Banks seeking to sell commercial-property loans are encountering a dried-up market with few options for an easy exit.
Lenders including Goldman Sachs Group Inc. and JPMorgan Chase & Co. have been trying to sell debt backed by offices, hotels and even apartments in recent months, but many are finding that tidying up loan books is no easy feat when concerns about commercial real estate have surged.
This year’s rise in borrowing costs has made commercial real estate one of the hardest-hit areas of the economy. Property sales, especially for office buildings, have slowed to a trickle, giving landlords and lenders few markers to determine the value of certain assets. In the absence of transactions, stakeholders are closely watching the loan sale market to see what price banks can ultimately nab for some of the loans.
Banks have been eager to sell what they can, at times to shore up liquidity or to avoid complicated situations that may crop up when a loan is maturing and needs to be refinanced. For some lenders, taking a slight haircut on the price may be better than running the risk that the lender has to foreclose and ultimately ends up stuck with the property, according to Gregory Hagood, president of SOLIC Capital, which has an investment banking practice.
“Even if most of these are performing loans today, they’re trying to reduce their exposure by selling loans at a discount as they head into a refinance cycle,” Hagood said. “A lot of these banks will say, ‘I’d rather take the hit there than take the hit on a foreclosure and have to deal with the asset after.'”
Goldman and JPMorgan, along with other banks including Capital One Financial Corp. and M&T Bank Corp., have sought to sell property debt in recent months, seeking buyers both for one-off sales and transactions for portfolios of loans, according to people familiar with the matter, who asked not to be identified citing private information.
While pressure is building on banks to reduce their commercial-property exposure, distressed loan sales are still relatively rare. Many banks are opting to hold onto the debt for longer and work out situations with different borrowers.
Hit the Numbers
With so few sales occurring, it’s been hard to figure out exactly what the loans are worth. On top of that, some sellers have become more cautious about what bids they’ll accept, especially after the spate of bank failures earlier this year. Too low of a price could spook investors and raise concerns about the health of the financial institution, according to Josh Zegen, co-founder of Madison Realty Capital, a non-bank lender.
“Some banks have tested the market on office loans and they just can’t hit the numbers,” Zegen said. “There’s too much of a bid-ask spread, and there’s really nothing to talk about because agreeing to the lower pricing would make these banks more insolvent.”
Given the banks’ caution about accepting too low of a price, some lenders have opted to entice buyers through other means. Seller financing has become one option, where the seller helps the loan’s buyer finance the purchase.
It’s become particularly challenging for debt tied to offices — the property type that’s seen its value plummet the most over the past 12 months. Job cuts and the rise in remote work have led to record vacancies across major cities, while higher borrowing costs have made financing more difficult.
“We don’t know yet where tenant demand shakes out, and in the absence of that, you can’t have stability in the market,” said Winston Fisher, a partner at New York-based real estate investment firm Fisher Brothers. “We’re a contractual income business. If you don’t know where that contractual income is going to stabilize, how do you value it?”
Shopping Loans
Capital One has struggled to offload a large office debt portfolio with a heavy concentration in the tri-state area including parts of New York, according to people familiar with the matter who asked not to be identified discussing private information.
Capital One Chief Financial Officer Andrew Young told investors in July that the bank had moved about $900 million of loans from its office portfolio to a “held for sale” designation as it seeks to offload the debt.
Earlier this year, Webster Financial Corp. sold an $80 million portfolio tied to offices and mixed-use properties in Connecticut, New Jersey and New York.
JPMorgan is exploring a sale of a $350 million loan that’s backed by Manhattan’s HSBC Tower, Bloomberg reported in July. The bank has approached potential buyers to sell the loan at par, while offering cheaper-than-market financing.
Spokespeople for Capital One and JPMorgan declined to comment.
Banks have also sought to sell debt on other types of real estate besides offices, such as apartments or hotels. Pricing has held up better for those property types, with apartment values dropping 16% over the past 12 months through July compared with a 27% decline for offices, according to real estate analytics firm Green Street. Hotel prices were unchanged over that time period.
Goldman has sought to offload hotel and apartment loans, according to people familiar with the matter, who asked not to be identified citing private information. Meanwhile, M&T is in the market with a hotel loan too, the people said.
Spokespeople for Goldman and M&T declined to comment.
Lenders that have found buyers for loan portfolios have used the deals to help shore up liquidity at a time of increased stress across the banking industry. PacWest Bancorp, for example, has been selling construction loans and other real estate debt.
Because recent loans at higher rates are more profitable, banks are becoming more inclined to get rid of low-yielding, high-maintenance “dead money” loans with limited prospects for returns, according to Will Sledge, senior managing director in Jones Lang LaSalle Inc.’s capital markets group.
“Liquidity is a prized possession,” Sledge said.
The industry is keenly watching one big potential sale that’s being managed by brokerage Newmark Group Inc. The Federal Deposit Insurance Corp. is seeking to offload about $60 billion of loans — many of which are tied to real estate — from the failed Signature Bank.
Walking Away
Banks are facing the prospects of getting stuck holding the properties in some situations. Large institutions, such as Brookfield Asset Management Ltd., Blackstone Inc. and an office landlord tied to Pacific Investment Management Co., have chosen to cut their losses on some buildings, defaulting on debt. In some instances, landlords have handed the keys back for certain properties.
Aareal Bank AG is working to sell debt on two Manhattan buildings where owners walked away. A unit of the bank is offering non-performing loans on two large offices, one in the Financial District and one in Midtown’s prestigious Plaza District, according to people familiar with the matter. A spokesperson for Aareal Bank declined to comment.
Even if banks are struggling to offload loans, some lenders are controlling their exposure to commercial real estate by halting origination of new debt. Banks including Fifth Third Bancorp have said that they’ve stopped originating office loans.
More deals for old loans would give better clarity on pricing, which could reveal just how different valuations are these days, according to Martin Nussbaum, principal of Slate Property Group.
“There’s a complete fear around office values and where they stand,” Nussbaum said. Repricing “could be a seismic shift in the asset class.”
An old tool is back as mortgage rates rise: Seller financing often occurs when buyers hope to save on closing costs and sellers want top dollar for their home.
NEW YORK – Real estate professionals report an increasing interest in seller financing for transactions involving residential properties after the rise in interest rates.
Seller financing was almost nonexistent when mortgage rates hit record lows, but it’s not a new tool. It’s used most often when buyers seek to increase their purchasing power by saving on closing costs or paying lower interest rates – and, at the same time, by sellers who want buyers to make a full-price or higher offer on the home.
However, sellers who give buyers the title upfront face significant risk if they provide financing.
David Dweck, a private investor from Boca Raton whose portfolio consists of single-family homes in Florida and North Carolina, says he carefully vets his buyers when he agrees to provide financing.
“I underwrite it as if I’m a bank,” he says. “I want to have a reasonable expectation that the borrower will pay me back.”
Dweck requires a down payment of at least 20% and will only consider seller financing if the buyer pays full price or above.
Danny Hertzberg, an agent with The Jills Zeder Group at Coldwell Banker in Miami Beach, says that while owner financing is often discussed between buyers and sellers, it is rarely consummated. He noted its most likely to occur when the house has either been languishing on the market without any offers, or the offers come in too low.
“There has to be some carrot for the seller to consider it,” he said. “Usually that carrot is a buyer offering full asking price or close to it.”
Source: Wall Street Journal (07/26/23) Friedman, Robyn
While Rithm Capital’s purchase of $1.4 billion of consumer loans from Goldman Sachs will assist with its diversification efforts, it can also help its mortgage lending business, a BTIG report said.
