Investing and Financing Investment Properties - what you NOW HAVE to know Buyer or Realtor.

Investing and Financing Investment Properties - what you HAVE to know Buyer or Realtor.

As a lender with everyone and their uncle wanting to get in and become the "millionaire" next door by buying fix and flips or potential rental properties I felt I should publish the challenges as lenders what we face when trying to help clients buy their first or first of many homes.

 

So the topics I will cover will be:

What if I want to buy a flip?

How many homes can I buy?

What's the lowest down I can do?

What's my rate going to be for one or more properties bought?

Whats the lowest amount I can finance?

What are the Rapid aquisition Rules?

Getting Started...

 

What if I want to buy a flip? 

Several things to know -

~ most homes can't be sold to a buyer after a foreclosure purchase before 91 days if the buyer of the home is using FHA - yes there are exceptions.

~ the contract for purchase needs be written on the 91st day from ownership on title.  Do not confuse buying at an auction. Lenders lend from the date of title transfer which can be several days after you actually paid for the home!

~ In AZ with over 80% of sales being in the FHA price point make sure when you buy the home you build in the cost to carry the home for 120 days from purchase and be ready for 2 appraisals to be done on the home.

~ If the property is being resold for more than 20% of acquisition cost then receipts and 2 appraisals will be required.

~ If the property is being sold for more than 100% of acquisition price then this is very difficult to resell to a financing buyer. As with everything in this article get with your lender a good one and let them run the exceptions ahead of time before committing especially at the auction or bidding on a HUD home!

How many homes can I buy?

~ Well it depends on the buyer and how many homes they already have.

Here is where the confusion lies for many.  The seller servicer guidelines for Fannie and Freddie say a borrower can finance up to 10 homes including their primary.  So a primary, a second home and 8 investment properties.  Here-in lies the problem. It is almost impossible to get one institution to finance more than 4 and combined with more than 8.  There are only a few institutions willing to lend more than four at once and up to the full 10.  It is a specialized market now and not for the faint of heart.

~ The more homes you buy the more you need to put down, the higher the fees and rate!

I tell my investor clients - in the old days at the 19th hole we bragged how many homes we have.  Now bragging rights fall to the guy who was able to finance an investment property at all.  It usually leads to shock and awe and them asking so who is your guy that did this for you?

 

What is the lowest down I can do?

~ Well here I go again... it depends on the situation but generally start at 20% then, 25% and 30% and you must have higher than a 700 fico score.

~ There is little difference in amount down and interest rate, in terms of more down get a huge rate drop.

~ Use the amount down to influence the cash flow and your property acquisition goals

~ Remember the less down the higher the fees and the rate - but that can be offset by the cash flow returns leaving your money to work for you on another property.

~ Down payment will also be dictated by the level of reserves required.  Some lenders want 6 months for each property owned left after the acquisition.

 

 What's my rate going to be for one or more properties bought?

~ If you haven't gotten the theme of this blog post yet - it depends!

The lower down and the more homes you have financed the higher the rate.  The more down and the less homes you own, the lower the rate but not by much.  You need to know that institutions are deliberately making it expensive rate and fee wise to separate the men from the boys.  They want real investors back in the market who have assets, cash and "moxy".  They deem speculators, dabblers and the I just cashed in my 401k clients as a nuisance and one of the reasons that led to the collapse.  While your views may be different as are mine - the fact remains the market has handled it by using price and cost as a deterrent.  One big bank told me "those that can play will play and they bring it to the closing table."

~ Here is a great calculator for helping you decide how much down and how much to pay Mark Taylor Calculators

 

What's the lowest amount I can finance?

~ For most of us out their it is $50,000 loan amount. Primarily due to the new high cost loan rules.

~ Lower amounts really need be paid for with cash, however a few credit unions will lend less than 50k to its members. I have a great contact at Desert Schools in Arizona Tim Vigneaux if you need help.

 

What are the Rapid Acqusition Rules?

So to prevent the markets from over heating and to give certain markets time to recover we have rapid acquisition rules in place.  Again exceptions are in place but generally this means:

~ tho' shalt not finance more than 4 homes in a 6 month period and more than 5 in 12 months.  Some investors are stricter with 4 in 12 months equally spaced out like buying every 2 months.  Some investors if you haven't bought before only allow one in 12 months, and some investors wont let you buy if you haven't got 24 months of rental management experience.

~ Tip to the wise those really amazing low rates you see advertised are generally the ones with the strictest guidelines - as they are looking for the lowest risk, highest cash in, highest credit and least amount of properties owned!

~ So by now you get the idea - get with a lender who actually does this on a daily basis not one who has an investment property loan on a rate sheet who will need your purchase to figure all of this out.

Getting Started...

1. Get with your lender get approved before looking at anything - 2 extra days won't make you miss the market
2. If you intend to get multiple homes make sure your lender runs your approval as if you have acquired all homes.  If you do 2 loans with me and then go to another lender and try and do 2 with them the system very well may kick all the loans out for non disclosure. (This was put in place due to the loop hole a few years ago where people were buying four homes at once and closing on the same day with the same builder in different subdivisions all as second homes!)
3. Be prepared to pay the rate and fees they aren't negotiable anymore its what the banks charge
4. Don't be greedy in your offers make sensible non emotional decisions and listen to your agent
5. Balance cash flow with future appreciation returns
6. Balance Rate of Return with the cost of the money you are using down and to finance
7. Have your agent give you examples comparing auction versus re- sale you might be surprised to find where the real deals are in your market
8. Listen to your Realtor they really do have a ton of experience and please remember (tongue in cheek) "a ton of cash to put down does not investor expert make"

I trust my post on Investing and Financing Investment Properties - what you now HAVE to know as a buyer or Realtor. 

Feel free to circulate, re-post this blog at will - I hope it can help some people to purchase investment homes with clear expectations up front so the chance of frustration, disappointment and lost opportunity may be minimized.  I can be emailed at for questions.

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