Originally Posted by JohnDoe
On a scale of 0 to 100 I am at about 5% of buying a 2nd house and I have some questions.
Are mortgage rates typically higher for investment properties?
Is there a down payment percentage that is required?
I have gotten into rental properties this year and learned a great deal. My experience is that investment loans are considerably more expensive (almost double). Let me explain in more detail....
We have an LLC for rentals. If I tell the banks I want to buy the properties through the LLC, the rates are much higher. This is for a variety of factors, such as little equity currently in the LLC against which to borrow, no history of income of the LLC, etc.
In addition, when you buy an investment properties, there are different "rules". For example, if I buy one that's vacant and not "livable", they will loan me only 70% of the purchase price
. If I buy one with a tenant in it, they will loan me 85% of the appraised value
. One strategy to deal with this is a bridge loan until it's livable, then refinance.
Another factor is that most investment loans are not truly fixed rate. I've spoken to 4 local banks, and none of them will give a 15 or 30 year fixed. Rather they will give 5 or 7 year ballon, amortized over 15 or 30 years. This essentially translates significant
interest rate risk to the borrower. As a result, we've elected to borrow only enough that we could pay the loan off entirely in 5 years should rates skyrocket.
Now, there is a way to get around the high rates. Instead of using the business to secure the loans, use your primary capacity. That could mean a HELOC against your primary residence, a personal mortgage instead of a business mortgage, and so on. Obviously this only works if you have income or assets to show the bank your repayment ability. The other complication is that you are then "crossing lines" by borrowing from a personal capacity for an asset owned in an LLC. Although I don't believe this is illegal, it certainly creates some gray areas for the accountants and lawyers and most them advise caution in this area.
Our solution? Use HELOC to secure funds, draw down the HELOC, send this to the business as a "cash contribution from owner", then use those funds to bridge until the property is livable, then refi through the business on a 5-year balloon with the intention of dramatically overpaying the 15 year amortization schedule so that a balloon in 5 years is doable.
The above is admittedly not in alignment with many "experts'" philosophies on using OPM (Other People's Money) towards advancing ownership, but it's the way that suits us.