The Basics of Property Investment Finance
Multiunit purchasers have two options when borrowing to buy property:residential loans and commercial loans. The tipping point for either option is generally the number of units in the building. Typically, for four units or less, you can borrow through conventional residential financing. Above that, you're in commercial loan territory.
Where can I go to learn more?
Some community colleges run basic classes on property management, and they're worth checking out. But don't pass up a chance to buy the time of an experienced real estate attorney to talk for a while about setting up an investment business in real estate. And remember, it will be a business.
Commercial loans are a whole new ballgame. Lenders are far nosier about whether you'll be making money off this property; the down payment demands are larger (at least 20 percent); and fees at all stages of the game toward closing tend to be higher. Experts generally agree that new investors, who may be leveraged to the max, stick with smaller properties that can be financed with residential loans, preferably of the owner-occupied variety.
Getting involved with real estate doesn't start with finding a loan. It starts with learning about investment real estate. But there are several gradations in buying investment real estate, and conventional lenders go from friendly to “hands-off” based on a variety of factors, which include the following:
Whether you plan to live in or near the property that you plan to buy and rent out to commercial or residential tenants
Whether you have a business plan for the property, including description of property, neighborhood, renovation plans, and dollar projections on income
Your creditworthiness in addition to money you may already hold in reserve for project renovations and cash-flow issues
Your understanding of the history of the neighborhood you're buying in and its appreciation prospects, in addition to community laws and restrictions allowing various uses for the property you plan to buy
From a loan-application standpoint, it is similar to the process of finding a mortgage for your primary residence. The process for buying a building with up to four apartments fits generally the same loan application process of buying a home for yourself. Prep work is similar, too. You need to make sure your credit is good and you've made a student of yourself not only in lending requirements for investments but in the whole business of owning property.
In simplest form, a lender will allow you to include the rental income along with your salary to determine whether they'll make the loan. It makes sense to keep principal, interest, taxes, insurance (PITI) to 25 percent or less of your before-tax income, including what you'd get from rent.
Timing is important in residential or investment real estate, but it's particularly important when it comes to investment property. Smart investors — whether they're picking stocks, land, or houses — instinctively know or know people who know when prices are low in a market and the maximum amount they'll need for rehab and resale.
After doing your due diligence on particular types of properties you want to buy and communities you want to buy in, start talking to conventional lenders (including the one with whom you developed a successful relationship with on the mortgage for your own home) and ask them what their various options are for real estate investment loans. Some lenders will be happy to let you borrow money to buy a vacation home but not as delighted if you want to borrow money to buy a Quik-Mart downtown. Yet if you've had a good relationship, use your contacts whenever possible.
