This is a follow up to Brandon Turner’s blog article on 8 steps to buying a rental property. The first step that Brandon mentioned is that when you’re going to buy a rental property, it’s a good idea to get pre-approved (if you know you’re going to be buying with financing rather than all cash). It doesn’t do anyone any good if you want to buy a property at $90,000 and find out you’re only pre-approved to buy up to $70,000.
However, if you’re new to the real estate you may have lots of questions running through your head just on step 1, and that’s okay. Everyone has to start somewhere. Here are some questions that I’ve seen posted on the Bigger Pockets forums over time:
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What lender do I work with? Is it better to work with a credit union, a local bank, or a national big bank?
Some people on the forums have indicated that it’s much easier/better to work with a local bank or credit union. Why? You can establish a relationship with a mortgage loan officer and become more than just a number to them. Other people have found good success with a national bank such as Wells Fargo.
Should I get multiple quotes from multiple lenders or just go with one?
If you shop around for mortgage quotes, generally all pulls within a 30 day period of time are treated like one pull, so yes, you can definitely shop around. You wouldn’t walk into a car lot and buy the first car you see, right?
Keep in mind that you generally need a 20-25% down payment in order to buy a non-owner occupied investment property. The lender wants to know that you have some “skin in the game” and that if you walk away from the property and stop paying, that you’re putting your own money at risk.
How do I calculate my DTI ratio? What *is* a DTI ratio?
A “DTI Ratio” stands for “Debt to Income Ratio.” Some additional forum posts:
If I have credit card debt, should I pay that off before trying to get pre-approved? What does my credit score have to be?
Jimmy Moncreif was featured on a podcast where he explained more about what lenders are looking for, and ways on getting them to say “Yes.” I believe that if you have high-interest credit card debt, you should definitely clear that off before trying to get a pre-approval. Credit card debt is treated as “bad” debt, being unsecured. Using credit cards is not a bad thing, holding a balance and incurring interest at 20%+ month after month is what will work against you as a real estate investor.
What is a portfolio lender?
A portfolio lender is called that because instead of selling off your loan to Fannie Mae or Freddie Mac, they keep it in their own portfolio. These are the smaller banks and credit unions I mentioned above.
What if you find a really good deal and need financing but cannot work with a traditional lender? What other options are there?
You typically want to try traditional lenders first for buy and hold because you’re keeping the property (and thus the loan) longer term. But if you just cannot get traditional bank financing, there are other options:
a) Hard money lenders – shorter term loans; typically < 2 years. You could use those to buy a property, fix it up, and then before the end of the term, refinance with a conventional lender.
b) Private lenders – these are people you know or have networked with who are willing to lend you the money from their own pockets (or an investment IRA or 401k). A private lender could also be your parents or another relative who is only earning 1% interest in their savings account and wants to earn more money by investing in the opportunity you bring them.
Note that all three options will more than likely cost you more than a bank loan in terms of interest and give you less of a term (think more like 5 years or less). There’s also other alternate options like buying a house on a credit card, or pulling money from an IRA or 401(k) but those are generally not recommended.
If you’ve done your homework, researched lenders, and gotten your pre-approval, then you’re on you’re well on your way!
Have you taken the first step in buying a rental property? How’d it go?