Getting pre-approved for rental property

[LagunaLauren]

I bought all my properties personally and then had my attorney put the deeds into separate LLCs for my personal protection. (So my tenant can't sue me personally if they slip and fall, etc...). Check on the laws in your state, but protect yourself from any frivolous law suits when dealing with rental properties.

 

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[MonTexan]

Some good advice in the above posts. If you're getting into a property that requires heavy rehab, your best bet will be private/hard money. Pay cash, get it rehabbed and rented, then go for conventional financing.

The hardest part is feeling *confident* that the permanent financing will be available to get you out of the hard money.

Bankers will "yeah, yeah" you all day and then renege when you bring them the actual deal. This is why the relationship is so important. Get to know your small portfolio lenders or credit unions as they're the ones who can do these deals. Forget about the big banks....

I had to close my first three properties personally. I just put an umbrella policy in place for liability. After developing a relationship with my banker I started closing deals in the name of my LLC and eventually moved all properties under LLC's.

Closing in your name and personally guaranteeing is often what it takes if you want to get in the game. No risk = No big payday.

 

[MonTexan]

Ah ok, averaging 12.9% and 5-8% up front for closing costs right now. You have to be getting a serious deal for this type of money to be worth your while, but yet I still hear of these deals closing all the time.

Cheers,

- Hakrjak

Those numbers are accurate for hard money, but I wouldn't immediately lump all private money in that range. There are many people out there that aren't comfortable with the roller coaster stock market and therefore have big $$ sitting in CD's and money market earning a pittance.

By educating them about real estate and securing them with a 1st lien position, many will throw money at you for a 10% return. I've paid 10% plus 1.5 points on my last 9 money partner deals and 10% with 0 points on my two most recent deals.

Be careful ruling out hard/private money because it's "too expensive!". If the deal still makes sense, who cares what the interest rate is?

 

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[MonTexan]

BTW - by paying 10% + 1.5 points on money held less than 6 months, my investors are getting 15-20% annualized ROI on every deal...think they want me to keep buying houses??

 

[SaraK]

I am ready to get serious about buying my next rental property and need to find out what kind of financing I can get. Is there any difference in getting pre-approved for a rental property loan as opposed to getting pre-approved for an owner-occupied loan? What is the process?

Ironically, I have never gotten a loan myself before. When we bought our house my husband (at the time) handled all that and my first rental property was all cash. So I am learning. But so far everything I am finding in my research is about getting financing on a home you're going to live in, which is what the masses do. Any advice you can provide specific to investors would be very much appreciated!

Thanks,

Sara

 

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[hakrjak]

You'll need at least 20-30% down, and a FICO in the 720+ range before anybody will consider lending you money on a non-owner occ right now.... Most banks are not lending for investment property at all at the moment.

Some here have suggested shopping the local banks, but I've done that and haven't found anybody who will lend right now. I know some guys here have been successful, but I've only heard of success when they deposit something like $100k+ into the small bank to encourage the small banker to work with them.

Cheers,

- Hakrjak

 

[andviv]

getting pre-approved is the same process for primary residency or investment property.

as hakrjack said, the conditions are different. more money down, more conditions.

do you happen to have an account with a credit union? check and see what they offer.

also, what are you planning to do? a rental, no rehab needed, buy and rent right away, or a place that needs rehab to get ready to go? This will affect the conditions as well.

check the investment groups in your area and talk to people there, maybe you can get in touch with private lenders to see what terms they are asking for. you could buy with hard money, get it ready and rent it, and then look for refinancing with a conventional loan once the property is bringing money (positive cash flow and experience will help a lot with the loan approval process)

 

[SaraK]

Thanks for the input. I am a member of a credit union so I will look into that. I have really good credit so that shouldn't be a problem, and I should be able to swing the 20% down payment for the type of property I'm looking at. I prefer a property that doesn't need much fixing up, but that's hard to find in the price range I'm looking at

 

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[SaraK]

Also - will it make a difference if I am buying the property through my LLC instead of me personally? I imagine they'd want a personal guarantee on the loan, but I want to hold the property in an LLC for asset protection purposes.

 

[andviv]

what I found out a couple of years back was that LLC funding required something like 40% to 50% down... and they will probably ask for personal guarantees as well if the LLC has not been working for a couple of years (tax returns) and is profitable.

