Hi all.
I recently went to a local bank to see about getting preapproved for buying investment properties. I let her know my plan was to buy properties for rehab and then to sell, within 6 months if possible. She got back to me within a few days to let me know I was prequalified for 80k.
I then asked her a few questions. How much of a down payment would be expected on an 80K property? What were the current rates for 15 and 30 fixed, and 3/1 and 5/1 arms? What is the bank’s policy on PMI?
She tells me that I am confusing a typical mortgage loan with the “business/corporate” loan that she is offering. She said I have to put at least 10% down and the longest term she could offer would be for 20 years, and the rate would only be good for 5 years. She quoted me a rate of 7.6% with no origination fee on the 20 year loan. They don’t offer any arms on “business” loans, and that PMI wouldn’t apply.
All I can say is, I am very confused. Should I check with other banks or mortgage companies to see if I can get a better deal? Do I really want this “business” loan or should I try to get preapproved for a normal “mortgage” loan.
FYI – My wife and I both have credit scores over 800.
Thanks.
Bill M.
Bill,
They are telling you that do to the loan length The rates they quote you are going to be high do to the fact you told them 6-8 month time frame. Now had you asked for a 30 year fixed for a rental property (long term hold) you would of had a totally different conversation. There are banks that just do short term lending for rehab projects. The rates are a touch higher on the other hand there are other ways to acquire rehab loans with credit scores like yours. Why not get a signature loan from 2-3 banks for 50k each at 5% interest and do it that way? Then you can call yourself a cash buyer! And trust me cash buyers get the best deals…
Hope this helps,
Robb O.
Nc,
You are on the right track. Most investors don’t establish commercial banking relationships. Commercial money can vary from lender to lender, so I’d advise checking with a few. If your plan is to purchase a number of properties, having access to these funds could be a huge benefit. One very efficient way to purchase properties that need to be rehabbed is to buy it first with hard money. Once the work is done, refinance the hard money to your commercial lender. No down payments, no seasoning, no hassels. Additionally, you won’t find these mortgages reporting to your credit report and depending on how you do your taxes, the interest may be tax deductible.
There are many good ways to finance the purchase of real estate for investment. Using commercial money is one of the best. I’ve found that as you get a little further down the road in your banking relationship, often the terms improve. If you’re investing long term, finding good sources of capital will be a continual challenge. More options=good things.
Do the math.
-H
Thanks for the info!
I realize that I am sort of confusing the issue by saying I am going to be rehabbing and selling within 6 months, and then asking about long term “mortgage” rates. While the plan is to sell quickly, you never know what might happen. If I can’t sell, I may end up renting it out.
How do the closing costs for a business loan compare with that of a typical mortgage loan?
Are there any tax advantages using a business loan v/s a mortgage loan? Is the interest still deductable?
I apologize for my ignorance. While I feel like I do know a little about mortgage loans, I don’t know anything about business loans. I guess I have a LOT to learn!
Bill M.
All good questions Bill,
This all looks great in black and white. Unfortunately, life tends to be a little grey. Things don’t always go as planned. Since my purchases don’t envolve more than 1-4 unit homes, my closing costs are about half ($700) what a similar loan from residential lenders are. More importantly to me, is that I can take title to the property in the name of a LLC, or limited partnership. In both entities, mortgage interest reduces taxable income. I think right now competition is driving smaller banks in my city to loosen their lending policies. I’ve also had much success using residential equity loans to finance my investment real estate. They’re easy and really maximize cash flow.
-H
Great post housebroken.
Bill,
Keep in mind if you do have out Business loans and need to refi that property you can always look into HELOCS home equity lines to do so I know I have some of them at 3.9% intro rate so that to will lower your monthly payment and allow you to cash flow better!
Robb