The price paid was not disclosed. The portfolio consists of loans originated by Goldman Sachs’ Marcus unit, and held on the parent company’s balance sheet.
“To a degree we think the acquisition of Marcus loans could pair nicely with its origination efforts on the mortgage financing side of the business, especially if there’s some first-time homebuyers in the mix,” the BTIG report, authored by Eric Hagen and Jake Katsikas said. “However, we think the deeper objective is to flex its capabilities as a diversified investor and lender, including the ability to toggle between putting assets on its own balance sheet and generating fees from managing and servicing on behalf of third parties.”
These are fixed-rate closed-end installment loans, with about 95% of the pool originated between the fourth quarter of 2021 and the same period in 2022. BTIG provides “cursory details” on the portfolio, namely an average credit score of 735 and a projected loss range of between 8% and 10%.
Goldman Sachs is in the process of reorganizing Marcus. Furthermore, in the second quarter, Goldman Sachs recorded a $1.15 billion hit to its earnings because of commercial real estate issues.
At the end of the first quarter, Goldman Sachs had $2.9 billion of Marcus loans on its books, net of a $470 million write-off. During the period it sold a $1 billion portfolio to Varde Partners and provided $830 million of seller financing, BTIG and Bloomberg said.
“This purchase is extremely attractive to us building off our past and current expertise in consumer finance,” said Michael Nierenberg, chairman, CEO and president of Rithm, in a press release. “Consistent with our investment approach, we continue to look for opportunities to grow shareholder value and believe this transaction will be an excellent addition.”
Rithm could move into direct consumer lending given the changing landscape in the banking business, a Keefe, Bruyette & Woods flash note on the deal said, citing Nierenberg’s comments in a Bloomberg article.
“We view the transaction positively, as Rithm has a history of making opportunistic investments that generate attractive returns,” Bose George, an analyst at KBW said in a flash note.
This deal compliments a prior Rithm investment in what BTIG termed the SpringCastle portfolio, a small, but high-yielding package of lower credit score unsecured consumer loans originated and serviced by OneMain.
“The acquisition also aligns with Rithm’s objective of widening its stance to incorporate a comprehensive list of target credit investments, along with developing third party asset management capabilities,” BTIG said.
Rithm wants to flex its capabilities as a diversified investor and lender, with the ability to toggle between putting assets on its balance sheet and generating fees from managing and servicing them on the behalf of third parties, the report continued.
BTIG’s bottom line on this transaction is it continues to see Rithm’s diversification of capital as a source of value for investors, “especially if the objective is to eventually spin off the [mortgage] origination and servicing segments of the business, as it could help certain tangential strategies with strong returns become more visible earnings drivers.”
The Hottest Thing in Real Estate Is a Loan From Two Years Ago
Real estate agents are pushing sub-3 percent mortgages as an amenity, just like marble countertops or a view of the mountains.
June 10, 2023
The only goal was to not lose money.
When Matthew Kilboy listed the Washington, D.C., condominium that he and his husband had bought in 2017, they accepted that higher interest rates and a soft market for condos meant any dollar over the $529,000 they had paid was a dollar they would thank their lucky stars for.
A similar two-bedroom and two-bath unit in the building had recently gone for just under half a million. The $549,000 price they listed in April was basically a wish.
A month later, the couple closed at $565,000 — thanks to a little-known amenity that has become increasingly popular as mortgage rates have risen. Their unit came with an assumable 30-year mortgage, with a 2.25 percent fixed rate that the couple had locked in after a November 2020 refinancing. By advertising that the buyer could inherit the mortgage, the couple, who have moved to Denver, got several over-asking-price bids that seemed like a relic from the warped real estate market during the Covid lockdown.
“It was the very first sentence of the listing,” said Mr. Kilboy, 39, a former Navy nurse whose loan, backed by the Department of Veterans Affairs, could be passed to the buyer. “No one could find an interest rate that low, so we were really pushing it.”
resumed their ascent, despite a huge increase in borrowing costs. The refrain among real estate agents and economists is that anyone who secured a mortgage rate of 3 percent or lower owns a valuable asset that they are loath to give up.
But every asset has a price. And now an emerging cadre of investors and real estate agents are trying to, in effect, sell mortgage rates from several years ago by transferring them to new buyers.
Redfin, the real estate brokerage, has seen a steep rise in listings like Mr. Kilboy’s that have comments like “beautiful home with assumable loan at 3.25 percent.” Facebook groups have popped up to find buyers for them, while new companies are pitching services to speed up the transfer.
Assumption Solutions, a consulting firm that, for a $1,100-per-deal processing fee, helps real estate agents navigate transferring mortgages between sellers and buyers. In his pitch to agents, Mr. O’Boyle argues that they push sub-3 percent rates as they do marble countertops or a view of the mountains.
“You market this, and let’s say you’re competing against the house next door, your house should sell either faster or for more money,” he said.
2/1 buydown,” in which a borrower pays for an interest rate reduction of two percentage points during the first year and one percentage point in the second.
Put simply: “Most homes are unaffordable at today’s rates,” said Luis Solis, a real estate agent in Phoenix and Portland, Ore.
A majority of Mr. Solis’s recent deals have had some form of interest rate compensation that is a price cut in all but name, he said. Usually it’s a lump sum at closing that buyers use to buy temporarily lower rates. Sellers with a lot of equity can cut out the middleman and finance the buyer’s purchase below prevailing rates by acting as a lender — seller financing, it’s called.
Assuming mortgages, paying down rates: These are creative but straightforward solutions to rising borrowing costs. But on the margins, a rising number of investors looking to buy homes with minimal cash are trying a gray technique of finance — known as “Subject to” or “Subto” — in which they try to find people who have fallen behind on their debts and make a side agreement to take over their (low-interest) payments. (The deal is said to be “subject to” an existing loan.)
@ConorDougherty
A version of this article appears in print on , Section BU, Page 1 of the New York edition with the headline: The Hot New Thing Is a Loan From 2021. Order Reprints | Today’s Paper | Subscribe
For those looking to build their dream home, purchasing land is usually the first big step.
While building a house is far from easy, there are ways for first-time homeowners to make their dreams achievable. Land loans are a great resource, often used in conjunction with a traditional loan. Anyone choosing to build a house is likely to at least consider applying for a land loan.
A land or lot loan is a great financing option for those who have always dreamed of buying land and building their own home.
11 Best Banks for Land Loans
Because land loans typically carry higher interest rates than traditional mortgage loans, it pays to carefully consider the pros and cons of several lenders.
Below we’ve compiled a detailed list of the banks and credit unions offering the best land loans available today. Whatever lender you choose, be sure to check beforehand that they are fully licensed to provide mortgage loans.
The Nationwide Mortgage Licensing System (NMLS) is a centralized database of licensed lenders which you can use as a reference.
1. Atlantic Union Bank
Atlantic Union Bank offers land loans for both residential lots and undeveloped land. The bank is based in Virginia.
There are also separate construction loans available for those interested in financing the construction of a residence. Bear in mind that while Atlantic Union has a strong reputation as lenders, having been in business since 1902, they don’t have services like loan calculators, interest rate guidelines, or down payment information on their website.
For more information on a land loan with Atlantic, you’ll need to call them or visit a local branch to speak about a land loan.
2. Old National Bank
Old National Bank is headquartered in Indiana, and has been in operation since 1834. They offer lending products and services to residents of Indiana, Minnesota, Wisconsin, Michigan, and Kentucky. Old National has two different types of financing for land on offer, depending on the size of the property you’re interested in:
Lot Loans are designed to finance land purchases of no more than 5 acres, requiring a 20% down payment.
