Need Advice on Financing a new purchase

Sarasota, FL · Member since 2024 · 6 posts · 4 votes

Hello everyone,

I'm in the process of securing a loan for a new (my first) rental property purchase. I have already signed the purchase contract. However, I'm facing a dilemma on what loan structure I should strategically opt for. My loan agent has laid out few options for the loan. The purchase price is $410K.

Should I go for 15%, 20% or 25% down payment, taking the current high interest rate situation into consideration? Should I put more money down to keep the monthly payment down and have cashflow? Or keep money in hand for the next purchase and refinance if and when rates come down in future? Just to add context I'm expecting to be at 78% of ARV.

This is my first real estate investing venture after listening to Brandon's book so hoping the experts in the community will help me with some guidance. Thank you!

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Nicole Heasley Beitenman

Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes

Hopefully you can find a lender with lower rates/fees as the others have suggested (although I would be wary of the cheapest lender. I've used the cheapest lender in the past, and they were cheap for a reason). Do you cash flow regardless of the scenario? If so, I'd always put the lowest amount down. The additional funds can be used for reserves, down payments on other properties, or closing costs when you refinance.

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
2y
Koushik,
I am over in Saint Petersburg I see you are over in Tampa so not far! I am not sure who you are using but those rates are extremely high. If you have good credit 720 and above your rate should be around or under 7.75% with only 15% down.
I have seen rates that high but last time I checked it was on a DSCR with low fico scores. If you can go 'Full Doc" another words use income to qualify plus rents it would be worth it to take a look at other options.
I would be interested in knowing what program you are using and the property type.
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Koushik Saha
OP
Sarasota, FL · Member since 2024 · 6 posts · 4 votes
2y
Hi Jason, thanks for responding.
It's a SFH investment property and I'm using a conventional loan program. Most banks are asking for 20% or more. However the rates are nowhere your numbers :)
I have cash saved to put 25% down plus closing cost. But I'm wondering whether it is wise to put more money down for lower interest rates or take a hit on interest rates and keep money in pocket? Whats the key number I should look at when making the decision? Thank you!
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David Ramirez
Investor · Tampa, FL · Member since 2019 · 1k+ posts · 1k+ votes
2y
Hey @Koushik Saha,

This would depend on how much risk you are willing to take, since you mentioned that you don't have much money to spare after purchasing it. I would go for the lowest interest rate because of the state of the market, not knowing if interest rates will go down any time soon. The Tampa Bay market is more of an appreciation play than a cash flow, so I don't really know your ultimate goals with this rental.

By the way, I saw that you are here in Sarasota. I've been hosting a Real Estate Meetup for about two years here in Tampa, and the next one is next week. You are more than welcome to attend; we would love to have you. Make sure you RSVP because we only have 6 out of 100 spots left.

https://www.eventbrite.com/e/momentum-makers-investor-meetup...
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Mark MunsonBusiness Member
Lender · Orlando, FL · Member since 2022 · 440 posts · 300 votes
2y
Hey @Koushik Saha
If you have good credit, your rate should be much lower. I wouldn't necessarily go for 15% down, but if that allows you to use the remaining capital to out preform the cost of the higher rate, then I get it.
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Austin ClarenceBusiness Member
Lender · Phoenix, AZ · Member since 2023 · 136 posts · 32 votes
2y
This pricing seems really, really high. Likely a retail mortgage lender with extremely high margins. I would reach out to a broker, or use the find a lender feature if you do not have one.
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Zachary DealPro Member
Lender · Member since 2023 · 465 posts · 425 votes
2y
Quote from @Koushik Saha:

