Loan Types for Buying an Investment Property

Karen:  Thank you for joining me for another episode of House Talk. I am so fortunate to have this show where I get to interview the best people in the real estate business, and they help simplify the complex world of real estate transactions and home ownership. This is House Talk on 104.5 FM 1340 AM and kbnwtalk.com. I’m your host, Karen Malanga, principal broker with Remax Key Properties. So excited to have Dan Williams, vice-president of Directors Mortgage back with us today. And today we’re going to be touching on investment properties and the types of loans you have to offer for people that want to buy an investment property. So do you want to take it away, Dan?

Dan:  Sure. Man, we have a lot of different things. The biggest thing for people to know is that qualifying and utilizing investment properties especially in the market like this, it’s a great thing. Your biggest hurdle probably is mostly the down payment. And so if you’ve got some money and you’re wanting to invest one of the best things about an investment property when you’re buying a new one, whether you have any history of ever owning an investment property or not in the past, if you’re buying an investment property and it’s within the year that you’re buying it we can utilize a percentage of the rents that it collects to offset the mortgage that you would have on that property.

So what I mean by that is that you don’t have to be able to qualify for your own personal mortgage plus the mortgage on the rental property completely without taking into account the fact that you’re going to gain rents off of that. In a market as strong as Bend as you well know taking advantage of ownership on an investment property and this market is huge.

Karen:  It is huge. So just back to how we always talk, so pretend I’m buying my first investment property, what is an investment property? Would that be a single-family residence, a duplex, a triplex?

Dan:  Yes, all of the above.

Karen:  What about a four-plex?

Dan:  Yes, up to a four-plex. So anything more than four units is considered commercial property, and that is a whole different animal, you’re going then into more of a commercial loan for business. As opposed to if you were to buy a four-plex or a triplex or duplex, any of those, those are all regular residential loans for investment properties.

There’s huge opportunity there, and I’ll even throw a different twist on this that one of the better … because in our one of our previous talks we talked a lot about first-time homebuyer products and options there. One of the better things that a first-time homebuyer can do to really qualify for a lot and not pay a ton is to buy a triplex or a duplex or even a four-plex if they could find one.

Karen:  And then live in one of the units and rent out the rest?

Dan:  Exactly.

Karen:  We had this great client a few years ago, and her parents actually helped her on her first property. And what they had her buy was a duplex, and she lived in one side and then she rented it, and that was her way to get started, and it was fantastic. Now she still owns that duplex and she’s moved on and bought another home.

Dan:  Correct, yeah. We just help to guide you to do the exact same thing, and it was an amazingly cost-effective way to buy a home. To live in a nice duplex, he’s renting out the other side, that person’s paying a big portion of their monthly mortgage payment.

Karen:  Exactly.

Dan:  And, man, they’re living in a much nicer place and with the exact opportunity you’re talking about to down the road continue that as a second rental unit and go buy another place for themselves to live in. And it’s just great, it’s cash flows, it’s you’re taking advantage of all the equity, they’re super desirable to own from an investment standpoint, and especially if you can find the higher units, the three and four units to do that, you’re still buying an owner-occupied property. We’re not even treating it like an investment property. And what that means is that opens up much lower down payment requirements, much better and more aggressive rate pricing on that because it’s the owner-occupied home that’s the roof over your head, and the lenders consider that lower risk.

Karen:  I think that’s a fantastic way for someone to get started in the real estate market.

Dan:  Yeah, I do too.

Karen:  Yeah, right now when we have this board in our office and it shows our listings and our pending properties, and two of our properties pending currently are investment properties, one’s a triplex and one’s a four-plex.

Dan:  Nice.

Karen:  Well, actually we have three, and then one’s a client that’s buying just a little house in Midtown as her first rental, which is great.

