I know many banks require (or want) me to put cash down on investment properties, but can someone explain why this makes cents… (ha)?.. Why wouldn’t I just search for another property with a different LTV equivalent to what my previous “cash down” deal would’ve been and seek 100% financing? I could understand it if I were buying primary resident and had to pay interest on the loan, but renters will be paying my loan for me…
Can anyone help? thank you
I am a little confused by your post, could you please clarify what you are saying? Are you saying that instead of putting down $20,000 on a $100,000 loan you would just get the loan for $80,000 and find a property for that amount?
I could understand it if I were buying primary resident and had to pay interest on the loan, but renters will be paying my loan for me..
What if the renters move?
Simple…
You as a buyer are more likely to make your payments on time and fight to stay in your primary residence because that’s the roof over your (and your family’s) head. If you have a loan on your house and also an investment property, which one are you going to be late on if you run into money problems?? Exactly, you’re going to pay for your own residence so you have a roof over your head and you’re going to let the investment property lapse. If you have a 20k down payment in your investment property, you’re much more apt to not let that fall into foreclosure because your down payment money would be gone.
Keep in mind, your renters may or may not be paying your loan for you. If you do a crappy deal, you may be supplementing the payment with your own money to make the payment. Lots of people screw up and think just owning any property is a “deal.” Then they find out it doesn’t cash flow and actually costs them money.
Thank you guys for the quick response!
To Mdhaas: Yes that is what I’m saying, but that the new $80k property would have the same LTV ratio as the $100k
To justin0419: I can absolutely understand this from a lenders position, but I’m talking about from my/investor’s position. I would also budget in vacancy, repairs, etc…, so hopefully the property would cash flow. I mean, one could have the same problem with the 20k down loan.
I mean, one could have the same problem with the 20k down loan.
This is true but you will have more “skin in the game”. You would be less likely to walk away.
Why wouldn't I just search for another property with a different LTV equivalent to what my previous "cash down" deal would've been and seek 100% financing
100% financing is not available for N/O/O properties unless you have built up a relationship with a lender.
MySouth,
Most normal banks won’t touch a NOO property for less than 15% down. Most want between 25-30%. We’ve developed a very good relationship with a local banker who will lend 100% on our properties as long as we buy them right (low). It can be done, but not from the start. We had to put 25% down on our first property with one bank. Then we did several with 15% down with a different bank in a different market. Then we used that portfolio, our good income, and credit score to help us get loans for 100%. All these things and our character are the reasons why we can do this. You have to start somewhere. If you don’t want to put any savings down, you’ll probably not be able to buy anything unless you save up and pay cash for it, but that will really slow you down.
Justin0419,
Thanks for the advice! I’m new to reiclub, but have been an investor for several years now. It seems that I’ve learned everything the hard way (on my own). It’s just good to hear from folks who can relate. I actually use a credit line to buy properties at a discount and then get the bank (usually local) to refi out 100%. I was just wondering why investors would use their cash to lower the LTV instead of taking some extra time to find a better deal.
thank again
MySouth:
Because the more cash you have the better the deal that you an negotiate.
I don’t know any investors who are paying retail. They are all hunting for the very best deal. Then once you find the deal, it might be possible to make it work even better if you purchase with cash.
20% down gets rid of PMI, which is a pretty substantial difference in the monthly payment. It’s not like PMI is an extra $10 a month, it’s real money. Without PMI, you can make the same monthly payment, yet be buying a house that is $10K or $20K higher in value.
10K difference in price is an enormous difference in quality of a house. No PMI, better house, same payment.
You can put $20,000 down, borrow $80,000 and buy a $100,000 house. Or you can put no money down and borrow $80,000 and buy an $80,000 house. The problem is, that you still need 20% down to get the loan for the $80,000 house. So you need $16,000 in cash to buy the cheaper house.
$20K is a huge difference in price. It’s a gigantic difference in quality of the property.
Let’s say you are a great hunter and you get your properties for 50 cents on the dollar. That difference between spending 100k and 80k, just turned into 40k difference in the FMV of your purchases.
Cash can always be put to work, and in this market, it can work really hard for you.
PMI rules have changed for FHA. 80% does not preclude you from PMI anymore. Here are the new rules for PMI for FHA.
* For mortgages with terms 15 years and less and with Loan to Value ratios 90 percent and greater, annual premiums will be canceled when the Loan to Value ratio reaches 78 percent regardless of the amount of time the mortgagor has paid the premiums.
* For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years.
* Mortgages with terms 15 years and less and with loan to value ratios of 89.99 percent and less will not be charged annual mortgage insurance premiums.
hi ya, just make sure that if you go for it and manage to invest, that you know your liabilities as the landlord which can be costly. also, you think the renters will pay it for you, the problem is that as long as you got renters yoru fine but there may be a period where you mgith not have renters, so you should think of that too 