What’s the Best Type of Investor Mortgage For a New Real Estate Investor? [Ask Coach]

[00:00]

You’re a brand new investor and you know you need to get financing to buy your next investment property. But there are so many options for loans and types of financing. Which one should you start with and what’s the best one for you? That’s the question I’m going to tackle in this episode of Ask Coach, and we’re getting started right now.

[00:24]

Welcome to the Ask Coach edition of the podcast. If we haven’t met yet, I’m your host, Chad Carson. You can also call me Coach. And my mission here is to help you get out of the financial grind so you can do more of what matters in the Asked Coach podcast series is all about answering your burning questions related to real estate investing and personal finance. Today’s question came in from Frankbee by email to [email protected], which, by the way, if you have a question you want it to be considered for a future episode, be sure to send me an email there as well.

[00:51]

The question is my question is about loans and different types of loans for a new real estate investor. I’m trying to start in the real estate business and I want to know if the banks will give loans to new investors. And what types of loans do the properties need to have current tenants? And do the banks look at that for the type of loan? I have a lot more questions, but I’ll leave it at that for now.

[01:08]

I really wanted to get into renting, but I feel frustrated about the market now and the loan process. I appreciate your time and videos, so thank you, Frank, for the question. And financing is, first of all, such a critical piece for everybody. And as a new investor, it really is overwhelming because there are so many different options. And what I like to do in my response is to break it down and how I would coach you if we were talking one on one and I have a process.

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[01:34]

This is actually the same process I go through in my real estate deal school course, where I think this is kind of a logical sequence of things you need to focus on. And one of the first things I focus on before we get to financing, even though it’s really important, is what is your target strategy within real estate investing? So what I found is if you figure out what strategy you’re going to focus on, the financing sort of takes care of itself or it becomes more clear and it’ll help me focus you down to a narrower set of financing options. The same with deal finding, the same with building a team. So going back, the very first step is what’s your strategy?

[02:06]

And as a new investor, I want to give you three different possibilities of how you might start, particularly with rental properties, which is what you said you were looking at the first one, one of my favorites. You’ve probably heard me talk about before is the umbrella of house hacking strategies. So house hacking in general means you’re living in a property and you’re going to turn that into an investment. And there’s a few different ways you can attack that. I will just briefly summarize those.

[02:30]

One could be you live in a small multifamily property like a Duplex, a triplex, A, fourplex, or many people are being a little more creative with that. You’re living in a single family house and renting out extra bedrooms, if that’s your kind of thing. Or maybe you get a single family house with a basement apartment you could rent on Airbnb. Or maybe you convert a garage or upstairs of a garage into an apartment. Or you have a granny flat or an accessory dwelling unit in your backyard.

[02:54]

The point is, one form of house hacking is just renting out part of the home you live in. So I’m going to get back to the financing for that in a second. You could also live in a property and then later on rent it out. So let’s say you don’t even want to rent it while you’re living there. You could just buy a single family house or some kind of property that could be rentable.

[03:09]

It would make sense and the numbers make sense for renting it. But down the road, whenever you move up to a different house, you just keep that one instead of selling it. So that’s another house hacking. A third form of kind of cousin of house hacking is a living and flip. That’s where you live in a property that needs some work or has some cosmetic upgrades that could be done and over time, usually over a two year period, because that’s the tax rule that is written today.

[03:30]

If you live in a house two out of the last five years and you make a profit on it, you can make that profit tax free, up to $250,000 as an individual or 500,000 as a couple who files together on their taxes. So it’s a lot of background information. But the point is options. Strategy number one is house hacking. And I really love house hacking for new investors because the financing is so straightforward.

[03:51]

So to your question, Frank, will banks give you a loan on investment property if you’re doing house hacking? It’s very similar to a normal owner occupant loan, which is the more simple loans to get. It’s easier to get a loan when you move into the property because it’s lower risk for the bank because you’re less likely to take off. And the things get really ugly because you have to have a place to live. And there’s also just a lot of loan programs like FHA, Federal Housing Administration loan.

[04:15]

There’s a VA loan program for any veterans of any of the military services. There is something called a USDA Agricultural Department has a loan with a no down payment. And so so many options like that that are government kind of subsidized or insured loans. But then you have what’s called a conventional loan, which is typically a 20% down payment. But they also have five and 10% down payment programs where you pay mortgage insurance.

[04:39]

And so you can get in with a lower down payment. And the point is, though, you’re living in the property. So you’re qualifying for an owner occupied loan. But they have programs where you can also rent out the place that you’re living in. So that is probably the number one option if you just want to get into the game.

