Hello
I have been interested in buying real estate for awhile and I am trying to convince my husband that it would be very profitable. He is hesitant bc we talked about buying another house to live in and thinks that if we get 2 or 3 rental properties once we try to buy our own home to live in the bank will not give us a loan bc our debt to equity will be too high.
PLEASE EXPLAIN TO ME HOW INVESTORS WITH 5-10 PROPERTIES GET AROUND THIS WITHOUT THE BANK SATING OK THAT IS ENOUGH BORROWED MONEY!!!
The key to being able to keep borrowing money is to BUY RIGHT. I ALWAYS buy at a maximum of 70% of the market value (less repairs), thereby giving me a minimum of 30% equity in each property. The bank likes that! In addition, I always buy properties that are cash flow positive which gives me additional income with each purchase. I have not found getting loans to be a problem.
Mike
Do you have super good credit??? I am sitting at around 660.
I have a perfect credit history, as in never been late on a payment. However, my credit score has varied from 635 to 760 for no apparent reason (at least it’s not obvious to me). The small local banks that I use ignore the credit score number and instead pay attention to the history. I’ve been dealing with them for years.
Mike
Ok, let me make sure I understand what you are saying…
If we found rental 3 homes (just an example) that were no more that 70% of the market value we could possibly finance them with the bank and still purchase our new home in about a year and a half???
I am new to the investing world, but one thing you might want to do is create an LLC (s). This enables you to aquire property in the name of the LLC, vice your own. Your credit stays clean and the properties don’t show under yor name. I do suggest to do your reading on creating an LLC so you structure it according to your needs. Additionally you want to protect your personal assets by creating an LLC.
knbradley,
Yes, I don’t see why you couldn’t buy 3 rentals and still buy a house in the near future. I’ve bought a lot more than that and the bank hasn’t cut me off yet.
3ft fm gold,
Setting up the LLC won’t really help with the financing. The bank will make you sign personally for the loans, so it won’t really help. However, the asset protection and business aspects are still worth doing the LLC in my opinion.
Mike
propertymanager,
I agree it won’t help completely with financing, I was offering a way to alleviate the number of loans under their name. Their are institutions that will make loans if the there is enough equity in the property to cover the loss in case of a default.
The loans will still be in personal name with personal gurantee no matter what
if you have more than 10 loans, you are not longer eligible for FannieMae/Freddie Mac compliant loans. This narrows the pool of options, but you can still get funding either thru a good broker or small private banks willing to do portfolio loans.
I always do full doc so it boils down to Debt to Income; all my rental bring in strong rent vs. debt that is being serviced plus I have solid W-2 income and almost no personal debt.
The banks will take 70% of the rent and add it back to your income. Say you have a house rented for $1000/month and the note is $650/month. The bank will add back to you $700/month to your income. So debt to equity is not an issue. I go full documentation with my loans (to get the best interest rate) and they usually ask for copies of the signed leases to calculate the income from them.
Have you guys had any luck with owner financed mortgages? How many do you have?
Yes, I have several rentals that are or were owner financed. These include properties taken sub-2 and with lease-options as well as straight owner financing.
Mike
The first property I got the seller held the mortgage while I refinanced the property. Owner financing is by far the best way to finance a property. Its easy and negotiable. Banks should always be a last resort. Of course usually the last resort is the only option unless you are in a buyers market. If you are in a buyers market you are sometimes able to negotiate with the seller to hold the financing but usually people want their money and they want it now, they do not want to receive payments.
That’s what I’ve heard too - that owner financing is the best. But also I wonder if the guys saying that are the wholesalers who know that method is also ‘best’ for them too. =)
Why would that be best for a wholesaler? It would be best or a seller that wants good interest income secured by a property. You wont find 8-10% interest with your cash in a bank.
Well, if you buy a house at auction for $20k, fix it up for $4k & rent it for $500 a month, and wholesale it to another investor for $40k [tax appraisal puts it at $50k]…you become a noteholder and not a landlord… and your yield is still significant. Even better, take the same $20k house and sell it for $40k as a “fixer upper” and get an even higher yield. Buying that house for $35k and selling it for $40k would be pretty dumb though. It’s all a matter of the #s.
Being a landlord is great, but being a noteholder is even better - as long as you’re making a killing of a profit.
Thats a good point. Being a noteholder although doescreate good income. It does not create wealth. You have no asset just a piece of paper, the piece of paper will not get an equity, appreciation, or anything else except amonthly payment which is great but once its gone its gone it does not grow.
It does not create ‘equity’ wealth, but it sure creates cashflow ‘wealth’. And if you can do a long-term note, say 20-30 years, wow. Your ROI can be huge if the deal is done correctly. Imagine if you can get yourself a whole bunch of notes. Just keep reinvesting your earnings and in 10 years you have so much cashflow you don’t know what to do with it all. Plus notes are transferrable and resellable. You can let a 30-year note cashflow for 5-10, and then turn around and sell it for a slight discount and still make a profit.
Who is the true owner of property…the person who has the name on the deed, or the person who owns the mortgage [who’s name is ALSO on the deed]? It’s the noteholder…the person who holds the mortgage…who in this case is probably either the wholesaler or the bank. Since they are the true owners of the property, they can foreclose on the first late payment [if state law allows such a thing]. Yikes.
I have no doubt - you can make money as a wholesaler/noteholder OR as a landlord. The key thing is just getting the right deal that works for everyone. If you can do that, where everyone is happy and still makes a profit, you can’t have a better business deal.
The ROI is the interest rate paid on the note. Also, notes rarely run for their full term and most people doing carryback do a balloon 5 yr or so.
Yes, you can sell notes, but unless there is a stellar payment record, the street value of that note can be substantial less than face value. Plus foreclosing is huge hassle and can be very expensive and time consuming.
My point is that carrying back notes can be a nice way to generate income, but it has it pitfalls as well.