Land Loans are for larger property, designed to finance land purchases between 5 and 25 acres. These loans come with a minimum down payment of 35%.
Both land and lot loans with Old National will carry various interest rates and repayment terms. You can get either of these loan types for both improved and unimproved land, and there is no obligation to immediately begin building once a loan is secured.
Old National Bank also has around 250 brick-and-mortar locations since merging with First Midwest Bank. If visiting a local branch to speak with a loan officer is your preference, you shouldn’t have to travel too far.
On the other hand, you also have the option of using Old National’s online loan calculator and online loan application service, if visiting a local branch isn’t convenient.
3. Mountain America Credit Union
Mountain America Credit Union is a federally chartered credit union regulated by the National Credit Union Administration (NCUA) and headquartered in Sandy, Utah. They locations across Arizona, Idaho, Utah, Montana, Nevada, and New Mexico.
Mountain America’s lot loans are available with 85% financing on approved credit, fully amortizing fixed-rate and balloon options, and an easy online application process. The loans are designed to be easily converted to a construction loan, ensuring that you can move forward with your home building plans when you’re ready.
4. WaFd Bank
WaFd, or Washington Federal, offers bank loans for improved land up to the value of $700,000, without any immediate obligations to build.
You can use their online loan calculator to receive an estimate of the interest rates you can expect for a land loan. These estimates are based on your credit score, development plans and the specifications of your desired property.
The minimum down payments and interest rates will vary depending on your ideal loan term, as well as all the other details of your application.
You can apply directly for loans through their online portal, as well as in person at a bank branch. Land loans are available from WaFd Bank only in the following states: Washington, Idaho, Nevada, New Mexico, Oregon, Texas and Utah.
5. Banner Bank
Banner Bank is active in the states of Idaho, Washington, Oregon, and California. They offer financing for purchasing both improved and unimproved land. Banner allows customers to borrow up to 75% of a property’s purchase price, and they also claim to bring competitive interest rates and fees.
All loans with Banner Bank are approved in-house, which means a streamlined credit score check and loan approval process.
If you do apply for a loan with Banner Bank, you also have the option of locking in a fixed interest rate or a flexible rate. Banner also offers financing for construction and personal loans.
6. California Bank & Trust
Customers with California Bank and Trust can potentially avail of both a land loan and a construction loan in one. The bank offers financing for up to 60% of the lot purchase value, along with several loan options.
The option to choose either a single or dual-purpose loan, which can cover both land purchase and construction of a home, makes California Bank & Trust an attractive lender. This is a great option for those looking to save both time and money.
You can apply for a loan online, over the phone, or in person at a local branch.
7. Randolph-Brooks Federal Credit Union
Randolph-Brooks Federal Credit Union is not your typical financial institution. As a financial cooperative, its sole mission is to help members save time, save money, and earn money. Over the years, the credit union has expanded its reach to over 1 million members in Texas and beyond, with a strong presence in Austin, Corpus Christi, Dallas-Fort Worth, and San Antonio.
With over 60 branches dedicated to serving members and the community, RBFCU offers a range of land loan benefits and features, including term options up to 15 years, free 60-day rate lock, and up to 90% financing.
And the best part? There are no building requirements from the lender, so you can have the freedom to build your dream home the way you want. Set up automatic payments and let RBFCU help you make your land ownership dreams a reality.
8. Citizens Bank & Trust
Citizens Bank & Trust is a North Alabama-based institution that’s committed to providing a hassle-free lending experience. What’s more, you can roll your loan into a permanent one, saving you on closing costs.
With local decision-making and processing, you’ll get the personalized attention you deserve, while a streamlined application process ensures you get your funds when you need them. You can experience a stress-free borrowing experience when you choose Citizens Bank & Trust for your land loan needs.
9. Alpine Bank
Alpine Bank is active in Colorado, offering financial services including land loans. Specifically, they offer loans for both lot and new constructions, with a maximum loan to value amount of 75% for land classified as improved.
Alpine Bank doesn’t offer lending details on their website. You can use their website to connect with lending experts in your county. You can also reach out for more loan information online, over the phone, or in person at one of their local bank branches.
10. First Bank & Trust
If you’re looking to buy land or a lot and build your dream home, First Bank and Trust Company can help. Headquartered in southwest Virginia, with additional locations in Tennessee, North Carolina, and Virginia, the bank is committed to helping you realize your homeownership goals.
With a range of lot and land loans, you can choose the financing option that’s right for you, while enjoying competitive rates and flexible terms. Whether you’re looking to build your dream home or invest in a piece of land, First Bank and Trust Company has the financing options you need to make it happen.
11. First Hawaiian Bank
First Hawaiian Bank offers land loan options designed for those who are ready to buy land but not quite ready to build. With 2- and 3-year terms available and no prepayment penalty, you can secure the land you want without worrying about costly fees. And with interim financing available to purchase a vacant lot at residential pricing, you can lock down the land you need to bring your vision to life.
Best of all, your FHB land loan can be refinanced into a construction-to-permanent loan with reduced fees, making it easier than ever to get the financing you need to build your dream home.
What are land loans?
Land loans are loan products designed to help individuals and businesses purchase land for development. A bank, credit union, or online lender can offer specific loans for those interested in buying land. Land loans are also known as ‘lot loans’.
Similar to a mortgage loan, land loans provide individuals and small businesses the opportunity to finance the purchase of land for many purposes, such as investment, agriculture, recreation, or development.
However, because these types of loan are considered riskier for lenders, they typically come with a higher interest rate compared to a mortgage loan. In addition, the conditions of the loan will depend on the type of land being purchased, as well as what the land will be used for.
Let’s take a closer look at the types of land that a land loan can help finance.
Types of Land Classification
Your chances of obtaining financing for land will depend partly on the type of land you want to purchase. In general, lenders who offer land loans will view developed land as less of a risk than undeveloped land.
When it comes to land loans, there are three primary types of land considered for financing.
Raw Land
‘Raw land’ is the first classification and refers to completely undeveloped, rural land. Think no buildings, electricity or drainage system. This is the most difficult land to obtain financing for because land loan lenders view it as the greatest risk of abandonment.
As a result, if you plan to apply for a land loan for raw land, you’ll need to demonstrate that you’ve got a detailed plan for development. Showing lenders that you’re competent and dedicated to the project will help you navigate the lending market.
Although the purchase price of raw land is often cheaper than land that is developed, a raw land loan will come with higher rates. You may also be required to put up a more substantial down payment.
Unimproved Land
‘Unimproved land’ is a step up from raw land, and covers a broad variety of possibilities. Unimproved land will often be land that was once developed, or has seen failed attempts at development in the past. In some cases unimproved land will have some limited access to utilities and amenities, but will need significant repair and refurbishing.
An unimproved land loan can also be difficult to get, even though it poses less risk compared to raw land. Again, having a detailed plan and being aware of the challenges at hand will be a huge help when negotiating with lenders. A large down payment and a strong credit score will also be helpful.
While lenders tend to view unimproved land loans as less risky than raw land, it is still common for rates to be a fair bit higher compared to traditional mortgage rates, for example.
Improved Land Loan
‘Improved land’ typically has decent or good access to utilities, roads and water. Because improved land is the most developed land type, it almost always comes with a higher price tag. On the other hand, this means that interest rates will be significantly lower compared to raw or unimproved land loans. You’ll also find more affordable down payments for developed lots.
For most aspiring homeowners, purchasing land that is already developed with access to basic amenities is the ideal. This allows them to immediately get to work building a house, whereas having to develop land first could add at least another year to their construction project.
