the DFW area.
After considering the drawbacks to the alternatives, putting 20% down, especially if you have the 20% in hand, is really not a bad deal. Also, like I mentioned in my first post, you could buy it with 20 % down and later refinance and pull out some equity in cash. But even doing that you incure more financing fees. My observations of investors I have spoken with who have owned about 8 to 20+ properties, is that most landlord type investors go ahead and put 20 % down on solid properties. Often times they will look for properties that need light to moderate rehabs to get a discuount. In these cases they may use hard money. Honestly, the one investor I persnonally know who has 20+ properties just buys them cash now. As Zach said, once you get a number of properties, the cashflow snowballs - especially if you put 20% down on them as you go.
OF is a great way to go if the terms are acceptable. Go to a title company and have a lawyer draw up the contract (I have researched this when considering exit strategies for my own property).
It may not show on your credit report, but you will still be legally required to disclose it upon future mortgage applications.
Thanks Guys, this is why I came here, dang good advice. Brian Hoyt I'll be sure and keep a lookout for that white unicorn; I'll send him north if I corral him!