What Newbies Need To Know About Investment Property Financing

Basics for Financing for an Investment Property

You have big dreams of owning real estate and retiring young. You simply don’t have the funds to go out and buy the properties in cash (most of us don’t either). This leads you down the path of financing with your local bank. Maybe you already own your own home and have been through the process of getting approved and signing the mortgage. This should be easy then right? Wrong, investment property loans are not like your traditional home loan.

Lenders are more strict with underwriting an investment property than that of a personal home mortgage. You might be wondering, but why? It’s simple when you own investment property and a personal residence and then you lose your job or things start going south financially you’re going to pay your personal mortgage before anything else in a worst case scenario. You’re not going to want to default on your mortgage, because that’s where you live!

Interest Rate

The interest rate is going to be higher than that of your home mortgage, it just is. Add 1-3 percentage points more than the owner occupied loan rate. That means that if a lender charges 4.00% interest for homeowner loans, you’ll likely pay 5-7% interest for investment loans. That’s just how it works folks. The loans are more risky, so the banks want more for them.

Credit Score

As with any type of loan your credit matters. It shows the bank a history of your previous credit experiences and basically says why you should get a loan or why you shouldn’t get a loan. Working to make sure your credit is top notch is something you need to do far before you get into the real estate game.

With investment property your credit score does not have as big as impact as it does with home mortgages. You will still have options if your credit isn’t perfect. If you score is below 740 you should expect to pay more in interest rate, lender fees, and lower LTV’s. This doesn’t mean you shouldn’t invest with a lower than 740 credit score, it just is stating what you need to expect.

Lower LTV

20% learn it, love it, live it. That’s the number the bank will want from you as a down payment for your investment property purchase. There are of course exceptions to the 20% down, however that’s what most banks are requiring.

20% is a lot of money, right? Yeah I know, but the good news is you will not have to pay mortgage insurance! Nobody likes mortgage insurance. The bad news is, that’s the only good news. Also the 20% down is best case, if you have piss poor credit expect the bank to expect more or not even look at your deal at all. As a final note, plan on needing at least three months’ payments as a liquid cash reserve. Cash reserve is important, yes you may finally have saved that 20%, but if you don’t have more than the 20% in working capital for when the furnace goes out in the first month then the bank will again question giving you a loan.

House Hacking to Get Started

The idea behind house hacking is simply to decrease or minimize your own expenses and use the spread (money you are saving) to invest into acquiring properties to rent out. Living in a nice house with an indoor swimming pool and movie room is great and all, but that house isn’t making you monthly cash flow, it’s costing you monthly cash flow.

The basic idea behind this “house hacking” mentality is to simply rent out part of your home to another person, or co-exist with another person as a roommate in your own home. Also it can mean selling your primary residence now and buying a multifamily property and living in one of the units while renting out the rest. Basically when it is all said and done you are renting what you already live in, to decrease your monthly expense to save capital for your dreams of real estate glory!

If you have yet to buy your first home, or if you want to sell your home now to get into real estate a multi unit property might be the right fit for you. By buying a multifamily home you can live in one of the units and have your tenants pay all of your expenses this is generally more appealing to most people than having someone live in their home.

For example, if you buy a 4 unit, live in one unit, and rent each of the other units out for $$600 a month, that would mean you’re making $1800/month in rents. If your loan, escrow (taxes + insurance) utilities, and other expenses come to just $1600 – you could get paid $200/month just to live in the home. Even better when it comes time to move out into your future home, you can rent that 4th unit out for even more income. Sounds like a great idea right?

Key Takeaway:

Investment properties have higher interest rates

Lenders are slightly more lenient on credit score

You’re going to need 20% for down payment (exceptions do happen)

Try house hacking to get started into real estate

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How to Effectively Market Your Rental Income Properties

Anyone who has been engaging in real estate investing for any amount of time has surely tried to sell an investment property at one time or another.

It’s called marketing. Over my thirty-year real estate career, I certainly did my share. And though my attempts didn’t always produce a successful outcome, the experience taught me a few things about marketing rental income property I would like to pass along.

Most are common sense, but mentioned as a reminder because there are realtors and sellers out there who need to hear it. The remaining tips are more subjective, but included to help you consider what might be a more effective marketing approach than you’re using.

Foremost, never make your marketing packages too vague. When you omit important financial data, it makes it very difficult for a buyer to adequately determine whether or not it presents a good investment opportunity. And this will typically lead to a further exchange of data with a buyer or agent that, at the very least, will be time-consuming, and at the worst, could cause a buyer to lose interest in the deal altogether.

Secondly, resist the temptation to skew the property’s financial data to appear overly optimistic. Perhaps rents can get raised, for instance, and you want to reveal that. But if you over-inflate what you deem could be future rents, you risk losing your credibility with the buyer, or may end up wasting your time in a deal that never has a chance anyway, once it’s subjected to the buyer’s due diligence. Keep your estimated assumptions realistic.

