Mortgage after Cash Purchase of Rental Property

[jazz4cash]

I am looking for some help/input from the real estate investors and landlords. I am considering purchasing rental property primarily as a means to diversify my retirement income sources. It seem that some of the really attractive opportunities might be more accessible with a cash offer. By accessible, I mean ability to offer a quick closing with less risk of problems. In the long run I would much rather carry a mortgage than pay cash.

What are the pros and cons of obtaining a mortgage for a rental property after paying cash for the property? Would a mortgage company even consider making a loan immediately after making the purchase?

Thanks

 

[ExFlyBoy5]

I am looking for some help/input from the real estate investors and landlords. I am considering purchasing rental property primarily as a means to diversify my retirement income sources. It seem that some of the really attractive opportunities might be more accessible with a cash offer. By accessible, I mean ability to offer a quick closing with less risk of problems. In the long run I would much rather carry a mortgage than pay cash.

What are the pros and cons of obtaining a mortgage for a rental property after paying cash for the property? Would a mortgage company even consider making a loan immediately after making the purchase?

Thanks

You could, but you will most likely pay a higher rate if it's not your primary residence. Also, if you are using it as rental property, some lenders are not a fan of making loans with no history of rental payment. Also, most lenders will not give you more than an 80% LTV on a rental property. Of course, this isn't ALL lenders, but a large # of them...particularly the ones with good rates.

And not to question your decision to do this...but are you SURE you want to buy a rental property NOW? I know timing the market is a fool's game, but IMHO, there are some significant signs that we are approaching a R/E bubble. Of course, this can be very regional in nature but nonetheless...I would make this decision with an abundance of caution.

 

[jazz4cash]

You could, but you will most likely pay a higher rate if it's not your primary residence. Also, if you are using it as rental property, some lenders are not a fan of making loans with no history of rental payment. Also, most lenders will not give you more than an 80% LTV on a rental property. Of course, this isn't ALL lenders, but a large # of them...particularly the ones with good rates.

And not to question your decision to do this...but are you SURE you want to buy a rental property NOW? I know timing the market is a fool's game, but IMHO, there are some significant signs that we are approaching a R/E bubble. Of course, this can be very regional in nature but nonetheless...I would make this decision with an abundance of caution.

Thanks for the feedback. The lenders I have contacted all require 20% downpayment to purchase rental property anyway and some do charge a bit more in interest. I would not consider pretending that this purchase is for principal residence (which is common, I believe). As for the RE bubble concerns, I believe we are actually in a "sweet spot" in my area as prices are starting to rise and rates are still low so there is a diminishing level of value right now, but I believe I am aware of the risk. I'm not sure about rent history, but I think my loan application might be enhanced if I had a lease.

 

[ExFlyBoy5]

Thanks for the feedback. The lenders I have contacted all require 20% downpayment to purchase rental property anyway and some do charge a bit more in interest. I would not consider pretending that this purchase is for principal residence (which is common, I believe). As for the RE bubble concerns, I believe we are actually in a "sweet spot" in my area as prices are starting to rise and rates are still low so there is a diminishing level of value right now, but I believe I am aware of the risk. I'm not sure about rent history, but I think my loan application might be enhanced if I had a lease.

Something else you might consider; if you own your primary residence out right, a HELOC could work for this situation. I know PenFed has them available for about 3.75% (adjustable rate) and you *could* keep the payment pretty darn low for the first 15 years (interest only payment). This isn't something that *I* personally would do, but it's an idea for financing a rental property.

 

[Senator]

A cash offer will definitely be best. I was submitting an offer for a friend (I have a RE License) on a 4-plex.

Our offer was $460K, they accepted a $477K cash offer.

Cash is no appraisal, no mortgage qualifications, faster and cheaper closing. Much less risk for the seller.

Use a HELOC, that is the best source of cash. I use my HELOC on a regular basis, if I have to. It is paid off either immediately, so within six months, so far.

 

[euro]

Explore the "delayed financing exemption" options with your lender (or mortgage broker). This allows you to do exactly what you intend. Buy cash, and then get mortgage (you have to complete the transaction within 6 months). No seasoning requirements or rental income stipulations. If you made significant improvements, you can include the value-add int he mortgage, up to 100% of the original purchase price (plus closing costs).

The Senator is right - cash is king in today's market

 

[laurence]

The terms were much better on our rental when we put 25% down vs. 20% and we had to prove we could cover the mortgage with no rental income. I agree with those who are hesitant now, our property has increased in value by nearly a third (345k purchase comps selling 460k) in just three years. Meanwhile if you really market it you can get $2600-$2800/month, tops. This is north county San Diego, FWIW.

 

[Senator]

The terms were much better on our rental when we put 25% down vs. 20% and we had to prove we could cover the mortgage with no rental income. I agree with those who are hesitant now, our property has increased in value by nearly a third (345k purchase comps selling 460k) in just three years. Meanwhile if you really market it you can get $2600-$2800/month, tops. This is north county San Diego, FWIW.

My last mortgage, because I would have had five, required 30% down, a 740+ credit score, and enough money in the bank to cover at least six months worth of mortgages. I now only have three mortgages and significantly more cash flow.

 

[laurence]

One rental is enough for me! Phew!

 

[jazz4cash]

Explore the "delayed financing exemption" options with your lender (or mortgage broker). This allows you to do exactly what you intend. Buy cash, and then get mortgage (you have to complete the transaction within 6 months). No seasoning requirements or rental income stipulations. If you made significant improvements, you can include the value-add int he mortgage, up to 100% of the original purchase price (plus closing costs).

The Senator is right - cash is king in today's market

Thanks, Euro. This is exactly what I was looking for. I didn't have a clue about this delayed financing option. I did find several links but it seems to be fairly obscure (which I think is an advantage for me somehow). I think I want/need the leverage of a mortgage but using cash to complete the purchase has many advantages as many have noted.