SFH Financing
Hi All, I am curious if anyone can talk a bit about their experience securing financing for their first few rental properties. Was it tough to get a loan when you didn’t have much experience to lean? what kind of questions did your banker ask you?
[{"id": "ftm00cv", "text": "First rental property mortgage is going to be very simply based on DTI.  Either you can afford it or not.\n\nLater mortgages, in particular if you want rental income to be counted towards income to offset debt, is going to require showing proof of a track record managing rental properties.\n\nBiggest variable at play is who your lender is and to what standards are they underwriting - are they using Fannie/Freddie guidelines and later passing the loan on to someone else (something like 90%+ of residential mortgages) or are they using their own standards for a portfolio loan (something they keep in house, much more likely with a smaller local bank/credit union).  When we moved and started investing in a new area, we wrote up a \\~2 page bio of investment activities and past success to serve as an \"introduction\" to a new local bank based on our history elsewhere - we're now at 5+ years of success with that bank relationship.", "replies": [{"id": "ftm0gyj", "text": "Thanks for making that distinction. I am trying to understand how things will work when DTI isn\u2019t the primary consideration and I hadn\u2019t thought of it that way. \n\nSo when you did move towards the properties where cash flow from the asset would be used to service the debt, did you use a broker? or did you manage everything yourself? It\u2019s interesting to hear about your use of a bio to help sell it - that must present well.", "replies": [{"id": "ftm2lkz", "text": "Our first purchase (\\~15 years ago) was actually a triplex bought with an FHA loan that we lived in.  For that, at the time our mortgage broker was able to use 70% of projected rents for the other two units as income.\n\nThe next few purchases (made with equity from the sale of that initial property) were all done via the same mortgage broker.  Once we stepped up to using commercial mortgages for larger properties in that market (NYC) we found a local bank that we established an ongoing relationship.  We moved to NC a while ago and started working with a local bank for investments we make here.\n\nWe've been using property management across our portfolio since the day we moved out of living in that triplex.  Real Estate for us is an investment, not a job, and I don't want any of the hassle of dealing with day-to-day issues.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ftm5gbu", "text": "I bought duplexes and worked with a mortgage broker who found lenders that would use the rent income as part of the loan package.", "replies": [{"id": "ftm67be", "text": "In your experience did the mortgage broker add a lot of value? I am trying to understand if the cost of a mortgage broker is really worth it. Alternatively, have you (or anyone else reading this thread) seen any sort of service that will build a loan package for you for a flat fee? instead of commissioning a broker to fully handle the financing.", "replies": [{"id": "ftm7veq", "text": "Residential mortgage brokers are usually compensated by the lender on the back end, unlike commercial. So for residential mortgages, there's not much downside to at least getting in contact with a broker and seeing what loan options they offer.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "ftmft0x", "text": "Don\u2019t use a mortgage broker if you have a clean property, good location, you\u2019re organized and the lender can show you a track record of their book of business to ensure what you have is what they truly like. Lenders will say yes I like the property, up front, and then after going through the diligence maze, could, and do, change the terms or reject you. A good broker should know UP FRONT what the issues may be, and choose the lender who can work with any issues. Not all banks are created the same. \nHope this helps.", "replies": [{"id": "ftmhqhe", "text": "This is helpful feedback. I have taking some online courses and have a fairly strong understanding of basic underwriting and market analysis, but am yet to move forward with any of my own investments yet. I have drafted some sort of template \u201cloan package\u201d or \u201coffering memorandum\u201d to send up front to a lender when the time comes (I plan to acquire a 4+ unit property for my first acquisition) to show my analysis and support for the numbers at the least. do you think a lender will value this kind of analysis even though it is not coming from a professional broker?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ftmmatc", "text": "Yes, definitely. It shows your depth. Keep in mind a bank is making a credit decision; you are making an investment decision. These are not the same.", "replies": [{"id": "ftmpd7v", "text": "Very true. A side question, do you know if there is a service out there that can provide the sort of loan package I am describing on a one-off basis? From my research i don\u2019t see that option, but I would like to know if instead of hiring a broker could i just pay for this type of report to present to my lender?", "replies": [], "depth": 2}], "depth": 1}, {"id": "ftmwk11", "text": "I don\u2019t know any organized services like that. It may cost anywhere from $50 to $150 per hour to hire an analyst. But again, when it comes to arranging the loan, the analysis is important but far from all there is in getting over the finish line.", "replies": [{"id": "ftn0qou", "text": "I see. Sounds like an opening for someone with the right skills haha. \n\nReally appreciate the feedback.", "replies": [], "depth": 2}], "depth": 1}, {"id": "ftnb7ez", "text": "You\u2019re welcome.", "replies": [], "depth": 1}, {"id": "fuum2fe", "text": "You should definitely investigate non-bank lenders. There are several nationwide non-bank lenders out there that don't look at DTI, its much more about the LTV and DSCR of the asset.\n\nRates are a little higher (usually) but it's much easier to close. Just depends on who you are and what's important to you.", "replies": [], "depth": 1}]