What Financing Advice Would You Give Your Younger Self?

Question

Every investor remembers making decisions they would approach differently today.

Maybe you didn't fully understand loan terms. Maybe you underestimated holding costs. Maybe you didn't ask enough questions before signing.

These experiences can help other investors avoid the same mistakes.

What's one financing lesson you wish someone had explained to you before your first investment property?

Manuel Angeles · Answer

Great question — and I'll add the lesson I wish someone had drilled into me before my first investment deal: learn to run the math before you shop the loan.

On a DSCR loan, the deal is really decided by one ratio — rent divided by PITIA — and the lender will generally use the lower of the lease or the appraiser's market rent. If you can run that math yourself, with honest numbers for taxes and insurance, you can tell in five minutes whether a property is even financeable, before you fall in love with the house or the rate. I see a lot of first-timers shop the rate first and discover the math problem later, when the appraisal is already ordered and the clock is ticking.

The second lesson is one for the self-employed borrowers out there: keep your deposit records clean from day one. If your income doesn't show up neatly on tax returns, a bank-statement path can be an option — but only if your deposits are consistent, documented, and not tangled up with personal money moving in and out of the same account. Separate accounts and clean records cost nothing and keep doors open later.

And to Dan's point on extensions, which I think is spot on: read the extension language before you sign a short-term loan, not when you need it. Know what the fee is, whether the extension is automatic or at the lender's discretion, and what conditions you have to meet to get it. The borrowers who sleep well are the ones who underwrote the exit and the extension on day one.

The financing never makes a bad deal good — but understanding the underwriting order before you buy keeps a good deal from falling apart at the finish line.

James Jones · Answer

My advice is simple: learn the refi before you buy the house. I buy single-family in Memphis under $100,000, rehab for around $40,000, and refinance at 70 to 80% LTV on DSCR, based on an ARV of $180,000 to $265,000. The rent, $1,395 to $1,950 for a 3-bedroom on Section 8, has to cover vacancy, repairs, CapEx, property management, taxes, insurance, and the loan payment, and pass the 1% rule, or I pass on the deal. Most new investors I see get this backwards: they fall in love with the purchase price and figure out the loan later. Do not do that. Ask the lender which rent they will count, what LTV they will lend to, and what the payment looks like before you make an offer. If the refi does not work on real numbers, the buy does not work either.

Chris Colton · Answer

I am still early in this, so I am answering as a student, not as someone with a track record. The lesson I am taking from this thread is to ask a lender how they underwrite a first deal before I fall in love with a property. I am also learning to check whether the monthly payment fits the rent first, and to let the rest follow from that. That is what I am practicing now, and I am still learning the rest as I go.

Stacy Raskin · Answer

I think if I was talking to my younger self I would say that I will never feel perfectly prepared to invest. It's important to do reading, research and learn about the market that you're going to invest in but at some point, it's time to move forward with action.

Also, that not all real estate agents and mortgage professionals have equal experience working with investors. Working with professionals that are experienced in the real estate investment space can give options and opportunities that can grow a real estate investor's net worth. For example, DSCR mortgage programs are not like conventional loan programs where conventional loan programs are similar across all lenders since the conventional loan guidelines are put forth by Fannie Mae and Freddie Mac. Fannie and Freddie are the government sponsored enterprises that buy conventional loans after closing and they are the ones that put forth the guidelines that conventional lenders underwrite their loans to meet so they can sell them. Because of that conventional loan guidelines are very similar. The loans are also largely underwritten by AUS which is the algorithm that analyzes the data and says if the borrower is conditionally approved. AUS is the same system used by all conventional loan lenders. Sometimes loans can go to manual underwriting depending on the borrower. Conventional loan lenders can have additional guidelines to meet called overlays that can differ between lenders. Conventional loan lenders and programs are very similar because of this.

Conversely, DSCR loans have more variation than conventional loan programs. DSCR loan guidelines can vary between lenders as DSCR lenders set their own guidelines as Freddie and Fannie are not buying these loans so it's helpful to work with a mortgage broker who has access to multiple DSCR mortgage programs. Not all DSCR lenders advertise directly to the public and since loan programs can vary more than conventional loan programs, having more DSCR loan program options can make the difference between being able to do the loan or not. Working with a mortgage broker who specializes in DSCR loans can also make the difference for more favorable guidelines for the investor such as higher LTVs for purchases or refinances, shorter seasoning periods to use the new appraised value and lower credit scores qualifying for a couple of examples on guidelines that can vary.

Also, since business purpose loans such as DSCR and fix and flip loans are not regulated the same way as owner occupy conventional loans and rates and terms can go up at any time up until closing even when nothing has changed on the loan, such as the appraisal coming in lower that affects loan terms, it's important to work with a mortgage professional that's well researched and you feel comfortable with. That will hopefully avoid wasting money and time on a loan that can't close or won't close under the terms discussed.

Real estate investment can be worthwhile for an investor in various life stages depending on the investor's individual goals. Since property values and rents generally go up over time, it's helpful to take action at any age, but the more time invested in the market, generally the longer timeline for increased returns.

Noah Wright · Answer

The one I'd want every first-timer to hear is that your experience gets underwritten right alongside your credit and the deal. Plenty of the lenders I shop tier leverage, reserves or pricing by how many rentals you've owned or projects you've finished, and fix-and-flip lenders especially tend to save their top leverage for people with a track record. Some DSCR programs also won't count short-term rent toward qualifying until you've run one for a while. None of that should scare a new investor off. It just means the first deal should still work at the more conservative terms a newcomer is likely to see, because a closed, performing property is what moves you up a tier later. The first deal gets you the property, and it also gets you the history the next lender asks about.

Dan Beaulieu · Answer

Mine is pretty simple. Stop shopping the rate and start shopping the timeline.

When I was newer I would've fought you over 11% vs 12%. Meanwhile the thing that actually hurts people is the flip that was "4 months" turning into 8. I see it from the lender side all the time now.

So let's look at an example. Say you borrow $200k at 12% with 2 points. That's about $2,000 a month in interest plus $4,000 in points up front. On the 4 month plan you're at $8,000 interest, $4,000 points, and maybe $400ish a month in taxes, insurance and utilities, so call it $13,600 all in. Not too shabby.

Now it goes 8 months (permits, a contractor who ghosts you for 3 weeks, a slow sale... pick one). That's $16,000 interest, the same $4,000 in points, a 1 point extension fee of $2,000 because your loan was a 6 month term, and $3,200 in holding costs. Thats $25,200. Same deal, same rate, almost DOUBLE the cost of the money.

Arguing over that 1% on the rate would've saved you about $1,300 over those 8 months. The timeline cost you $11,600.

So the advice to my younger self is run the deal at twice the timeline before you sign, and read the extension clause like it's the most important page in the stack. It kinda is. If the deal still works at 8 months, you've got a deal. If it only works at 4, you've got a hope.

I'm a lender, fwiw, and the borrowers who do that one thing sleep a lot better than the ones who got the cheapest rate in town.

What's the extension language look like on the loans you guys are seeing right now?

What Financing Advice Would You Give Your Younger Self?

What Financing Advice Would You Give Your Younger Self?

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