Many investors ask me how best to buy rental housing. Typically, it is not finding investment property, it is financing the properties that are.
The main difference between buying “hold” properties (rentals) and buying investment properties for rehab and resale is the financing. For flip properties, you only need to borrow for 6 to 9 months typically. For rent, your financing will be the traditional 30 years.
When we started investing in 2005, banks would take up to 8 mortgages per annum. Qualified Borrower. So I got 8 mortgage in my name, then Jim got 8 in his.
Today, large financial institutions still offer the cheapest long-term funding, so I recommend you start there. Check with national lenders, local banks, and don’t forget about credit unions. See what financing they offer, how many rental loans they will make and how to qualify.
If your goal is to own a lot of rentals, don’t pay cash for the properties – it’s best to have a mortgage. There are 10, 15 and 20 years of funding available, but go for 30-year mortgage loans. Keep your monthly payment as low as possible to get all the cash flow you can at the beginning of your ownership. When you have a large enough portfolio and enough funds coming into your business, you can always pay off the loan early, but you can never ask for a reduction in the size of your mortgage payment.
Another benefit of the priority balance is that you can claim interest deductions for your taxes. Rental offers as many tax write-offs that you especially need if you’re doing flips and wholesale.
You need available cash to qualify for additional mortgage loans, so do not sink more than necessary into a property you plan to own. For years, we flipped every property that we put a lot of money into, everything needed for rehabilitation, and kept only those properties that had very little of our own money tied into them.
Eventually, you use leverage to build your portfolio by borrowing against the equity you build into your rental over time. We have borrowed against our properties more than once to get the funding we needed to acquire more.
How do you find the means to acquire rental housing? Do you plan to pay them early or wait and let your tenants pay the full mortgage over time?