How to Apply for a Land Loan
If you want to buy land and build your dream home, you’ll probably want to apply for a land loan. Land loan applying isn’t complex, and land loans work the same as many other types of loan. Here are the steps involved:
Find a Plot
You should start by first identifying the plot of land you want to buy. It helps to have a few options chosen in advance. For example, in the event that you can’t afford to find a good lending option for your first choice, you can quickly move on to an alternative instead.
Draw up a Development Plan
The next step is to make a development plan for each plot that you have on your shortlist. You may need or want to hire professional help to create a solid plan. Try to include as much detail as possible, without overextending yourself or wasting too much time and money.
When it comes to development and construction plans, both an estimated timeframe and overall cost range are the most important details. A good plan will help you negotiate the best rates with a lender.
Find a Lender
Once your development plan is ready, it’s time to seek potential lenders. Depending on the type of development you’re proposing, as well as the type of land you want to buy, it may take some time to find willing lenders.
Be prepared to also take some time to consider more than one loan offer. Ideally, you can compare multiple lenders, and use a pre-approved quote from at least one lender to negotiate against others.
Complete the Application Process
Once you’ve chosen a lender and been approved for your loan, you’ll be guided through the lender’s application process. The majority of lenders will require information such as your development plan, a credit check, and personal information.
You might also need to provide details on things like zoning considerations, utilities access and land use restrictions, where relevant.
Alternative Land Financing Options
In addition to seeking a land or construction loan, there are several other types of loans and financing options available.
USDA Loans
If you’re looking to own land and build a home in a rural area, you may be eligible for a USDA loan. The U.S. Department of Agriculture offers loans that may assist low and moderate income families in finding a new home. USDA Section 523 loans are for wanting to purchase land to develop, and Section 524 loans are for financing new constructions by contractors.
While it isn’t easy to qualify for a USDA loan, the benefit is they require no down payment and the interest rates are low. USDA loans must be settled within two years, however, so there are no long term options.
FHA Loans
Another government-funded product, FHA loans are tailored towards those wanting to buy land and quickly build a home. The Federal Housing Administration insures these loans, protecting FHA-approved lenders from risk.
FHA loans are not available for land purchase alone, but for those intending to build a home on as well as land. FHA loans are sometimes granted in conjunction with construction loans, too. If you’re eligible for one of these loans, you’ll likely have a lower minimum down payment, but potentially higher interest rates.
Home Equity Loans
Home equity loans may be an appealing alternative to land loans for some homeowners. If you already own a property and have good credit standing, this kind of loan might be a good fit. A home equity loan acts as a second mortgage, and will essentially convert your equity into collateral for a new loan to fund your purchase.
Cash-Out Refinancing
Cash-out refinancing involves homeowners refinancing their homes to increase equity. This type of refinancing is essentially paying off your current mortgage to secure another mortgage, but with a lower interest rate and easier monthly payments.
Once the remortgaging is made official, your bank or financial institution will issue you a check based on the equity in your property. You can then use this payment to fund your land purchase.
SBA Loans
The Small Business Administration (SBA) offers loans to small business owners from the 504 loan program.
These loans are best suited to the purchase of real estate for business reasons, so they are not ideal for regular homeowners. However, if you’re looking for land to purchase to grow your business, you might want to consider an SBA loan.
Generally, the Small Business Administration will cover 40% of the purchase value, with 10% from the borrower and another lender of choice providing the other half of the loan. The terms and rates on SBA loans vary depending on the lender you choose to fund 50% of the land purchase.
Seller Financing
If you’re lucky, you may be able to obtain financing directly from the landowner you want to buy from. Also known as land contracts, these types of loans involve the buyer essentially taking out a loan directly from the seller, often with a substantial down payment.
Seller financing also tends to come with less than competitive interest rates. For those who struggle to qualify for a traditional mortgage or financing, seller financing can often be a great, but more costly, alternative.
Frequently Asked Questions
What is the best loan for buying land?
The best loan option for buying land depends on your circumstances. While improved land loans may seem ideal, the reality is there are multiple loan options to choose from.
Your credit score, debt-to-income ratio, and the condition of the land you wish to purchase are all factors that can influence which type of financing will suit you best.
Is it difficult to get a loan for land?
It’s true that obtaining loan financing for the purchase of land isn’t as easy as getting a regular personal loan. However, there are lenders out there with experience financing land purchases. As with any loan, the bottom line will be your credit score, as well as the size of your down payment. The nature of the land in question is also a primary factor.
If you can’t qualify for traditional financing options, there are alternatives such as USDA loans, FHA loans and more to consider.
Turn-key rental properties can be a great option for investors looking to get cash flow without a lot of work. They are also a great option for investors who cannot find cash-flowing properties in their state and must invest in a different area. Turn-key rental properties are fully repaired, rented, and managed by a property manager. Buying a turn-key property allows a long-distance investor to buy a property that cash flows with minimal work. I own a lot of local to me real estate, and I have bought a turn-key rental as well out of my area. You must be very careful with the property you buy and the company you use. While turn-key rentals can help investors buy cash-flowing rentals in different markets, it can also be a risky investment.
What is a turn-key rental property?
Some consider a turnkey property to be a house that is remodeled and needs no repairs, but for this article, we are talking about rental properties that are set up to make money right away. I consider turn-key to mean the home needs no repairs and has a tenant and property management in place. Make sure you and whomever you are talking to about turnkey properties have the same definition of turn-key!
There are many companies that will sell turn-key rentals to real estate investors, but be very careful when using these companies. Some are great and some have caused investors huge losses. Make sure you vet whatever company you use.
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What are the advantages of turn-key rental properties?
One of the biggest problems for many investors is finding affordable properties that will make money. Turn-key rentals are often located in areas that have low prices and relatively high rents.
Here are a few advantages to buying turnkey rentals and why I bought a turn-key rental:
Easy to find: You can buy a turn-key property very quickly from turnkey providers who have a stock of turn-key properties available to purchase. Turn-key companies can have a large inventory of turn-keys because the properties are providing cash flow and are making money while the company owns the properties. You do have to know the right turnkey companies to work with.
Less work than a normal rental: Turn-key properties are already rented, managed, and repaired. You do not have to find contractors, property managers, or real estate agents.
Provide cash flow from day one: The first day you buy a turn-key, it will have a tenant in place paying rent. You do not have to worry about how long the repairs will take or how long it will take to get a tenant.
Provide a great return: Most turn-key rentals provide 10 to 15 percent returns. The return begins right away and takes little work to maintain because a property manager takes care of the house for you.
Provide diversification: Buying turn-key rentals in different markets of the country gives you diversification.
Can be bought for cash: Many foreign investors have trouble buying properties because they cannot get financing. Turn-key rentals can be as inexpensive as $30,000, making them easier to buy with cash.
You can invest your retirement savings: You can invest a self-directed IRA or 401k into turn-key rentals.
What are the disadvantages of turn-key properties?
While there are many advantages to buying a turn-key rental property there are disadvantages as well:
Turn-key rentals are usually priced at retail value or even above retail value. I like to get a great deal on my rentals and that is why I have not bought more turn-key rentals.
It can be tough to know where to buy a long-distance rental or keep track of it. You must have a great property manager to make sure the home is maintained and managed right.
Not all turn-key companies are reputable and many take advantage of long-distance buyers because they do not see the property.
There may not be as much cash flow with a turn-key property than if you buy it yourself.
How can you find turn-key rental properties?
There are many turn-key rental property providers throughout the United States. Some companies are specific to local markets such as Memphis, Ohio, Missouri, Florida, Texas, Chicago, and Wisconsin while other companies have properties all over the country. The properties vary in price, rent, financing options, and returns, but a good turn-key property will cash flow. Even with cash flow, I would advise investors to spend time researching the property manager and the area they want to invest in before buying any turnkey property.