Thirdly, and this is a bit more subjective, don’t present marketing packages that contain everything but the proverbial kitchen sink-at least not in your initial presentation. In my opinion, distributing more than a three-page property report at your local investment club meeting or in response to a telephone inquiry, is overkill. Remember, you’re just trying to generate a response from credible investors with a valid interest; a more comprehensive set of reports can always get presented during subsequent exchanges.

Okay, now let me show you the essentials that worked for me. For simplicity, I’ve organized them by category: the numbers, and the reports.

The Numbers

Aside from sale price (which is a given), you’ll want to provide an itemized break down for the property’s annual cash flow, and computations for at least two rates of return.

1. Cash Flow

Cash flow is crucial because it’s essentially what the real estate investor is purchasing in the rental property. So compute it for at least the first year of ownership by focusing on the following three financial elements:

Gross Rental Income
Operating Expenses
Debt Service

2. Rates of Return

The rates of return (at least the two listed below) are important for the investor to determine whether or not his or her yields get met as well as providing a good way to compare the property’s financial performance and value to other similar-type rental properties in the market area.

Cap Rate

The Reports

Here are two reports I commonly used for initial inquiries. Both clearly show the rental property’s cash flow, and each include the cap rate and cash-on-cash rates of return. So they are informative, easy to read and understand, and straight to the point. Consider them as examples.

1. Marketing flyer

This announces the listing to the community-at-large (i.e., investment meetings, call-ins, and inquiries from colleagues). (Sample available on my site).


This enables you to show your own investor-customers a likely scenario during the first year of ownership. (Sample available on my site).

In a Nutshell

An effective way to market rental income property is to consider the process in two stages: the initial presentation, and the subsequent follow-up. Keep the initial presentation concise; even one report with enough data to reveal the property’s description, estimated cash flow, and investor’s rate of return should be adequate to garner interest from credible buyers when they exist. And reserve all the other reports (e.g., acquisition funds, proforma income statement, rent roll) to the subsequent follow-up exchanges.

Momentum: A Secret Weapon to Destroy Your Fear

I had such a good time delivering my motivational message to both the Denver and Minnesota Investor Success Summits in the fall, that I wanted to write a series of articles on what was discussed. The goal of the presentation was to help motivate and inspire investors to take action and achieve success. Based on the feedback I received, that goal was accomplished. Fear is deadly to your success. Without tools to overcome fear, you will not have success or reach your goals to realize your dreams. This will be the last article in the series of articles covering ideas and strategies to help you accomplish your goals. Momentum is another tool you can use to stop fear from stopping you.

One of the coolest terms, or quotes, I can ever remember hearing is, “Just Do Something”. That one really stuck with me and has served me extremely well in my career. When I feel nervous or get stuck on something, I think about this and it helps push me forward. The idea here is to just get started on a task. You can correct and continue as long as you are moving, but it is hard to head in the right direction if you are standing still. We have discussed in the past that you will make mistakes and you will head in the wrong direction, but you will not be able to see that if you don’t start.

The problem I see investors have, is they create irrational fear by thinking about all the bad stuff that might happen, which typically is not even that bad. That type of thinking is stopping them from success. I know this sounds funny, but if you think less, you will accomplish more. Real estate attracts a lot of analytical minds. For good reason, real estate is a numbers business. The analytical mind is structured to look at everything through a magnified glass, then think about it, then look again. Although it is smart to try to stay safe and make good decisions, the process of over analyzing and over thinking prevents results. I made a ton of mistakes and lost a lot of money, but because of that, I had a lot of success too. It is better to take action quickly and make mistakes, than to think a deal to death and never make your move. Stop thinking and “Just Do Something! ”

Once you start and you see results, you will find the motivation to do the “scary” tasks you might not normally do. Think of momentum as a wheel. At the top of the wheel is inspiration, which is used to get the wheel moving. The faster the wheel goes, the more momentum you will have. It all starts with getting inspired. This can come from many places, including reading articles like this or attending live real estate events. YouTube is another great place to find inspiring messages. Once you feel that inspiration, the hope is that you will use that to take some type of action. Action is the hardest step to get the wheel moving, but it is essential. You cannot stop at inspiration alone, remember… ” Just Do Something!!” Once you take action, even a few small steps, you will start to see results. Results are extremely motivating, which will lead to motivation and back to inspiration to take more action. Think about working out or getting into shape. That is a great comparison to business. It is so hard to get into your routine and to start the process, but once you do and you start to feel better and see results, it becomes addicting. You will want to eat better and work out more. Once you are in the routine, you realize it is much easier to keep the wheel moving than to get it moving.

I have had investors tell me they are not taking action because they don’t know what to do. I believe they don’t know what to do, because they are not taking action. Correct and continue. Knowing you will mess up takes the pressure of making a mistake away, so you can focus on learning from mistakes and moving forward. Once you have a little momentum and you start seeing some success, it will become addictive. This addition will help you plow through the tasks that can be a little scary, so go get your wheel moving.