Dan:  Yeah, it’s a great opportunity if you’re trying to get your foot in the door on buying your first place. If you’re a seasoned owner and you’ve got multiple places, well, then obviously this conversation makes a lot of sense to you too because you see the opportunity to have multiple units. But it’s not just that, single-family residences they’re just gaining so much value that to have a majority it’s usually a 75% of the rents that are collected on that based on the current market are available to offset that existing mortgage payment.

Karen:  So it looks like income.

Dan:  Exactly. It’s a way to take a payment instead of paying 100% of it you’re basically accounting for 25% of the payment.

Karen:  That’s terrific news. So I have another question for you. When it comes to people buying investment properties how many can they own before it almost … can’t you reach a point where it becomes a detriment or you have to …

Dan:  Yeah, it’s pretty high. So there’s a couple of different things that go on. So the way that I would address that is there’s kind of two lines. At four properties or less it’s pretty much standard operating procedure from an investment property standpoint what the requirements are – down payment, all of those things are pretty consistent. Once you get past four, and I’m talking about financed properties, if you own a property free and clear it does not factor into this equation. But if you have more than four financed generally what happens is you fall into a little bit stricter guidelines because now you have a lot of properties out there and from 4 all the way up to 10, so really 5 to 10 properties financed when you’re buying investment properties your reserve requirements go up.

Karen:  Okay.

Dan:  And so what that is referencing is that for the number of properties that you have, you need to have a certain number of months of reserves in your bank account to cover the payment on each of those properties.

Karen:  Okay, now can it be instead of a bank account can it be in your IRA or some retirement account?

Dan:  Yes, sorry, I did say that generically. But yeah, so it can be any source of assets that you can get to essentially that whether it’s in an investment account or if it’s in your bank account itself.

Karen:  Well, okay. So it’s almost time to take a break here, Dan. I’m Karen Malanga and we’re talking with Dan Williams, vice-president of Directors Mortgage on KBNW, the place for talk. We’ll be right back.

Hi, we’re back with House Talk. This is Karen Malanga and we’re on 104.5 FM 1340 AM and KBNW.com, the place to listen. I’m back with Dan Williams, vice-president of Directors Mortgage. And for those of you that just tuned in we were discussing the ways to move forward on mortgages with investment properties. And so I thought I would just talk with Dan right now. And Dan, welcome back to the program.

Dan:  Thank you.

Karen:  I was doing a recent poll as of this morning on MLS, and there are only 10 multifamily properties on the market in Bend.

Dan:  I’m not surprised.

Karen:  And then we also have 10 pending. But we’ve had 67 that have sold, so it is obviously a very hot market. And the prices, it’s interesting too, the different price ranges that we have, and of course that could be based on units that are available. But you can get multifamily for 345 and then off lift to 5.8 million, but that’s 18 units, so there’s a vast difference. But on some of those smaller ones and more affordable ones what type of a down payment does someone need?

Dan:  Well, that’s a great question. So normally you’re going to put a minimum of 15% down on a single-family residence. So if it’s just one unit you’re generally putting a minimum 15% down, but I will tell you that as a lender if you can put more down, the more the merrier when it comes to risk and rates, because Fannie Mae, Freddie Mac, they build in fees into risk layering and essentially saying, “The less you’re putting down the more risk they take on the loan.” So they generally have a little bit higher fee structure on those.

And if you’re at 25% down for example it’s considerably better. 20 is quite a bit better than 15, 25 is that much better than 20. And that’s kind of your limit. Once you’re at 25 or more you really kind of … you’ve gotten all of the benefit out of down payment for the most part. But on a single family it’s a minimum 15, and when you’re doing a multi-family like we were talking about a duplex, triplex, four-plex, any of those, you’ve got to put at least 20% down, that’s the minimum requirement. But again the more you put down the better your pricing and your overall look of that loan is going to be.

Karen:  Yeah, and it also might make a difference to the investor too as far as cash flow goes. They might want to be mortgaging to a certain amount or putting enough down so that they have more equity.

Dan:  Correct.

Karen:  Yeah, and that brings up I wanted to touch on the vacancy rates in Bend right now, and again this is current information. So our vacancy rate right now is 1.04, probably give or take a 10th of a percent.