Things have probably changed since then... and my memory is not good anymore

 

[hakrjak]

Also - will it make a difference if I am buying the property through my LLC instead of me personally? I imagine they'd want a personal guarantee on the loan, but I want to hold the property in an LLC for asset protection purposes.

Unless you pay cash, most of the time you can't buy with your LLC.

You may be able to transfer the deed to your LLC after the sale occurs, but there is much debate about that.

Let us know your experience as soon as you apply at some banks. It's been 6+ months since I've tried to get a traditional bank loan, so I'm interested to know the latest pulse on the banking environment for investors!!

Cheers,

- Hakrjak

 

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[NoMoneyDown]

I'm in the same boat as harjak (more parallel universe, hak!). Lots of belt-tightening in the loan business these days. Another option would be to seek out a very experienced mortgage broker as it's their job to hunt the best loan for your situation. Of course, you can always go down the PML/HML path and refi afterwards, but that has its own set of thorns.

 

[hakrjak]

I'm in the same boat as harjak (more parallel universe, hak!). Lots of belt-tightening in the loan business these days. Another option would be to seek out a very experienced mortgage broker as it's their job to hunt the best loan for your situation. Of course, you can always go down the PML/HML path and refi afterwards, but that has its own set of thorns.

PML/HML? (An acronym I don't know?)

Also remember that refi's are now limited by Fannie/Freddie.... You must hold the property for 6+ months before they'll allow you to refi it -- Whether you've paid cash or not....

Cheers,

- Hakrjak

 

[Cat Man Du]

I am ready to get serious about buying my next rental property and need to find out what kind of financing I can get. Is there any difference in getting pre-approved for a rental property loan as opposed to getting pre-approved for an owner-occupied loan? What is the process?

Ironically, I have never gotten a loan myself before. When we bought our house my husband (at the time) handled all that and my first rental property was all cash. So I am learning. But so far everything I am finding in my research is about getting financing on a home you're going to live in, which is what the masses do. Any advice you can provide specific to investors would be very much appreciated!

Thanks,

Sara

Why not mortgage your existing rental property and use that cash? May be much easier. :huh2:

 

[kwerner]

Sara - Just out of curiosity, what's your plan with buying rental properties?

Are you looking to hold them indefinitely for cashflow or do you plan to hold them for a few years then sell or something else?

If it's for cashflow, have you considered doing Lonnie Deals with mobile homes?

 

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[CactusWren]

Sara, if I remember correctly you are in AZ. Just last year, I looked into Bank of the West. You can buy up to 4 through them, I think.

 

[Runum]

I bought all my properties personally and then had my attorney put the deeds into separate LLCs for my personal protection. (So my tenant can't sue me personally if they slip and fall, etc...).

Forgive me if I don't understand, why does an LLC prevent someone from sueing you personally? In this litigious society I think anyone could sue you if they want to and can find an attorney to take the case.

 

[phlgirl]

I would start by calling 3 big banks and three small banks. Schedule a time to sit down with someone, at the smaller banks. In my experience, most of the big banks are very clear about their rules - so face to face time isn't necessarily going to help much.

Explain exactly what you are looking for, tell them about your experience, credit and the type of property you are looking to acquire. Ask them what LTV (% of value) they are willing to loan? What are the rates? Fixed? 30 years?

The loans are out there but definitely tougher to find. We have investors who are getting short and long term bank financing on investment properties. It will be to your advantage that you do not yet have any properties in your name. If you find the right bank and the right type of deals, you should be able to get up to 10 properties in this market.

LLC or no LLC - we found we were unable to get financing in the LLC. Instead, we contribute all properties to one of our LLCs, at year end, for taxation purposes. Some people swear by the coverage of an LLC, others choose different levels of insurance. LCC will also often make your insurance premiums higher (at least in PA and FL).

Good luck! Great time to buy!!

 

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[BuffaloBill]

I have gone the same route as MonTexan. The first 4 properties were in my name. At that time I formed an LLC and refinanced one of the properties into it. I had to pay down the first note another 20% just to do this. A new LLC with no track record is a risk for them, so they want to see alot of equity. It will cost alot of money to get established but they seem to want to work with me. I have a property now that I am ready to refi with this lender. It is owner financed, just completed rehab, and rented. Now I will get a commercial loan on it, have some capital for the next one, and continue my relationship with this lender. As my deals get bigger, this will prove priceless.