[04:54]

So many people start with some form of house hacking because financing is really easy. Now, after you’ve done that one or two deals, it’s much easier to then go get an investment property loan because you can show that bank or show those other lenders or the private lenders. Hey, here’s a rental property I’ve already done. I’ve got some experience under my belt. So option strategy number one, house hacking is great for that.

[05:14]

But let’s say you’re not house hacking. You don’t want to do that. The second strategy you could work on is just a pure rental property. So let’s keep it simple here. Let’s say you buy a rental property that already has tenants in it because you asked about that, Frank, you have to have tenants in it.

[05:29]

That’s probably the simplest scenario. Like if you bought a property where the former the person who’s selling it to you had tenants in there for at least a year or two. You can then show the lease history to your lender and you’re going to apply for an investment property mortgage. So I mention the conventional mortgages. There are multiple options out there, but the best interest rate you can get.

[05:48]

The best loan program you can get as an investor is if you have the credit and the down payment to get a conventional investor loan. Now, if you have a single family house, duplex, triplex or fourplex, that’s what usually qualifies. You have to have a certain type of property. You can’t go get a 20 unit building and get a conventional loan. But if you have the credit, which you need, I’m not sure that the credit requirements change and you can ask your mortgage broker what those are.

[06:10]

But you do need to have some good credit. You probably need to have the down payment. Whereas owner occupied loan might have a lower down payment. Most of the time, investment property loans are 20%, sometimes 30% down, depending on what loan program you’re looking at. But let’s say you put 20% down, then you have that investment property and you have rental income coming in.

[06:28]

Then the lender can often count that income from the renter on your debt to income ratio, which is one of the challenges people have is that if you’re adding a mortgage to your credit file now you have that debt coming in and it decreases the amount of loans that the bank wants to give you. But if that renter is paying the income, if there’s probable income, you can count that often when you’re buying the property. So that’s a conventional loan. There’s also another option that I’ve been exploring a lot in the last year or so, which I like is something called a DSCR loan that stands for debt service coverage ratio loan. So this is a loan that’s going to cost a little bit more than a conventional loan, but it has some benefits to it.

[07:07]

It’s often a 30 year loan, 30 year fixed, which is what I like about the conventional loans. They’re not adjustable. There’s not a big payment you have to make in five years. But even though the interest rates a little higher, you’re able to lock that in. They will make loans to you in your LLC.

[07:21]

They will also don’t necessarily look at your personal income. All they’re looking at is the income on that property. They do look at your credit file. So that’s still going to be pretty consistent. You still have to make a down payment.

[07:31]

But there’s also not as much of a limit on how many loans you can do. Like with a conventional loan, you get four loans, it gets a little harder. You got to show how many reserves you have. If you get up to ten loans, that’s usually the way you get cut off for conventional loans. But when you go to the DSCR loans, which is a form of commercial loan, a lot of these are sold to pension funds and hedge funds and things like that and Wall Street.

[07:52]

Then there’s a different set of requirements. And it’s not in the residential loan world, it’s a different type of loan. And so you’re not going to get cut off necessarily at four. As long as the income looks good on the property, as long as your credit is still good and you have the down payment, then it’s a great program. So check out those I’m going to have a link in the podcast description below and also in the video description for YouTube of a page I’m working on on my website, still in the early stages where I’ll have list of loan DSCR loan lenders and also people who do hard money loans, which I’ll talk about in a second.

[08:25]

So if you’re interested in looking at some of the lenders I’ve researched, you can go to that page and I’ll have a link in the video description. All right, so we’ve covered two options. If you’re house hacking or living in a property, that’s one set of financing. If you’re going to just buy a straight rental property is already rented. That’s another.

[08:40]

The third option that I’ll give you, which is pretty common in the investment world, is you buy a fixer upper property or a property that’s vacant, doesn’t have a tenant in it right now, and you need to do what’s called stabilizing the property, either fixing it up and or getting it rented out. If you’ve ever heard of the Burr strategy by remodel rent, refinance, repeat, I’ll do another ask Coach on one of those that topic in the future. But that’s where this strategy comes in. You’re buying a fixer upper property often like you would like to see people flipping houses on TV, but instead of flipping it to sell it, you flip it from a short term loan. So that’s what I’m going to talk about that in a second to a long term loan after you get it stabilized.

[09:20]

So let me explain. So you buy this property. Let’s say it’s just a big time fixer upper. Maybe the bank foreclosed on a property and it needs a lot of work and you buy it. It’s going to be more difficult to get a conventional regular loan that I talked about before on a property that needs a lot of work.

[09:35]

There are some loan programs out there that are remodeled loans. They have some extra Hoops you have to jump through. So what most investors do is they use some sort of cash, like financing. Let me give you a few options. One of the ones that people use when they’re new investors pretty often is if you have home equity and you can get a home equity line of credit.