Dan:  Unreal, yeah.

Karen:  And it’s interesting too because we have 4,996 rentals that were in this survey and only 52 were vacant.

Dan:  Exactly.

Karen:  That’s crazy.

Dan:  Meaning you own a rental property it’s rented in this market unless you’re just so priced out or something’s wrong. I mean, you have a very great investment opportunity in this town, in this area.

Karen:  So I did notice on the list of the ten properties that are available as far as multi-families go currently, I know some of these properties just because I know the area, and I know that some of them are going to need new roofs and stuff like that. Is there any way to borrow money on an investment property that also gives you money to like redo that roof or do repairs? Or is that just strictly for primary residences?

Dan:  Yeah, that’s generally for primary residences as a general rule. I’m not saying there isn’t something like that out there, but I sure don’t see it very much those rehab type loans. But we do have Directors is bringing out, Structures Mortgages bringing out a fix and flip type product that is for rehabbing investment properties only.

Karen:  When is that coming out?

Dan:  Very soon, actually it should be in the beginning of June sometime, very soon, yeah. And the value there is obviously that you can buy a place that does need some work and there will be a concession into that loan based on the future value when the work is done, and there it’s a great way to get in and buy a place that does need a little TLC and still get it back into a rentable condition and on the market.

Karen:  Yeah, because like I said I know some of these buildings, and I know they need some TLC. Of course purchasing it you’d have to do all the right rental rules with the tenants and etcetera. Well, it’s time to take another break. I’m Karen Malanga and we’re talking with Dan Williams, vice-president of Directors Mortgage on KBNW the place for talk. We’ll be right back.

This is House Talk on 104.5 FM 1340 AM and kbnwtalk.com the place to listen. And I’m back with Dan Williams, vice-president of Directors Mortgage. We’ve been discussing investment properties, way to purchase investment properties. And so we’re going to touch on that just a little bit again.

Dan:  Yeah, one of the things I thought I’d bring up is that there’s certain loan limits that people deal with when they’re buying investment properties or any home for that matter. And Deschutes County, every county is a little bit different, some of them all run the same numbers but Deschutes County in particular some of the numbers that are relevant to people is basically that if you’re buying a single-family residence you can borrow up to a loan amount of $453,100 and stay, now I know it’s a specific number but you can stay within conventional limits. Well, conventional limits means again you’re not going into non-conventional jumbo type pricing and things that are a little different. And so as you go up in units the numbers go up, so if you’re buying a duplex for example you can borrow a little over 580,000.

Karen:  Oh, I didn’t know that. And then what about a triplex?

Dan:  Triplex is a little over 700, a little over 701,000.

Karen:  That’s a pricey triplex.

Dan:  Yes, and a four-plex just so you know up to 871,000, a little over that.

Karen:  Wow.

Dan:  And that keeps you within conforming limits. So again, it opens up the door for a little bit better loan scenario for someone looking to make an investment purchase.

Karen:  Yeah, and I had a question I like to think out of the box sometimes, get a little creative. So when we were in our earlier session we were discussing how the possibility of having a loan that would also help with the fixing up and you have a new rehab loan coming out, fix and flip, but if you were that first-time homebuyer and you were buying a duplex and so it’s your primary residence then there may be a program out there where you could get some funds to fix because you’re buying your primary residence, correct?

Dan:  Correct. Yes. But again, I hate to just look at my world because we’re talking generally about people and then their investments, but we generally do not have anything for somebody buying an owner-occupied that needs repair, in that respect if they’re buying units with an investment property on the side. The product that we are bringing out here soon is for investment property only. So it couldn’t be the roof over their head in that case.

Karen:  Yeah, so that defeats my creativity.

Dan:  There you go, sorry.

Karen:  Hey, I’m always trying.

