Guide to Getting Loans on Investment ... - Invest Four More
Guide to Getting Loans on Investment Properties
Mark Ferguson
Copyright 2013 ? All rights reserved ? Invest Four More Proprietary
Table of Contents
Guide to Getting Loans on Investment Properties.............................................................................................. 1 Should you get a loan for investment properties? ............................................................................................... 3
Why are the returns better when you get a loan on a rental property?..........................................................3 Leveraging your money allows you to buy more rental properties ................................................................. 4 Advantages of rental properties are multiplied with leverage.........................................................................4 Downside to buying more rental properties .................................................................................................... 4 Waterfall effect.................................................................................................................................................5 Conclusion ........................................................................................................................................................ 5 Getting a loan on a Rental Property ..................................................................................................................... 5 Using Hard and Private Money.........................................................................................................................6 What is hard money?........................................................................................................................................6 Private Money .................................................................................................................................................. 7 Hard-money refinance to Fannie Mae loan......................................................................................................7 Traditional Banks .............................................................................................................................................. 8 Conclusion ........................................................................................................................................................ 8 Summary ............................................................................................................................................................... 8
Copyright 2013 ? All rights reserved ? Invest Four More Proprietary
Getting Loans on Investment Property
Should you get a loan for investment properties?
I'm trying to buy as many rental properties as I can, because of the low interest rates and the incredible returns I am seeing on my current rentals. Many people feel paying cash is the best option when investing, but when you get a loan you increase your returns substantially. You cannot get the incredible returns I get, or buy nearly as many properties if you pay cash.
The key to my strategy and obtaining great returns is being able to leverage my money. Leveraging means you are not paying cash for investments, but using other people's money in order to use less of your own. By using other people's money, you can buy more properties and increase your returns on the total cash invested. If you pay cash, your returns decrease dramatically and all the benefits of owning rental properties decrease as well. For me, financing properties is the best way to increase my wealth.
Why are the returns better when you get a loan on a rental property?
I am going to use some really basic figures to outline the benefits of leveraging your money. If you buy a $100k house with cash and make $500 a month in cash flow, you will make about 6% cash on cash returns. Cash on cash return is the actual cash return you are seeing on the cash you have invested into the property. If you buy a $100k house and put 20% down, you will have a mortgage payment, but the returns on your cash invested increase. If you are paying a 4% interest rate, your principal and interest payment will be about $382. You are only making $118 a month cash flow after subtracting the mortgage payment, but you are making 7% cash on cash return, due to the lower initial investment.
Copyright 2013 ? All rights reserved ? Invest Four More Proprietary
Even though the cash on cash return is 7% you are actually making much more than a 7% total return in the above scenario. You are also paying down the principle on the loan by an average of $118 each month. That $118 equals another 7% return on your money that you would not have on a cash purchase! You've more than doubled your return by getting a mortgage instead of paying cash. The really exciting part about using leverage is when you get higher cash flows the returns increase even more. If you can make $800 a month cash flow without a mortgage, you will be making 9.6% cash on cash return. With 20% down on the same property you would cash flow $418 a month after the mortgage payments and make over 25% cash on cash return just from cash flow! The way to make big money in rental properties is finding properties that will give you big cash flows and buying as many as possible while leveraging your money. I currently make over $500 a month cash flow on all my properties after expenses and mortgage payments.
Leveraging your money allows you to buy more rental properties
The best part about leveraging your money is it allows you to buy more properties. You can buy three or four homes with $100k instead of just one home paid for with all cash. If we use the cash flow figures from above and buy three rental properties instead of one, we can now make $1,254 a month cash flow instead of $800 a month. Not only does your cash flow increase by purchasing more properties, but the equity pay down increases, the tax benefits increase and the appreciation increases. If you are able to purchase homes below market, then every time you purchase a home, your net worth increases as well!
Advantages of rental properties are multiplied with leverage
Rental properties have many tax benefits including depreciation. The IRS lets you depreciate a percentage of your rental properties every year and write that off as an expense. If you have three houses instead of just one, you can get triple the tax deductions.
If you have three properties instead of one and your market appreciates, then you also have the benefit of triple the appreciation. It is the same situation if rents go up; the more properties you have the more money you will make.
With multiple rental properties you are also paying down the loans on three properties, which increases your returns as well. When you think of the tax savings, possible appreciation and equity pay down the returns shoot through roof by leveraging your money.
Downside to buying more rental properties
There is a downside to buying more rental properties. You will have to pay out more money for repairs and improvements since each property will need repairs not just one. You will also have three rental properties to manage instead of one. However, if you are able to cash flow $400 or more with a mortgage you will still be way ahead of the game by leveraging your money. You will also have more total cash flow coming in, which is very important in my system.
Copyright 2013 ? All rights reserved ? Invest Four More Proprietary
Waterfall effect
In my system all your extra cash flow is spent paying down one mortgage at a time. The more cash flow coming in, the faster you can pay off a property. With my rentals, I take all the cash flow from my rental properties and pay off one mortgage at a time. If you buy three properties cash flowing $1,254 a month you can pay off a 30 year mortgage in 4.5 years with this technique. In only 4.5 years you will have a house paid off free and clear plus two other homes producing income! Once you pay off that first mortgage the waterfall effect begins. The extra cash flow from paying off the mortgage goes into paying off the next mortgage even faster. I will have my first rental property completely paid off three years after I purchased it!
The principle and interest on the mortgage that was paid off above equals $382. When that mortgage is paid off that $382 a month equals $4,584 a year, which will go toward paying off the next mortgage. If you can keep buying properties, their cash flow will pay down the mortgages even faster. Pretty soon you will be paying off mortgages in a year or less with all the cash flow coming in and that is when the fun really starts!
Conclusion
When asking yourself should you pay cash for a rental property, consider all of these factors. In my opinion it is much better to use other people's money and increase your returns versus paying cash. Some people are very averse to any risk and don't want any debt at all. If the idea of debt makes you sick to your stomach, maybe paying cash versus getting a loan is the best route for you. I will continue to get as many loans as I can, to buy as many rental properties as I can, because of the incredible benefits rental properties offer. If you have decided you want to use leverage to purchase rental properties, what is the best way to finance?
Getting a loan on a Rental Property
If you are buying your first rental property, it is not extremely difficult to obtain financing. You will have to qualify for the rental property and have a down payment. With almost every investment property, you are going to have to put at least 20% down unless you use hard or private money. If you have less than four mortgage in your name you can get a loan through traditional lenders or mortgage brokers. The rates should be very competitive and you should be able to get a 30 year fixed loan.
Here are a few things to remember when getting a loan on an investment property.
You must qualify for the investment property loan and your personal residence loan if you have one
Copyright 2013 ? All rights reserved ? Invest Four More Proprietary
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