My friend and I are looking into investment properties. How did you manage having multiple mortgages at the same time when doing your real estate investing properties?
Is there a maximum number of mortgage loans you can take or it depends on credit worthiness and debt to income ratio? We are MD, VA, DC.
What are the best loan providers that you have used and how did you manage?
N – DC area
Congratulation on taking your next steps to becoming more self-reliant. You ask excellent questions. I have been a real estate investor since 2001, and have learned a lot over that time frame. I have made a lot of mistakes, but have also timed the markets fairly well.
Identify your potential market
When I first started, I sought out townhomes and single-family detached residences, and shied away from condos. However, condos at the right price can be amazing cash flow generators, as I will show. The downside with owning or buying condos as investments is that obtaining superior cash-out and purchase financing can be more daunting.
Last decade, condos were too expensive and the numbers didn’t make sense. But this changed as a result of the last housing bust, as many condo associations went functionally insolvent and/or lost their FHA status. This legacy still haunts many condo developments today, especially in the working class areas. As a result of their sharp price declines, many condo associations now have too high a percentage of investor-owned units to qualify for FHA or Fannie Mae financing. So, they can often sell at sharp discounts to last decade’s highs, even though rents are much higher. This is why I believe that many of these condos still provide the best opportunities.
When prices were severely depressed earlier this decade, many investors paid cash for their investment properties. I bought all my properties with cash during the early part of this decade, because I was competing with other cash investors and the banks did not want to deal with financing contingencies. Now, prices have risen to the point that one usually needs to obtain financing and the sellers expect it. As of now, I would not be buying condos in downtown Toronto, San Francisco, NW Washington DC, or New York. I do not necessarily look for rentals where I want to live, but I search out where the returns and cash flow are appealing and where locating a quality tenant is simple.
For instance, I bought several condos and single family houses just outside the Beltway in Prince George’s County, MD. Their rental income is far superior than any where else. A person in the DC area could find some properties in that particular area. The housing market in Fairfax County, VA is expensive and though my partners and I have long-term investments here, the rent rolls are much lower vis-a-vis the property values. People here would rather buy than rent and that is reflected in tenant turnover and rental rates.
Identify your sources of capital
Once you identify your potential market, the next step is to find the best and most flexible financing.
Obtaining cheap mortgages during the early part of last decade was much easier than now, and before prices went through the roof, home prices were more reasonable on an absolute basis. Of course, rents were a lot less, so the capitalization rates and IRRs were substantially similar to what these properties earn today. This is good news for those who are starting out now.
Despite what many may think, getting mortgages are as difficult as ever. Thus, credit worthiness is your biggest asset. Without superior credit, it will be almost impossible to find government-backed loans. If a person or partners can get a 20% down payment, have good credit and can show the loan underwriter the required income, getting a conforming loan is the first step. With this cheap financing, investors can look for more expensive properties with lower positive cash flow, because the cost of carry will be less, all other things being equal.
But getting these loans can be very difficult and if an investor cannot obtain the best financing, the next step is to run the numbers on potential properties to see what kinds of cash flow you can find. After you identify potential properties, contact hard money lenders. My last loan was through a hard money lender. It was a cash-out at 7.5%. As you can see, I was not able to buy a single family house with that rate, but instead I used the proceeds to purchase a two condos and completely rehab two more previous purchases, which generated an almost 15% cap rate at the time of purchase, based on my upfront costs. As you can see, hard money in this instance was a good thing.
With conventional and government-backed loans, unless you have ample documented W-2, 1099, or tax-return earned income, it is almost impossible to get more than 2-3 conforming rental mortgages. But with hard money lenders there really is no cut off, as the lender will lend out to you based on the property’s rental cash flow potential. If the property’s numbers make sense to the underwriter, your credit is at least high 600’s, you have enough money for the down payment with a cash cushion in the bank, you will get your loan.
Younger investors can be more aggressive as you have more time. At my age I have been paying off the two loans I have left. One is for 6.5% and the other is for 7.5%. I pay down much more than what is due, so I only have a couple years left. Once these loans are paid off, I will obtain the best financing as my rentals will provide me enough income to qualify. With superior financing I will seek out a higher end rental. I do not earn W-2 or 1099 income, so my sources are heavily discounted by the underwriter.
Hard money lenders are less concerned with the number of loans you have outstanding, as long as your properties provide a rent that is at least 1.3x the monthly expenses, including mortgage. Moreover, they now ask you to purchase and finance the property in an LLC.
Here are two hard money lenders that I have worked with in the past. I provide no endorsement to any lender, but I provide these two as examples.
The more costly your financing, the higher your cap rate and upfront IRR must be to service the mortgage. The cheaper your money, the lower the numbers can be. Do not get too caught up with the interest rate you pay as long as the numbers make sense.
I believe the condo market in Prince George’s County can still provide a cap rate of about 10%. Thus, obtaining a hard money, long-term loan at 7.5% can make perfect sense for those starting out. The two lenders I just mentioned provide these loans.
My condos, based on my upfront costs now provide me with a 18% cap rate and a 10% cap, based on current market value. If I spotted an opportunity to buy another one and needed a quick loan turnaround with minimum hassle, I would contact a hard money lender for a rental mortgage. Of course, I have excellent cash flow, because I manage the properties myself and do not hire property managers. I keep my costs low, since I can do most repairs if I choose and can find the best tenants. For those who are seriously entertaining real estate investment on a sizable scale I would only recommend self-management. Costs can easily spiral higher, plus the experience you can attain is priceless.