Investment Property Financing

I first started investing in real estate in 1994. Back then, even though I was clueless, I knew that real estte was going to be my ticket to cash flow and most importantly, passive income.

I started with creative financing strategies just because I didn’t have much cash and that seemed to be the way to go. Then I found a bank that was friendly to investors and they made almost all of my investor loans for many years.

Then a few years ago, it seems like the mortgage business went crazy. Wall Street was slicing and dicing up mortgages and selling them off as “derivatives.” I have a friend that works in the secondary marketing department of a mortgage company and that’s ahe does all day is sell off millions of dollars worth of mortgages to Wall Street buyers all day long.

It seemed like the rules really relaxed for a few years. Stated income loans were ok – even for real estate investors. And then 100% financing became available from regular lenders. I even did a few 80/20 loans where you got an 80% first mortgage and then a 20% second mortgage at the same time.  The interest rate was high on the second mortgage but hey, it was 100% investment property financing!

Then, last year the whole thing fell apart. The lenders took away all that stuff and made it even harder to get financing.

It seems to me that the whole cycle has completed. Come full circle. Because now, as a real estate investor, my best bet for financing is to hook up with a portfolio lender. A small bank or credit union that can get to know me, my business and fund all my deals.

Right back to the way I did it in the beginning.

I just found this video on YouTube about investment property financing. The person does a good job of quickly identifying all the reasons why it’s so tough to get investment property financing.

She brings up a great alternative that I agree with – using portfolio lenders. Portfolio lenders don’t have to follow the rules of conventional financing which you’ll see in the video.

Instead, they have all sorts of cool programs like blanket loans, business lines of credit, investor loans in your LLC that do not report to your personal credit report. Take a look at the video. The lady has an investment property financing  course I just bought and I’m going through it right now. I’ll have a detailed review up in a couple of days.

I hope it helps!

Just when you though it was already tough to get investment property financing, Fannie Mae and Freddie Mac instituted some new rules last August that really affected real estate investors all across the nation. Specifically, they had to do with cash out refinances, stated income loans and titling investment property in your LLC.

I’ve been a self-employed real estate investor for many years so the rule that affected me the most was the elimination of stated income loans. I typically don’t show enough income on my taxes to be able to qualify for financing. That’s the way our tax law is set up for self-employed people. But it sure hurts real estate investors!

The next investment property financing rule that hit me hard (and doesn’t make much sense to me) is that they say you can’t have more than four financed properties. Well, that’s not just investment properties, it includes the house you live in, too. So really it’s capped at three.

I guess Fannie Mae decided this didn’t make sense either because they raised the limit back up to 10. So now you can own your house plus 9 investment properties.

For me the lesson was to try to show more income on my taxes and think about another line of work!  But then my neighbor told me about portfolio loans. I guess there are loans out there that don’t have these rules.

Portfolio lenders offer investment property financing under their own set of rules. So you can have more than 4 financed properties and in some cases they’ll still do stated income loans.  That’s because the financing is based on the cash flow that the property produces, not the income that YOU produce! That’s the way it should be, anyway I think.

As long as your property makes enough rental income each month to pay the mortgage and expenses, then you’re in good shape. There’s a formula they use called debt service coverage ratio which is just the net income divided by the mortgage payment. It’s the same investment property financing formula that commercial lenders use so if you have commercial property you’ll be familiar with it.

In my next post I’ll tell you a little more about what I found out about refinances and properties that are titled in your LLC.

Last year, everything was going along fine until I called my broker to discuss investment property financing. I needed to refinance a bunch of my rental property.

He told me that Fannie Mae and Freddie Mac had changed their rules about investment property loans. Since I’m self-employed he told me that my chances of getting an investment property loan from any regular lender was going to be a miracle.

The problem was, and I’m sure you’ve experienced this too since we’re both real estate investors, is that I had all my cash locked up in my rentals and I need to refinance in order to get cash to continue my real estate investing. According to him, that wasn’t happening any time soon since I had some things preventing me from getting any type of  “conventional” investment property mortgage.  Those things included being a self-employed real estate investor, owning more than 4 rental properties and needing cash out on some properties that I had owned for less than a year.

Well, I called a bunch of banks in my area and I found out about this type of investment property financing called portfolio loans.  The way it was explained to me is that portfolio lenders don’t have to follow the Fannie Mae and Freddie Mac rules so they’re a lot more lenient when it comes to us real estate investors.  I’ll share some more about portfolio lenders in this blog and also give you some tips.