best financing for buy and hold ?

Question

im guessing most investors dont lend for buy and hold, so is the only financing for a landlord just a normal bank mortgage ?

Jon Holdman · Answer

Conventional often gives you the lowest rates and longest terms.  But you're limited in the number you can get.  Up to four is fairly easy, 5-10 with some searching.

Portfolio loans break those limits, but often mean a shorter term.  And you will have to do some searching to find the one bank out of 20 that does them.  But they are out there.

Some consider "subject to" to be an ideal form of financing.  You take over someone else loan.  It doesn't show up on your credit and there's no qualifying.  But there is a risk of the loan being called by the lender.  More so if rates start going up.

You might find a private lender (some one you know personally, if its advertised, its probably hard money) might be up for a longer term.

Sellers are another source of financing.

Jon Holdman · Answer

F Foster, Ed Nunno is talking about buying, not selling.  I'm not talking about making these loans, but rather a way Ed might be able to finance a purchase.  I'm not an expert on the SAFE act.  But my limited understanding is that if someone is selling their residence they can provide seller financing without falling under the SAFE act.  I'm sure this varies somewhat from state to state.  But that exemption is included in the model state law for this act.  So, if Ed finds someone who's selling their residence and they are willing to hold a note, is that not allowed?  Though it was 25 years ago, that was exactly the circumstances of my first purchase.

A large percentage of houses are occupied by the owner.  And some of those owners will be willing to hold the note on a sale.

Now, if the purchase is from a fix and flipper or builder, then I do agree the SAFE act kicks in.

Chris Martin · Answer

Also check out this BP post, Financing for buy hold strategy for other ideas.

David Krulac · Answer

@Clay Manship

Not all the deals were FHA, but the ones not FHA were owner occupied conventional mortgages with very low down payments like 5%.

When he started he was single, which obviously is easier to move.  But by the time of the last purchase, he was married with children.  When he bought the 3 and 4 units, the family actually moved into one of the units and lived there for at least a year before moving to the next purchase.

When you settle on an owner occupied property, the lender requires the buyer to sell a doc saying that you are actually going to move in and stay at least a year or some time period.  He signs those docs, actually moves in and stays at least the required time.  Then he moves out and keeps the property as a rental.  So all 7 of his rental properties have owner occupied mortgages on them, which are the lowest down payment, lowest interest rates and fixed for 30 years.

Jon Holdman · Answer

@Chris S.  I started with SFRs.   If I could find more deals, I would buy more.  I would try to get as many conventional, 30 year fixed loans as possible.  If I maxed that out I would either use commercial loans on SFR or apartments.  I would buy apartments if, again, I could find a deal.

I probably would not pursue commercial properties (offices, warehouses, retail.)  That's a different business than residential rentals.  I don't claim to understand that.  I have seen such building sit empty for years.  I wouldn't want to be the owner of such a property.

Clay Manship · Answer

Hi David-

I am intrigued by your friend who did the jumping from owner-occupied to owner-occupied property accumulating a portfolio using FHA financing. Would you mind PMing me some info on how they went about this, and what their strategy was?

Thanks a million.

David Krulac · Answer

@Ed Nunno

Think about this if you want to buy and hold, forever or a long time, then the perfect match of financing would also be long term financing like conventional bank financing fixed rate for 30 years.

Fannie and Freddie allow 10 mortgages, but they also allow your spouse to also have 10 more mortgages (properties should be separately individually titled).

Then you get the "portfolio mortgages for which there is no number limit.

And there of course is the serial owner occupied mortgages, living in a property for a year or so, then moving, keeping he old residence as a rental and buying a new personal residence with the lowest down payment and the lowest interest rate.  I actually know somebody who did this buying,  a condo, a townhouse, a 3 unit, a four unit, a SF house and a farm, buying all as owner occupants and keeping then as rentals after moving to a new place.  All perfectly legal under the terms of the mortgages.  Some of the mortgages were even FHA with only 3.5% down.

Then there is always seller financing and private lending....

Chris S. · Answer

@Jon Holdman  Jon, if I could bother you for a  quick question regarding financing.  Since it seems to be harder to invest as you go. with multiple loans, knowing what you know now, is there a certain path you would take if you were starting from scratch?

For example, would you buy 4 single homes, then multi-units, then apartments or commercial property (since we have to abide by the commercial regulations eventually regardless.)

Or just start with a certain type of investment, like all multi-units, commercial, etc..

Just looking for guidance.. Thanks for any help you can give here!  Chris

Joel Owens · Answer

One thing I would mention is you can run into property insurance issues when an owner is financing you around the existing mortgage.

Generally the mortgage company that is being wrapped doesn't care as long as the payments come in. In the next 5 years as banks clean up the books they might look for owner violations of the mortgage provision and call the loan due as they can relend at higher rates in the current market at that time.

I have talked to people that have actually had the note called for the violation but it is a very small percentage but a real risk. When owner financing if you the buyer are getting non-recourse and no personal guarantee and didn't put much down then you are not losing much.

When you have guarantees or recourse and have put considerable money down you have to have every exit covered to protect your capital at risk as a buyer.

Jon Holdman · Answer

Here's a thread with some good discussion about owner financing:

http://www.biggerpockets.com/forums/49/topics/75000-owner-financing

best financing for buy and hold ?

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