Buying a rental property? The financing game has changed drastically and we should all adapt to its new conditions. If your goal is to purchase a multi-unit rental property, then you are already on the right track, but there are more than a few things to consider here as well. One of them is the question of financing.
Just a few short years ago, buying an investment property with a next-to-zero downpayment, or with nothing down at all, was a piece of cake. And you’d be looking at pretty good interest rates, too. Those days are gone. In today’s more cautious mortgage market, rental financing is nowhere near as simple.
To get a mortgage for a small (up to four-unit) rental property, the minimal down payment you are looking at is one-fifth of the purchase price. This will not guarantee you the lowest mortgage rate, either.
The credit crisis we had endured, and the still pretty tipsy housing market, are making conventional lenders examine high-risk borrowers with rigorous scepticism. Real estate investors naturally fall into this category of high-risk borrowers and have to either bend to the rules or find other ways to finance their multi unit rental property.
When considering a small rental property and looking for a mortgage, remember these points:
- You will need a hefty down payment. Most lenders will demand 20% down for them to approve the loan. This amounts to $72,000 on the average $360,000 residential property will cost. A purchase of a high risk property will likely meet with a demand for another 5% on top of the first 20%.
- Picking the right lender matters more than ever. It used to be all so simple. You go to a bank (any bank) and get the same conditions as you would get in any other bank. Not anymore. Lenders have different criteria for you to qualify. Your total debt ratio should fall within the limits set by the lender. Here is where you really need a mortgage advisor, because the debt ratio calculator is not as simple as subtracting the payments from the income. Lenders will often only acknowledge 50% of your incoming rent checks and impose other restrictions that make it more difficult for you to qualify. Finding borrower-friendly lenders is not impossible but sure as hell isn’t easy either.
- Keep in mind the issue of debt ratios. Different lenders have different limits, which means that one can let you have 42% total debt ratio while others will permit no more than 40%. Finding the one with those extra 2 percent can make a significant difference, especially for investors with multiple mortgages on several properties.
The bottom line here is that finding the right lender in today’s market is probably the one hardest, and most important, thing you are facing when financing your multi unit rental property. The difference will be between being approved or not, and when approved, then on what conditions. And good lenders are getting harder to find.
Multiple Rental Properties mean More of a Headache
There is going to be a lender imposed limit to how many rental properties you can finance and own. This is why we stated in the very beginning of this column that purchasing a multi unit rental property is definitely a good idea. If functions as several in terms of income, but only counts as one from the lender’s point of view.
Even if the lender does not impose this restriction explicitly, the calculations where some of your rent income can’t be counted can turn getting approved into a real challenge. This means that if your goal is to own multiple small rental properties, you are best advised to contact a broker who has worked (and helped) clients with 10 or more separate rental properties.
Best Rates mean Stricter Rules
This is the new rule. Qualifying for better rates is not at all easy, so if you can’t then the lender who will qualify you will likely offer a less lucrative rate to compensate for the risk factor. This is something we already mentioned, but it’s worth repeating – it is important to work with a mortgage brokerage that has lots of contacts across the country and has a variety of solutions for your needs.
Choose Your Broker Carefully
If you are looking for the best rental rate and the highest degree of flexibility, an experienced no-fee broker is the best solution. Rental financing is a specialized niche and not all mortgage professionals are really apt at handling it.
Edward Voccola & Co, LLC is an operation with contacts all across the States, with a network of lenders for every need. We have vast experience in providing commercial mortgages, bridge loans, construction loans and multi unit rental property financing in New York, Boston, Denver, Miami, Chicago and other major cities. We hope you found this article informative. For real solutions, contact us and get your property financed now.