[09:53]

So let’s say your house is worth $350,000 and you owe $200,000 on your first mortgage. Well, you have some equity there that you can maybe go get $100,000 line of credit. And let’s say you buy $100,000 property or maybe you have 50,000 cash and then you combine that with your $100,000 line of credit to buy the property and fix it up. So it’s kind of a lower priced rental property. Well, a home equity line of credit would be a way to buy the property on the front end.

[10:17]

That’s kind of the short term to fix it up, to get it stabilized, to get it rented, and then maybe three to six months later, depending on the lender, you can then go refinance it with a long term loan for the same loans we talked about before, the conventional loan, if you can do that or the DSCR loan. So there are longer term loans that would be your option on the back end. So there’s kind of two steps to this. It’s a little bit more there’s more moving parts. But often because you’re buying a fixedup property, hopefully you’re going to get that at a lower price such that when you refinance in a best case scenario, you might even be able to refinance all of your cash back out.

[10:50]

Let’s say you bought it at a property at 75% loan to value. So it’s worth $200,000 and you buy it for like $150,000 all in including all your repairs. So if you refinance that property in a best case scenario, you’d get your money back and then you can start over again. In many cases, though, you might not get all your money back, but still you’re getting most of your money back and then you can go do another property again. So there’s a lot more details to say there, Frank.

[11:13]

But the point is those are kind of the way I think about financing as a new investor. First, decide your strategy, which one makes sense for you right now that will focus you. And then depending on which one of those three you’re focusing on, then you might want to go start looking at those different options and you want to get prequalified. You want to start talking to people. I forgot to mention a couple of options on the burst strategy or on the fixer upper property.

[11:38]

I mentioned the HELOC. You could also start looking at what are called bridge loans. So there are lenders out there basically commercial lenders. These aren’t your lenders alone on homes that you live in. They’re commercial lenders and they will loan these bridge loans or short term fixer upper type loans.

[11:54]

You might have heard of hard money lenders. That’s another kind of industry term for the types of lenders who make these short term loans, often at higher interest rates. So today it might be like a 8% or 9% interest rate instead of a four or five or 6% interest rate on a long term loan. But if you use it for six months, you pay a little higher interest. They’re more flexible on the condition of the property than a regular lender would be.

[12:16]

And then you pay off that lender with a longterm loan after that. So look for hard money loans, look for bridge loans, look for private loans. That’s where I’ve spent most of my career. It takes a little more time to develop relationships with private lenders. But if you’re networking, going to local meetups, you could ask people like, hey, do you have any money you’d want a loan on a deal?

[12:35]

I’m out there finding fixture upper properties. And so I built a relationship and I’ve had for 20 years now relationship with private lenders. So there are a few different options you can look at as a new investor. I’ll talk about this more in the future on the podcast. Let me know if you’re interested and let me know on YouTube if you have any additional comments or questions about this topic.

[12:52]

And I would love to hear from you. I hope you enjoyed this edition of the Ask Coach podcast. If you’d like to have your question considered for a future episode, please send an email to [email protected]. You can also leave a comment on YouTube. I do look at read those and I can’t answer every one of them in depth.

[13:07]

But if it’s a great question, I’ll also include that in a future episode. And just keep this in mind if you want to have them considered. Keep it brief and to the point. The longer ones are a little more difficult to answer and get in depth on and then two keep it relevant to the topic of this podcast which is personal finance and real estate investing. If you like the show, I’d like to invite you to subscribe to my free email newsletter at coachcarson.

[13:28]

Com/REIToolkit. In addition to weekly updates, articles and behind the scenes tips from me, my email newsletter subscribers get my real estate investing toolkit which includes a property closing checklist that I actually use when I buy properties, a real estate deal worksheet, a tenant screening criteria checklist and other spreadsheets and goodies that will help you on your journey to financial independence using real estate. You can get it all for free at coachcarson.com/REIToolkit. I also want to take this time to thank some people behind the scenes who make this podcast possible each and every week. This includes my podcast editor extraordinaire Michael Nguyen, my amazing virtual assistant Megan Thompson, my wife Kari who helps me behind the scenes and is my partner here at Coach Carson.

[14:09]

And of course thank you to all of you, the listeners of the show who make everything possible. This show exists for you. It exists because of you and I really appreciate you being here for another episode. Everything I’ve shared with you in this episode has been for general education purposes. I have not considered your specific situation or risk before buying your own investments.

[14:26]

Be sure to consult a financial real estate and or a legal professional until next time, I’m Chad Carson. You can also call me Coach and this is a show all about helping you get out of the financial grind so you can do more of what matters. See you next time.