Finding the Money is Key
As CEO of KRS Holdings - a rental property management firm serving investors in Central Virginia – earlier this year I declared being bullish on the purchase of rental properties in 2016. My experience and analysis of the Central Virginia rental property market supports my conclusion that 2016 presents a nearly perfect climate for rental property investors … one which may not prove repeatable for decades. What elements make up this unique mix particularly in the Greater Richmond and Tidewater regions? Three in particular:- Low mortgage interest rates.
- Attraction of millennials.
- Upward trending of rents.
Pre-Work – Know Thyself
Before getting underway with seeking financing, start with an assessment of what those OPM folks will look for. After the real estate bust several years ago, lenders are wary enough to make it tough to secure loans for investment properties. Here’s a checklist to start you thinking how to prepare and position yourself for greatest success.- Check your credit score, as it will have a significant if not the greatest impact on securing a loan and the terms of financing. A score of 740 is usually considered the dividing line between paying more or less in interest and fees. Fees to buy down the rate to the level of 740+ borrowers can be as much as a quarter to full two points. Check your credit score for free at myBankrate.
- What level of liquid reserves can you demonstrate that will pay for all personal and investment expenses? Ideally, that will be at least six months of cushion for all rental properties that you own, including the one for which you are seeking financing. Lenders want assurances that short-term vacancies won’t sink your ability to service the debt.
- How much of a down payment are you prepared to make? Private mortgage insurance (PMI) does not cover residential rental properties. Anticipate that you will need at least 20% down to secure traditional financing … more may mean a better interest rate. Non-bank financing may well require in excess of this amount, often 30% or more.
Bank Financing
The good news is that rates are at nearly historical lows and competition for quality borrowers is keen. That means that the cost of borrowing is attractive, plus competition has driven flexibility in mortgage terms. For example, it is common to find 7 – 10 year balloon loans as compared to the more traditional 3 – 5 year terms. The less than good news is the days of fast-and-loose financing are over. Banks exercise much more scrutiny and require prospective borrowers to clearly show the viability of both the borrower and the property to service debt and repay the loan. Start by determining a frame of reference of lender appetite for the type of loan you seek. Meet with two to three lenders and see what non-owner occupied loan programs they offer. Include a bank or two, plus a mortgage broker. Check online lenders as well. Lending requirements vary. A bank may reject you while a mortgage broker may deliver just what you need. Ideally, go to a community bank rather than a large regional or national institution. They are likely to have a better handle on the local market, are motivated to invest locally and may have more flexibility in their lending requirements.Private Lenders
Private lenders can include family and friends. Additionally, there are professional investors who you can find through Google and other online searches. The professional investor category also includes private professional lending institutions. While they may have lending requirements more relaxed than traditional lenders, anticipate higher interest rates and more restrictive terms. That need not be a deterrent if your investment generates positive cash flow and appreciation potential. You may only need private funding for a short time before you are able to arrange conventional financing. On the plus side, the private lending process is generally faster than conventional mortgage financing. Here are a couple of articles that will help you better understand these resources.- Private Money Lenders: Who They Are & How to Find Them
- How to Build Your List of Local Private Money Lenders
Owner financing
With qualifying for credit tightened, owner financing does not have the same less than positive connotation of years gone by. You will need to sell the owner on the idea of financing and your ability to perform according to the loan terms. Prepare your game plan ahead of time including anticipating answers to likely questions of skepticism.Self-funding
This is not a likely avenue to attain 100% financing. However, it may contribute to the liquidity you need to obtain financing and feel confident that your investment is secure with a safety-net in the event of unanticipated vacancies or costly repairs. What might these sources be?- Cash-out refinance of your residence or another property you own.
- Home equity line of credit.
- Cash values of life insurance policies.
- Self-directed investments from your IRA or 401K plan.
- Credit cards.