Last week, I called all the lenders that I could find in Smalltown and asked them about financing options. Even though the lending climate is extremely bad, I wanted to get a glimpse of what options are out there right now. By understanding what is there now, I'm able to get a good idea as to what will be around next year.
The banks aren't giving anyone money. The new restricted guidelines make it difficult for people with perfect credit to be qualified for a loan. Every lender I called told me the same about qualifying for a loan for investment properties: 25-30% down, credit score of at least 650, and a good income. A guy from Empower, the bank that I have my secured credit cards with, went so far as to tell me that I won't be able to get a loan for the next couple of years. I thought, "Hey asshole, just because the new rules are hurting your business, don't take it out on me." So, buying an investment residential property (4 units) for 100k would cost me about 35k with closing costs, downpayment, escrow, and everything else. And if I wanted an investment commercial property (5 units or more) for 100k, it would cost around 40-45k, since the downpayment percentage for commercial loans is higher. This is unacceptable.
Whenever I buy a property, I want to make sure that the profits I get will return my downpayment within 12 months. For example, let's say I had to put a downpayment of 35k to purchase a 100k property. With a monthly mortgage payment of around $950, each apartment would have to rent for at least $987 to return my downpayment within 12 months. With average rents for one and two bedrooms in Smalltown ranging from $500-$700, that's just not going to happen. So I started to think about how to purchase the same large property for a lower price. That's when I thought of a rehab loan.
A rehab loan (called renovation loan) is given when a buyer wants a property that needs work done. I find a property that is listed at 30k, worth about 90k, but needs about 40k worth of work. A bank gives me 70k and I purchase the property, giving me six months to make repairs. After that, I pay a 70k mortgage for a house worth 90k, plus I make my downpayment back within 8 months. After hearing a bunch of "no's" from almost every lender, Wells Fargo said yes. Their rehab loans require only 20% down, no matter how many units the property is. This is perfect.
The great thing about real estate is that you can make money in many different ways. I have three options: a conventional loan, a rehab loan, or simply buying a rehab property with cash and save up the money to fix it. I'm not 100% sure what option I'm going go with first, and it really doesn't matter right now. I just like knowing what my options are. The only thing I need to do is continue to make and save money, rebuild my credit, and monitor my expenses. I'll choose what to do when the time comes, but a rehab loan seems to be my best option.
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