A Google search for turnkey rentals will get many results for property managers and houses for sale that are not rented. I have spent a lot of time researching turnkey companies and have met with turnkey companies in person. I have met a lot of turnkey company operators and only met a couple that I trust! Fill out the form below and I will refer a company to you I trust. Your information will not be given to anyone or used for anything except a turn-key rental property company to talk to you about turn-key rentals.
The company I used for my turn-key rental is not one I would recommend and is not selling turn-keys anymore. This is a different company and I have talked to many investors who used them with success.
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Do I invest in long-distance turn-key rental properties?
I had always bought my rental properties in Colorado until 2015. That was when prices became too expensive here to get good rentals. I bought one turn-key property in Ohio that has done okay for me. I have no plans to buy any more turn-key properties because I prefer to find deals on my own in my local market. If I can find the deals I can get a discount which is a huge advantage with real estate. I may buy in other states but I would buy with a real estate agent who is able to search for more houses, but just what the turn-key company owns. A good agent can also find property managers and even contractors. I have a few agents like this across the country in areas with good rent-to-value ratios.
How much do turn-key rental properties cost?
Every turn-key property is different and every location for turn-key properties is different. I have seen turn-key rentals that are repaired, rented, and managed that range from $35,000 to $150,000. I have not seen turn-key properties in higher price ranges because it is much harder to cash flow on a higher-priced rental property than on a lower-priced one. The lower-priced turn-key rental properties usually provide better cash flow and may be a good option for foreign investors who have a hard time getting a loan on properties in the United States.
Can you make money with a turn-key rental property?
I normally do not buy rental properties that are turn-key ready, because they usually cost more. I rarely buy homes that are fixed up, because they usually are not a great deal. Rental property number nine, which I just got under contract, is the closest thing to a fully repaired property that I have purchased (or that I will have purchased). It needed a bit of paint, but that was about it. In a perfect world, I would love for all the rentals I buy to be repaired and rented before I buy them, which is one advantage of turn-key properties.
When I buy my rentals, they usually need work and I get a discount for the money and time I have to put into repairing them. In fact, it is less helpful to buy a home that needs repairs than purchasing a home fixed up, unless you can get a great deal. It is harder to have built-in equity on a turnkey rental, but you do not have to spend time repairing the home, renting it out, or finding a property manager.
When would investing in a long-distance turn-key property be a good idea?
I have had many people reach out to me about investing in rental properties, but they do not know how to start because their market is too expensive. When starter homes are $300,000 or more in an area, it is almost impossible to cash flow on rental property unless you pay cash for it. When you pay cash, your returns are not nearly as good as if you can get a loan (as long as the property cash flows). Rents are almost never high enough on a $300,000 home to cash flow, no matter where you live.
The down payment on a $300,000 property is going to be at least $60,000 unless you use a technique to buy with less money down. Then you have to add closing costs, reserves, repairs, and other costs associated with buying a rental property. I can buy two or three cash-flowing rental properties in my market, where someone in a more expensive area would only be able to buy one that may not cash flow at all. I never invest for appreciation, which is what many people are forced to do in these areas.
If you are in an area with very expensive homes or very low rents compared to home prices, you may want to consider long-distance investing and possibly long-distance, turn-key investing.
Diversification with turn-key rental properties
Many people like to spread out their risk when investing and rental properties are no different. If all of your properties are in one place, it could be riskier if something were to happen to that area. I have all of my rental properties in one place; one reason I like the idea of an out-of-state property is that it would provide diversification.
What is the difference between long-distance investing and long-distance turn-key investing?
Long-distance investing is simply investing in real estate outside of your local market area. You are still in control of the purchase, the renovation, and finding a property manager. This can be a great way to invest if you have a great team that can handle all of these aspects for you or if you are able to travel to handle them yourself. However, it takes a lot of time and work to buy a rental property in another state; you have to control the entire process of finding the property, repairing it, renting it, and finding a property manager.
Why do you need to do due diligence on a turn-key rental property?
Turn-key rental properties are typical houses that have been purchased by a turn-key company, renovated, rented, and have a property manager put in place. An investor still has to perform due diligence when buying a turn-key to ensure the properties are as advertised. The turn-key companies know their clients are out-of-state and they may try to fudge their numbers a bit to make more money on a deal. It does not hurt to have an inspection done on any property you buy even if the turn-key company says the home is completely repaired.
How can an out-of-state investor determine the value of a home
I wrote an article here about how to determine value. Even if a property cash flows great, an investor still does not want to pay much more than market value for a home. It is not easy to determine market value from a long distance, but it is possible. The best way to find out what a home is worth is to get an opinion from a local real estate agent. You can also use websites like Zillow or Trulia, but I would not count on them to be very accurate.
How can you find a real estate agent to provide a price opinion?
I wrote an article about how to find a great agent here, but many agents will be wary of providing values to an out-of-state investor. My advice is to be perfectly honest with the agent and tell them you are trying to verify if a price on a home is market value. Tell them your situation and see what they say. You should be able to find an agent or two who will give you ballpark values. You may even find an agent who knows of more turn-key properties in the area.
If you want a detailed value you can even order a BPO (broker price opinion) from a real estate agent. Most REO agents perform BPOs for banks on distressed properties. For $75 to $100 you should be able to find an agent who can complete a BPO report. Try looking on usreop.com, nrba.com or reonetwork.com for experienced REO agents. The agent should have their own BPO form they can use that provides three sales, three active comparables and they should know exactly what a BPO is. If not, find another agent.
How can an out-of-state investor determine fair market rents?
Not only does an investor need to know that they aren’t overpaying for a turn-key property, but they also need to know that the rents are accurate. It is possible a property manager or turn-key company rented a home for more than market rents by charging a premium to an unqualified tenant. You don’t want to buy a turn-key, have the tenant stop paying and then find out the home was rented for more than it should have been.
The best way to determine rents is to call a few property managers in the area. Tell them you are an investor, are buying some homes, and need a property manager. This serves a few purposes; it gives you an idea of market rents, the property manager can let you know if a property will be difficult to rent, and you can interview property management companies in case you need a new one.
You can also check Zillow for rental rates, but again they may not be accurate. You can also look at Craigslist, the classifieds, or check out this article for more tips on determining rental rates.
How to determine if your property management company is good on a turn-key property
The most important piece of a long-distance rental property is the property manager. A bad property manager can cause thousands of dollars in losses through lost rent or damaged property. This article on how to find a great property manager can help you determine if the property manager the turn-key uses or referred you to is any good. Make sure you ask the property management company what kind of screening process they use to check tenants; background checks, credit checks, references, income, and job verification. It is best to let the company tell you what they do and not suggest these screening processes to them.
In some cases, it may be difficult to contact the property management companies. A lot of turn-key companies sell hundreds of properties a year and the property managers do not have time to talk to hundreds or even thousands of prospective buyers.
What can you do if the rents, values, or property management is off on a turn-key?
The first thing you want to do is make sure you discover any issues before you buy a turn-key property! It will be difficult to get any recourse after the fact, although some turn-keys offer rent guarantees and buyback programs.
If you discover a problem before you buy a property, talk to the turn-key. Tell them what the issues are and see what they offer. The more facts and information you can back up your numbers with the better. You may be able to negotiate a better price or have them help you find a new property manager.
This is a great time to see how customer service-oriented the turn-key company is as well. Will they work with you and try to come up with a solution or become defensive? If they won’t try to help at all, then you have a great idea of how good they will be to work with after you buy a property and there is a problem.
Are turn-key rental properties a good option for foreign investors?
