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Old 10-25-2011, 02:01 PM   #21
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Originally Posted by JohnDoe View Post
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?

Thanks.
JD
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.
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Old 10-25-2011, 02:54 PM   #22
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Yeah, buildable lots in my town are $50 to $70K (3 acre min lot size).
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Old 10-25-2011, 03:56 PM   #23
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The nicer townhouse properties around here are in the 130 range but I don't think the rents command more than 1k. (still researching)

With my debt I would be taking on and probably a mgmt fee, cash flow would be minimal.

The properties are pretty nice though and are within 10 mins.

Properties priced around 100k are not necessarily in the suburbs which is what I would want.
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Old 10-25-2011, 04:06 PM   #24
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Originally Posted by Finance Dave View Post
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.

For financing, it was suggested to me to initially take out a new mortgage so that I am the owner of the investment property. Then refinance the property using a no cost fixed HE loan against my current residence of which I have plenty of equity - even though I am still making payments on it.

So then I would be left with the mortgage on my primary residence and the term HE loan against my primary. Even with all of that my loans to value would be less than 70%.

At some point I will need to get a real cost of what my debt service would be at different price points.
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Old 10-25-2011, 05:00 PM   #25
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Quote:
Originally Posted by JohnDoe View Post
The nicer townhouse properties around here are in the 130 range but I don't think the rents command more than 1k. (still researching)

With my debt I would be taking on and probably a mgmt fee, cash flow would be minimal.

The properties are pretty nice though and are within 10 mins.

Properties priced around 100k are not necessarily in the suburbs which is what I would want.
Here, there are $250K very ugly townhomes in mediocre areas. Some of these may even be cheaper in areas with crime reputations. And a bit north or south of city limits likely a bit cheaper too. Attractive townhomes in central part of city usually start at $450k+ and go way up. Some of these are very attractive.

But no way would any of these work as rentals. Rents are just not that high. My condo that I am buying is much cheaper, and in an area with good rent demand- but it wouldn't begin to work either-figuring payments on 100% of price.

I think posive cash flow in northwest coast cities must depend on large owner performed rehabs or something.

If I were not an inflationist I would continue to rent. I also expect a greater and greater price premium on prices and rents in attractive, close-in areas of growing cities. My major reason for buying is that I want some lifestyle protection. I really would not like to be priced out down the road.

Ha
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Old 10-25-2011, 05:54 PM   #26
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FinanceDave: If you can qualify for a mortgage personally based on credit scores and income, you can buy it as an investor (not owner occupied) and it's often less than than a 1% higher rate.

Then use a warranty deed (not quit claim for title reasons) to transfer ownership to the LLC.

You will be personally guaranteeing the loan, but if you don't have a problem with that, that's probably the best way to do it.

As always on the Internet, this is not legal advice and you shouldn't listen to random advice anyways, but consult your lawyer.
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Old 10-27-2011, 09:27 AM   #27
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Here in the Twin Cities you can find 5-10 year old, bank owned townhouses for $100-110k with rents in the $1200-1350 range so the numbers work. You typically need to put $5k into them to fix them up (appliances, carpet, paint) and there's lots of other investors to compete with. In addition, at least half the HOA's don't allow rentals so that rules out a bunch of possible good investment options.
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