Hi Jason, thanks for responding.
It's a SFH investment property and I'm using a conventional loan program. Most banks are asking for 20% or more. However the rates are nowhere your numbers :)
I have cash saved to put 25% down plus closing cost. But I'm wondering whether it is wise to put more money down for lower interest rates or take a hit on interest rates and keep money in pocket? Whats the key number I should look at when making the decision? Thank you!
This looks more like some type of non QM or DSCR product than conventional as it has a prepayment penalty. With DSCR loans putting more money upfront can help lower the rate and improve cash flow (DSCR ratio), which should improve pricing.
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Nicole Heasley Beitenman
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
2y
Hopefully you can find a lender with lower rates/fees as the others have suggested (although I would be wary of the cheapest lender. I've used the cheapest lender in the past, and they were cheap for a reason). Do you cash flow regardless of the scenario? If so, I'd always put the lowest amount down. The additional funds can be used for reserves, down payments on other properties, or closing costs when you refinance.
2 Reply
Koushik Saha
OP
Sarasota, FL · Member since 2024 · 6 posts · 4 votes
2y
Hi Nicole, 25% gives me cash flow, 20% breaks even. I will be wary of using the cheapest lender, thanks for the suggestion.
1 Reply
Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
2y
Quote from @Koushik Saha:

Hi Jason, thanks for responding.
It's a SFH investment property and I'm using a conventional loan program. Most banks are asking for 20% or more. However the rates are nowhere your numbers :)
I have cash saved to put 25% down plus closing cost. But I'm wondering whether it is wise to put more money down for lower interest rates or take a hit on interest rates and keep money in pocket? Whats the key number I should look at when making the decision? Thank you!

Reach out to me send me an email it would be easier to have a conversation.
[email protected]727-637-4289
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Amber Stout
Lender · Tampa/Saint Petersburg, FL · Member since 2014 · 356 posts · 148 votes
2y
@Koushik Saha - I would approach this first by plugging the numbers into an investment analyzer whether it's from BP or self created. I have created my own if you would like me to share mine, you can DM me.

Once you can get an idea on your return based on the interest rate and down payment scenarios, I think that will help to decide which is the best option. Happy to walk you through this as well if you'd like assistance.

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Zachary DealPro Member
Lender · Member since 2023 · 465 posts · 425 votes
2y
Quote from @Nicole Heasley Beitenman:

Hopefully you can find a lender with lower rates/fees as the others have suggested (although I would be wary of the cheapest lender. I've used the cheapest lender in the past, and they were cheap for a reason). Do yhttps://www.biggerpockets.com/forums/925/topics/1185311-need-advice-on-financing-a-new-purchase#ou cash flow regardless of the scenario? If so, I'd always put the lowest amount down. The additional funds can be used for reserves, down payments on other properties, or closing costs when you refinance.
Nicole brings up a great point. You want to ensure that your lender is doing their upfront due diligence on the deal, has programs to get the deal done if the final numbers come in different(low DSCR requirements, favorable rent guidelines, etc), and is offering you excellent customer service. The cheapest lender may be the cheapest for a reason and change terms down the road or have difficulties getting you to the closing table
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Brittany MinocchiBusiness Member
Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
2y
As far as the pricing goes, this isn't terrible. I priced your scenario out as a DSCR loan at 75% LTV with excellent credit and am very close to what you posted, slightly cheaper cost in points. Keep in mind that these are with 1 year prepayment penalties. I typically recommend 3 years to keep pricing more favorable but also not lock yourself in longer than necessary. The penalty will trigger upon sale OR refinance. Some lenders call DSCR loans (or other nonQM programs) conventional loans, but the fact that you have a prepayment penalty tells me it's not a Fannie/Freddie conventional loan - they don't allow them. If you can qualify by supplying W2s, paystubs, etc. your rate and/or cost in points may be lower and you will not have a prepayment penalty.
How much to put down depends on how much cash you will have in reserves and what your cash flow preference/tolerance is. With this being your first investment, you want to make sure you have enough held back to cover anything that pops up. We don't know when or if rates will drop any time soon, so it may be worth exploring the 2 and 3 year prepayment penalty options and compare the pricing there. It will lower your rate and help you cash flow a bit more, and if rates do come down after that period is up, then you can look at refinancing.
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