Foreign investors can buy homes in the United States, but it is hard for many of them to get financing. Traveling to the U.S., researching markets, finding real estate agents, closing on properties, and then repairing and renting properties is very difficult when you live in another country. Turn-key rental properties make it much easier for foreign or any long-distance investor to invest in rental properties. If you buy a turnkey rental property, you might not make as much money as if you did all the work yourself, but the time and money saved may be worth the cost.
Are turn-key rental properties a good option for self-directed IRAs?
You can invest money from a self-directed IRA into real estate. When you use an IRA to buy real estate, the IRA is buying the property and all income and expenses must go through the IRA. Some turn-key rental properties specialize in self-directed IRA investing and can help investors invest from their IRA into rental properties.
Can you buy turn-key rental properties with less than 20 percent down?
Some turn-key rental property providers offer seller financing that can be used to buy turnkey proprieties for less than 20 percent down. The trade-off with putting less money down is a higher interest rate and loan costs. Rates may be as high as 9 or 10 percent on seller-financed turn-key properties.
Conclusion
Turn-key rental properties are a great way to invest for cash flow when cash flow is hard to find in your market. Turn-key rental properties are also a way to invest in rental properties without having to repair or rent out the house or having to find a property manager. However, it is hard to get a great deal on turnkey rentals because turn-key providers want compensation for all the work they do.
How can you get more detailed information on specific turn-key properties?
If you would like a custom report on turn-key rental properties and more information on turn-key rental property companies, please fill out the form below. Your contact information will not be given to anyone, except a turn-key rental property company.
Many people want to buy investment properties because of the fantastic returns they can provide. However, many people do not have the 20 percent down payment (or more) that most banks require. There are ways to buy an investment property with little money down. The easiest way to buy an investment property with less than 20 percent down is to buy as an owner-occupant and later rent out the house, but there are many other options for investors as well. Using a line of credit, refinancing your home, house hacking, the BRRRR method, or even credit cards can provide ways to buy investment properties for less money. Seller financing is a great way to put less money down on a rental property if you can find sellers who are willing. A more advanced technique is to use hard-money financing that you can refinance into a conventional loan. Whatever way you choose to buy a rental property, research the method to make sure that it is legal in your state, your lender approves it, and that you are not stretching your finances too thin.
How much money down do most banks require?
An investor will have to put down at least 20 percent to buy a property from a typical bank. If you own more than four properties, that figure can increase to 25 percent down, providing that they are even willing to finance more than four properties. On top of the down payment, an investor will have to pay closing costs, which can range from two to four percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20 percent down, but they are not easy to find. Once you factor in repairs, carrying costs, down payment, and closing costs it can cost as much as $30,000 to buy a $100,000 rental property.
The video below goes over ways to buy with little money down as well:
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How to buy as an owner-occupant
The easiest way to buy an investment property with little money down is to buy as an owner-occupant, satisfy your loan requirements, rent out the property, and keep it as an investment. Most owner-occupant loans require the buyer to occupy the home for at least a year. Once that year is up, you can rent out the house and turn it into an investment property. There are many owner-occupied loans available, with down payments ranging from 0 to 5 percent down. You can put as much money down as you want if you want to put 20 percent down or even 50 percent down. USDA and VA have great no-money-down programs and little to no mortgage insurance, which will save an investor a lot of money each month. You will have more costs with little money down loans because mortgage insurance is required. Mortgage insurance can add hundreds of dollars to your house payment and eat away at your cash flow. The process of buying as an owner-occupant and then turning the house into an investment property is as follows:
1. Buy a house as an owner occupant, which will cash flow when you rent it out.
2. Move into the house and live there for at least a year.
After the year is up, find another house that will cash flow and purchase that home as an owner-occupant.
4. Move out of the first house and keep it as a rental. Move into the new house and repeat the process every year!
Eventually, you will be building up equity and extra cash flow, which will enable you to buy properties with a 20 percent down payment. Repeating this process 10 times would be an excellent way to get started, but no one wants to move ten times in ten years. It can also be tough to convince your family to live in a home that would be a great rental.
Low down payment owner occupant loans
If you are going the owner-occupant route there are many loans available that have from very little to nothing down required.
FHA loan
FHA loans are government-insured loans that can be obtained with as little as 3.5 percent down. You can only have one FHA loan at a time unless you have extenuating circumstances like a job relocation. You do have to pay mortgage insurance on FHA loans, which I will discuss later in this article. There are limits to the amount an FHA mortgage can be, which varies by state and even city.
USDA loan
USDA is a loan that can be used in rural areas and small towns. The loan can’t be used in medium-sized towns or large towns/metro areas. The loan is a fantastic loan for those that qualify and want to buy a home in the designated areas. USDA loans can be had with no money down, but do have mortgage insurance as well.
VA loans
VA loans are run through the United States Veterans Administration. You have to be a veteran to qualify for the loan, but they also can be had with no money down and no mortgage insurance! VA is a great option for those that qualify because the costs are so much less without mortgage insurance.
Down payment assistance programs
Many states have down payment assistance programs. In Colorado, we have a program called CHFA. The program helps buyers get into owner-occupied homes with very little money down. CHFA actually uses an FHA loan but allows for less than a 3.5 percent down payment. Check with lenders on your state to see if you have any programs that help with down payment assistance.
Conventional mortgages
Even conventional mortgages have low down payment loans available for owner-occupants. For owner-occupants, conventional loans have down payments as low as 3 percent. You will most certainly have to pay mortgage insurance with any conventional loan that has less than 20 percent down. Unlike some of the other loan options available, you can have as many conventional mortgages in your name as you want as an owner occupant.
FHA 203K Rehab loan
An FHA 203K rehab loan allows the borrower to finance the house they are buying and repairs they would like to complete after closing. This is a great loan for homes that need work, but the buyer has limited funds to repair a home. There are more costs associated with this loan upfront because two appraisals are needed and lenders have higher fees for 203K loans.
NACA Loans
NACA is a non-profit program with:
No down payment
No closing costs
No points or fees
No credit score consideration
Below market 30-year and 15-year fixed-rate loans
This sounds like it is too good to be true, and it is a great program. However, you do not simply apply for the loan and hope the lender approves you. You must take classes, and even host classes when in the loan program.
More details are on the NACA site.
What loan costs does a buyer need to consider besides the down payment?
On almost any loan you will have more costs than just the down payment. The lender will charge an origination fee, appraisal fee, prepaid interest, prepaid insurance and possibly prepaid mortgage insurance. Plus you may have more costs the title company charges like a closing fee, recording fees, and possibly title insurance. In most cases, the seller pays for title insurance, but with HUD and VA foreclosures the buyer has to pay for title insurance. These costs can add up to another 3.5 percent of the mortgage amount or sometimes more. When you talk to a lender they can give you an estimate of exactly how much these costs will be before you get your loan.
Can you ask the seller to pay closing costs?
Even though the lenders and title company will charge you more fees than just the down payment, that does not mean you have to pay that upfront. You can ask the seller to pay closing costs for you. If you can get the seller to pay your closing costs for you, loans like VA and USDA may be obtained with no out-of-pocket cash. You may still have to put down an earnest money deposit, but that can be refunded at closing in some cases. When you ask the seller to pay closing costs, it reduces the amount of money they are getting from the sale so you might actually be paying more for the home than if you didn’t ask for closing costs. But in my mind paying a little more for the house and financing those costs to save cash is better than paying more money out-of-pocket for a little cheaper home.