 

[LagunaLauren]

Forgive me if I don't understand, why does an LLC prevent someone from sueing you personally? In this litigious society I think anyone could sue you if they want to and can find an attorney to take the case.

Laws may vary from state to state, but a LLC is just that-Limited Liability. If the deed to a property is in an LLC, then if someone drowns in a pool on that property, (god forbid...), then I am not personally responsible. I carry a lot of insurance on my properties, but as a worst-case scenario, the assets and value of the LLC could be at risk, but my personal wealth and assets are protected. I have separate LLCs for each property. (If you have several properties under one LLC, they could potentially all be at risk from a tenant at one property.)

 

[MonTexan]

Laws may vary from state to state, but a LLC is just that-Limited Liability. If the deed to a property is in an LLC, then if someone drowns in a pool on that property, (god forbid...), then I am not personally responsible. I carry a lot of insurance on my properties, but as a worst-case scenario, the assets and value of the LLC could be at risk, but my personal wealth and assets are protected. I have separate LLCs for each property. (If you have several properties under one LLC, they could potentially all be at risk from a tenant at one property.)

Are you using a "series LLC" to accomplish this?

I always thought the gurus who said they held EACH property in a separate LLC were full of BS (for SFH's at least) as it's just not practical to have 25 different check books, business credit cards, etc. and especially to prepare 25 different tax returns.

As I understand it though, you can now hold multiple properties that are insulated from each other but would only require a single tax return through the use of a series LLC. Am I correct with this??

 

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[Runum]

Laws may vary from state to state, but a LLC is just that-Limited Liability. If the deed to a property is in an LLC, then if someone drowns in a pool on that property, (god forbid...), then I am not personally responsible. I carry a lot of insurance on my properties, but as a worst-case scenario, the assets and value of the LLC could be at risk, but my personal wealth and assets are protected. I have separate LLCs for each property. (If you have several properties under one LLC, they could potentially all be at risk from a tenant at one property.)

Agreed. However, just because you are not personally liable doesn't mean you can't get sued and won't have to spend money to defend yourself. Not saying an LLC is not worth it, just saying that an LLC cannot prevent a lawsuit.

 

[LagunaLauren]

Agreed that no one is completely protected from personal lawsuits. Gotta do whatever you can to protect yourself as much as possible. Lots of litigious people out there. I don't currently have a series LLC but have been meaning to ask my attorney more about it. And yes, it is a pain in the butt setting up, having, and keeping track of so many LLCs, especially at tax time.

 

[Bilgefisher]

Not saying its the best method, but I personally own my 2 rentals and manage 100% with the LLC. I have an umbrella policy for them.

As far as picking them up, I was able to purchase with private money then refi into a traditional loan. The govt has many incentives for banks to allow people to refi out of higher interest rates into lower ones. This was at the beginning of 09 and with the ever changing rules can get very dicey. Actually cost me 1 property, but its still another option.

 

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[SaraK]

I'm in the same boat as harjak (more parallel universe, hak!). Lots of belt-tightening in the loan business these days. Another option would be to seek out a very experienced mortgage broker as it's their job to hunt the best loan for your situation. Of course, you can always go down the PML/HML path and refi afterwards, but that has its own set of thorns.

What is PML/HML?

 

[SaraK]

Why not mortgage your existing rental property and use that cash? May be much easier. :huh2:

It was under $40,000, can't get a loan for that small of an amount. That is why I paid cash in the first place.

 

[kwerner]

What is PML/HML?

Private Money Lender / Hard Money Lender

:smx9:

 

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[hakrjak]

Private Money Lender / Hard Money Lender

:smx9:

Ah ok, averaging 12.9% and 5-8% up front for closing costs right now. You have to be getting a serious deal for this type of money to be worth your while, but yet I still hear of these deals closing all the time.

Cheers,

- Hakrjak

 

[Cat Man Du]

It was under $40,000, can't get a loan for that small of an amount. That is why I paid cash in the first place.

OK, but what is the worth today?? Try your own bank.

 

[BuffaloBill]

MonTexan, do you have a strategy for using a HML for a longer term, say 3 to 5 years? As you said, an investor will throw money your way for a decent return in 6 months, but what about longer term? Maybe that would be some kind of equity sharing.