Dan:  I agree. It’s a good thing. That’s why you work so well. Another thing that people can do that they don’t realize is they can have sellers who give concessions a lot of times to help offset closing costs and prepaid fees like we’ve talked about in previous shows. And with investment properties it’s up to 2%, so some products allow quite a bit more. On owner-occupied properties there’s a lot that will go up to 6 and even at the right loan 9. But with investment properties you can still get a couple of percentage points to help cover closing costs and prepaid, so again opens up a little more opportunity that much less cash out of your buyer’s pocket. So something to consider.

Karen:  Yeah, I think that Bend is such a fascinating market because we have our four quadrants, we’ve got the northeast, the northwest, southeast, southwest, and the investment properties in each one of those quadrants vary from the others, whether it’s initial cost to get into that duplex if it’s in the northeast part of town versus maybe in the northwest part of town, but then again the rents are also different too, like you’re going to pay less in rent in one quadrant versus rent in another.

Dan:  Yeah, absolutely. And that again will play into helping you qualify. I mean, if you’re paying a little bit more but you’re generating more in rents every month you can have a balancing skill there that helps you be just as easily in a position to purchase that home if you have the down payment. And ideally as it’s paid down and have a much more profitable rental property investment.

Karen:  Yeah, that makes a lot of sense. Yeah, this is exciting. I’ve got my wheels turning on some potential … I need to do an email to some of our buyers and just kind of discuss this with them. It’s exciting. So I want to do the all so to speak to something, because one thing we appreciate so much about Directors Mortgage is the financing guarantee that you offer. And I’m not sure our listeners know about that.

Dan:  It is awesome. One of the greatest things that we do is pretty much in this town the market is so hot that when you want to make an offer on at home you know that you need to have a pre-approval letter going in with your offer, correct?

Karen:  Yeah, uh-huh, correct.

Dan:  I mean, there’s probably almost no seller’s agent that’s going to accept an offer from somebody that’s not pre-approved.

Karen:  Definitely.

Dan:  So that being the case everyone goes in and they should meet with the lender first, get pre-approved, and know what they can actually afford and not do. Well, one of the best things that we do is when we give that pre-approval it’s not just a worthless piece of paper that, “Oh, yeah, here you go and away you go.” We actually guarantee the borrower’s financing on the person that’s been pre-approved. And so what does that mean?

Karen:  Yeah, what does that mean?

Dan:  How do we guarantee it? What we’re saying is we’ll put our money where our mouth is, and that when we take you through that process and you go put an offer on the table that you can write a check for earnest money which a seller is going to expect. And with us what we’re saying is that for any reason your financing does not come through, even things that aren’t our fault, that aren’t even really the borrower’s fault. The home let’s say for example doesn’t appraise at value, and the buyer and the seller can’t agree to come to terms on the price. Well, the buyer may have already written a check for earnest money that they’ve released early, and in doing so what we’re saying is we will guarantee your financing, and if it doesn’t come through we will reimburse your earnest money up to $5,000.

So now you’ve got a situation where the buyer can make an offer that separates themselves from the crowd and that they can possibly offer to release earnest money early, the seller can take that money and they feel like they’ve got skin in the game, they’ve got a solid borrower.

Karen:  Sure.

Dan:  The buyer on the other hand knows that they’re really not at risk, they can even lose their job and we’ll still protect.

Karen:  Well, that gives everyone such a sense of confidence.

Dan:  Exactly.

Karen:  I also wanted to mention that Dan and his partner Headley and my daughter Kristen Marshall, broker at Remax, will be teaching a home buying class next Thursday. And it happens to be in a neighborhood that we have listed called Trailside in Northwest Bend, and those are great investment homes.

Dan:  Yes, they are.

Karen:  They’re terrific investment properties, they’re in the low 400s, and the rents are above 2200 so it makes a lot of sense. So for any of you that are interested in learning home buying 101 please visit nestbend.com for all the details, and in the meantime we have a trivia question, so two more tickets to the movies and the question is what is a cap rate? So go to nestbend.com and put your answer in and you can go to the movies too.

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