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House Hacking
House hacking is when you buy as an owner-occupant but you buy a multifamily property instead of a house. By purchasing a multifamily property you can live in one unit while you rent out the other units. This strategy allows you to rent the property faster, which may mean the bank will be more willing to give you a new loan as soon as you are ready to move out. You will also have help from the other tenants to pay your mortgage. In some cases, you may be able to live for free while you own the house because the other rent covers your costs.
Virtual real estate
Yes, you can now buy virtual real estate! This is land in the metaverse that only exists digitally. Some pieces of virtual real estate have sold for millions of dollars and others can be bought for almost nothing. Here is some more information on getting started!
BRRRR Method
BRRRR stands for buy, repair, rent, refinance, and repeat. It is a great way to get into rentals with less money down. You will need to get an awesome deal to make this strategy work, but you may be able to get all of your money back. You buy a house that is an amazing deal, fix it up, rent the property, and then refinance it. Once the refinance is done you repeat over and over! The key to making this strategy work is getting an awesome deal with plenty of equity. You also need to be prepared if things do not go perfectly. Appraisals can come in low, the banks may not want to finance you, you may not get the property rented or repaired as fast as hoped, etc.
Hard money loans
Using hard money can save you a ton of cash in the short-term, but it is more expensive in the end. Fannie Mae lending guidelines, allow you to refinance a home with no seasoning period, which means you do not have to wait six months or a year after you purchase a home, to refinance at a higher value than what you bought it for. Fannie Mae guidelines base the refinance amount on a new appraisal, and they will allow a 75 percent loan-to-value ratio. Fannie Mae guidelines do not allow a cash-out refinance, but they do allow the refinance to pay off any existing loans. Many hard money lenders will allow a buyer to borrow up to 100 percent of the purchase price and to finance repairs as well.
Since Fannie Mae guidelines allow a 75 percent loan-to-value refinance, theoretically an investor could buy a home for $100,000 and get a loan with a hard money lender for $100,000 plus $30,000 in repairs for a total loan amount of $130,000. The investor could refinance the home for as much as 75 percent of a new appraisal. If the appraisal came in at $180,000, then 75 percent loan-to-value would allow a refinance of $135,000. Fannie will not allow a cash-out refinance, but the investor could refinance the full $130,000 loan amount. This strategy can be costly due to hard money fees, but it allows the investor to refinance the entire purchase price and repairs!
This strategy can also be very risky because you are depending on a high appraisal to get your money out. Most hard money loans are only one year and you must pay off the loan after that year. Refinance appraisals are not always as high as we would like them to be. Make sure you have an exit strategy if the appraisal comes in lower than you expect.
Private money loans
One legitimate way to buy real estate with no money down is to use private money. Private money is from a private investor, friend, or family member. The private investor will give you money at a certain interest rate to buy a flip or rental property. Private money rates can vary from very cheap to very expensive depending on the relationship, investment, and terms of the loan. I use private money from my sister for my fix and flips. She charges me six percent interest. It is a great way to reduce the amount of cash I have into the properties.
I have used private money to buy commercial rentals and then refinance into a long-term loan with a local bank.
Can being a real estate agent help?
There are many advantages to having your real estate license, but the biggest benefit is you can keep your commission on almost every house you buy. On a $100,000 house, your commission could be $3,000 dollars or more. Here is an article that details why it is an advantage to become a real estate agent if you are an investor. Being a real estate agent also gives me an advantage in finding and purchasing great deals. I detail how hard it is to get your real estate license here. I saved more than $270,000 a year on commissions by being a real estate agent. That does not include the money I made on deals that I got because I was an agent.
Turnkey rentals
A new trend in the US is buying turnkey rental properties that are purchased, repaired, rented, and managed by a turnkey provider. Turnkey properties are a great opportunity for investors to buy rental properties out-of-state when homes are too expensive in their area. There are turnkey providers who offer as little as 5 percent down for investors, but they tend to have very high-interest rates. Here is a great article about turnkey providers or send me a request here for turnkey providers I know of. I bought a turnkey rental in Cleveland a few years ago.
Line of credit
I have had many lines of credit in my career. I have had lines of credit against my personal house (the house I live in) and my investment properties. It is much easier to get a line of credit against your personal house and some banks will not even offer lines of credit on investment properties. A line of credit is basically a loan against a home, but you do not have to use the money all the time. If you do not need the money you can pay it back to the bank and not be charged interest on it. When you need the money again, you can borrow it very quickly as long as the line is open.
Off-market properties
Off-market properties are purchased through direct marketing or by word of mouth. Buying off-market usually means less expensive properties and in some cases, owners with flexible terms such as owner financing. Many investors wholesale off-market properties, which you can purchase with no down payment. Wholesaling is a process of buying and selling properties very quickly. The properties must be very good deals and are usually found by direct marketing for properties. Many investors make a great living by only wholesaling properties to other investors.
Seller financing
Some sellers may be willing to finance the house they are selling or finance a second loan on a home that allows a buyer to put less than 20 percent down. If your bank is willing to offer 80 percent loan-to-value, the seller may offer to loan the other 20 percent, which would amount to no money down for the buyer. The seller may also offer a number of other loan-to-value percentages to help a buyer get into a home for less than 20 percent down.
Finding seller-financed properties is the tricky part. Most sellers are not looking to finance a loan when they sell. To find seller financed listings, look for homes that have no loans against them or an MLS listing description that say seller financing is available. The seller’s terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal. Do not expect to pay four percent interest on a seller-financed loan; they will want a premium on any money they lend. It is also harder to find great deals with seller financing, which is key to my strategy.
There are many new restrictions on financing thanks to the recent Dodd-Frank Act.
Refinance
In most areas of the country, home values are rising and interest rates are at record lows. You may be able to refinance your home and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance it in one year (sometimes less with the right bank). With rates as low as they are, if you bought the home below market value, you should be able to take out as much as you put into the house and still cash flow. I use this refinance technique all the time. Getting lenders to do a refinance is tricky when you own multiple investment properties. I use a portfolio lender who has allowed me to use a cash-out refinance on as many properties as I want.
Below is a property I refinanced:
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Move in ready Houses
A move-in ready property means all the repairs are completed and it is ready to rent as soon as you buy the home. There can be many advantages to buying a nice home. The biggest advantage is you do not have to pay for repairs. You also do not have to spend time waiting for repairs to be done, which saves money on mortgage payments, utilities, and other carrying costs. The downside of a move-in ready property is that it is usually more expensive and provides less cash flow than a home that needs work.
Credit cards
A few other ways to get quick cash can be very expensive and are usually reserved for people looking to do a quick flip. If you have a killer deal you cannot pass up, you may want to consider these options, but I do not recommend using them unless it is necessary. The easiest way to get quick cash is with credit cards. You can get a cash advance or pay for repairs using your credit card. If you use a credit card to finance your down payment or repairs and cannot pay it off right away, do not pay the 17 percent interest rate. Do your best to get another card that will allow a balance transfer. Many times, you can transfer all of your balance and pay little to no interest for up to a year. That may give you enough time to pay off the card and not to be stuck with a high-interest rate eating all of your profits. I also suggest using a rewards card for repairs on your investment properties. If you pay the balance off every month, this is a great way to make a little extra money.
Self-directed IRA
If you have money invested in an IRA, you are not limited to investing in stocks or mutual funds. There are special self-directed IRAs that you can use to purchase an investment property. You can use your IRA for down payments and repairs and then collect rent in the IRA.
401K
Some 401ks allow an investor to take out a loan against them. You usually have to pay back the loan relatively quickly and pay interest on the loan. You have to be very careful when borrowing from a 401k because the money you borrow is no longer earning interest or growing in your retirement fund. If you lose your job, you also may be required to pay back the loan within 60 days or pay a 10 percent penalty and income tax on the loan.
Subject to loans
With a subject to loan, you buy a house without paying off the previous owner’s mortgage. This is another tricky situation; investors must be very careful with it. Most bank mortgages are not assumable; when the homeowner sells the house, they have to pay the loan in full. The bank most likely will have a due-on-sale clause that says the loans must be paid in full, once the property transfers ownership. With subject to loans the new investor buys a house subject to an old mortgage and does not pay off the loan. There is a chance that the bank will require the loan to be paid off if they find out that the home has been sold.
Investors buy homes subject to a mortgage so that they do not have to get a new loan. It may be hard for the investor to qualify for a mortgage or they may be maxed out on being able to get new loans. If you buy a home for $80,000 that has a $75,000 mortgage in place, the investor would only need $5,000 to buy the house instead of the normal 20 percent or more.
Fannie Mae Homepath program
The Fannie Mae Homepath program on their REO properties allows investors to put only 10 percent down and allows up to 20 financed loans in one person’s name, which is also a huge bonus. It is very difficult for many investors to get loans on more than four properties.
This program has been discontinued.
Conclusion
Rental properties can be expensive, but there are ways to purchase them with less than 20 percent down. If you are short on cash, buying properties with little money down can accelerate the purchasing schedule and increase your returns. However, you will most likely make less money on each property, because borrowing that last 20 percent can be much more expensive than the first 80 percent.
My book Build a Rental Property Empire, goes over how to buy investment properties with little money down. It also covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.
Buying an investment property before your first home can be an interesting and financially sound plan. There are clear advantages — generating cash flow or building equity in your asset could benefit you and your family for years to come. You may be able to qualify as a first-time home buyer and take advantage of programs that allow you to buy a multi-family property. You may also be able to produce a strong enough income for the unit to pay for itself.
Yet, there can be significant sacrifices you may need to contemplate in order to make this dream happen. Here, learn what needs to happen if you’re planning on buying an investment property before your first home, including:
• Is buying an investment property before your first home a good idea?
• What are the steps for buying a house to rent?
• What are the benefits of buying a house as an investment while still renting?
Purchasing an Investment Property 101
Purchasing an investment or rental property is similar to a regular home purchase. When you’re looking at buying an investment property for which you qualify as a first-time home buyer, however, there are some special considerations. Here is a guide:
Step 1: Decide if you’re going to live in a part of the investment property. One of the first things you should decide when purchasing a rental property is if you’re going to live in a part of the investment property. This decision will affect what types of properties you’re going to look at, how you’re able to finance the property, and how much down payment you’ll need to come up with.
For example, if you can buy a house to rent with two to four units and live in one yourself, you may be able to finance the purchase as an owner-occupied property. This may qualify you for lower interest rates, lower down payment options, and more favorable loan options. However, you do have to live on the property. You cannot finance a property with an owner-occupied loan without living on the property as this is considered a type of mortgage fraud.
Here’s a quick summary of the difference between owner-occupied and non-owner-occupied rental properties.
Owner-Occupied
Non-Owner-Occupied
Down payment options from 3.5%
Down payment typically around 15%
Lower interest rates by about half a basis point
Interest rates higher by about half a basis point
Step 2: Get preapproved for a loan. Before you go shopping, make sure a lender is willing to give you a mortgage. Qualifying as a first-time homebuyer has some positives. On the one hand, you may have a better debt-to-income ratio since you don’t own a home yet. However, you may have a shorter credit history or a smaller down payment. Whatever the case, it’s helpful to get some numbers from your lender to assist with your investment.
Factors your lender will take into account when deciding what to lend to you include:
• Amount of your down payment
• Owner occupied status
• Credit score
• Debt-to-income ratio
• Employment history.
Your lender will also take into account what programs you qualify for. Financing options for an investment property are wide. Some may include:
• FHA
• VA
• USDA
• Conventional
• Private lending
• Seller financing
Quick note: If you do decide to purchase a rental property and live in part of your investment property, your lender may be able to use the potential rent from that to qualify you for a mortgage.
Step 3: Find a property that meets your criteria Now that you have your budget and parameters set, you’re ready to find a property. You may want to enlist the help of a real estate agent who can serve as your first-time homebuyer guide, especially since you want to buy an investment property right off the bat.
Your agent can help you write an offer while your lender may be able to help you apply for a mortgage online. You’re well on your way to buying a house to rent at this stage.
Step 4: Start your rental business. Be sure to check local ordinances and business requirements for becoming a landlord. If you’ve got a plan and do your research, you may see success. Just don’t believe what you may see on TV, which makes owning a rental property look easy. Landlording is a tough job, and there’s a lot you need to know about the business before you start. Buying a house while renting is an endeavor that takes time and effort.
Buying a House While Still Renting
The benefit to buying an investment property before your first home is that your debt-to-income may be more favorable than for someone who has a mortgage. What this means is it’s possible you don’t have too much debt to qualify for a rental property.
The possible downsides are that you may not have the cash reserves to protect yourself from the risks of being a landlord. There’s always something that needs to be repaired or replaced.
What to Know As a New Landlord
Unlike what you may have heard or imagined, becoming a landlord can be anything but passive. You’ll also want to research all you can and put proper systems in place. Here’s a little of what you can expect to encounter as a new landlord.
• Learn local housing laws. Housing laws can make or break you. Are short-term rentals allowed (if that’s what you’re planning)? What rights does your tenant have? If you need to evict a tenant, what does the process look like? Will you benefit by putting your property in an LLC?
There’s a lot to navigate, and you may want to consider hiring a property management company that specializes in this.
• Determine how much to charge for rent. You’ll want to look at what other properties in the area are charging for rent and position yourself competitively. Also, consider what other landlords are allowing and charging when it comes to pets.
• Prescreening is key. The reliability of your tenant is so important. It’s incredibly stressful when you’re not paid rent. Don’t rent to someone who “feels” like they would be a good tenant. Do your due diligence. Check credit and their background, and call references.
• Create a plan for home maintenance, repairs, and other issues. If you’re hiring a property management company, plan for the expense. If you’re doing it yourself, make a list of contacts to call for the different issues that come up (electrical, plumbing, locks, handyman, etc.).
• Have procedures in place for unit turnover. It’s an incredibly intense time when a tenant leaves and another needs to move in. How are you going to handle inspections? Cleaning? Deposits? You will need a system for logging such events and being prepared for turnover.
Recommended: Fixed-Rate vs. Adjustable-Rate Mortgages
The Takeaway
While landlording has a lot of responsibilities and risk, there can also be a lot of reward. If you’re really interested in buying a house while renting, you’ll find a way to make it work.
If you’re starting to shop for a new home and need a partner to help with your lending needs, see what SoFi has to offer. With a wide range of loans to choose from, low down payment options, and competitive interest rates, SoFi Mortgage Loans can be a great fit.
A SoFi Mortgage: Smart, simple, and flexible.
FAQ
How much profit should you make on a rental property?
There’s no easy answer for how much profit you should make on a rental property. Some investors buy property for the appreciation alone. There are also a number of methods for determining how much profit investors want to make on an investment property, such as cash flow, the 1% rule, gross rent multiplier, cash on cash return, cap rate, or internal rate of return. Those can help provide guidelines.
Should I buy an investment property and live in it?
If you’re able to live in your investment property, you can qualify for owner-occupied financing, which means lower down payments and better interest rates. But it also depends on your plans. If you want to renovate an investment property, living in it during renovations could be challenging.
Is rental property a good investment in 2023?
Rental demand is strong in 2023, but buying property is more dependent on your individual situation rather than market conditions.
Photo credit: iStock/luismmolina
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