Aspiring landlord needs help obtaining positive cashflow with low down payments!
September 11, 2006 2:21 PM   Subscribe

When I read about people putting 10% down for mortgage financing, how are they achieving this with invesment properties which are not owner-occuopied? Read on for a more thorough explanation...

Real estate gurus, I need help! I am interested in buying property for investment purposes (multifamily properties with 2, 3, or 4 units) that I will not occupy. The frustration I have is that it is very difficult to find the optimization point between the money put down on the property and having a positive cash flow. I read in real estate books about how you can “leverage” the full value of properties with, say, a 10% down payment. I completely understand that concept, and buy into it. But now, with that in mind, I keep running into three issues, which comprise my questions:

1) The bank (Bank of America) which gave me the loan for the four-plex I am currently renting out would only work with me if I put down 25% and said this was “standard industry practice”. And to pre-empt another question, I was not allowed to use another loan for the any portion of that 25%. Is this standard practice? When I read about people putting 10% down, how are they achieving this with invesment properties which are not owner-occuopied? Please provide some names of institutions (banks or otherwise) that will work with me.
2) In shopping for other properties, I calculate what my PITI plus 5% for miscellaneous, then figure out what my monthly rental income would be, and in almost any case, the number is negative, or less than 5% over breaking even. So my question is: How can you leverage a property and have a positive cash flow with small down payments? This animal doesn’t seem to exist.
3) How do you avoid private mortgage insurance with financing where you put less than 20% down?
posted by paulino636 to Work & Money (11 answers total) 2 users marked this as a favorite
I'm not sure how it is on the west coast, but my mortgage broker in the Chicago suburbs told me that, with a good credit score, I could buy an investment property with no money down. I don't know if that is because the market here is slowing way, way down or what. Perhaps go with someone who isn't tied to a specific bank?

/not a guru, but someone going through the mortgage process as we speak.
posted by sugarfish at 3:03 PM on September 11, 2006

1) Yes, banks require higher down payments for investment real estate because it has a higher risk of default. You aren't allowed to use a second mortgage for the down payment because that defeats the whole purpose of reducing the bank's risk. Generally no bank will lend you money for investment property with only 10% down, unless you have other collateral or the interest rates and points are very high.

2) It is very difficult to find property that will provide a positive cash flow, particularly during a real estate bubble.

3) You can't, without some other collateral.

The best way to make money on real estate investments is to write fictional books and make fictional seminar tapes about how rich you have gotten and sell them to suckers. The reason you are finding difficulty with your items 1 through 3 is because they are part of the fiction.

There are some people who make a living at this but it requires a lot of research and a lot of work. It may take many months of searching to find a property that will turn a profit. There is an very efficient market for real estate with thousands of people all trying to do the same thing so that property prices rise to the appropriate market value so that there are very few bargains. There is no free lunch.
posted by JackFlash at 3:14 PM on September 11, 2006

Absolutely, you need to go and find a good real estate agent in your area. Its there job to help you find those properties. You could do a private second deed of trust, or any number of other options. There is alot out their that bank of america can not help you with. As a buyer you pay a real estate agent nothing, so search for a top level agent in your area and make contact. I am sure they would be happy to help you find the right property and guide you in the right direction for finance. Keep in mind however that not every property turns an immediate or an imense profit right away... if they did everyone would own one!! Theres pros and cons and alot more to buying an income property then its first year cash flow situation.

posted by crewshell at 3:14 PM on September 11, 2006

As a buyer you pay a real estate agent nothing

Wrong. Although their fee might be "paid" by the seller, it just comes out of the purchase price being paid by the buyer.
posted by MrZero at 3:59 PM on September 11, 2006

The answer to #1 depends specifically on what you are purchasing. If you purchase a 2-unit property you should be able to find 90% financing, I did. If you go with 3+ units you will need more collateral (cash or other assets). A lot of banks are more lenient on requirements for 1-2 unit rental properties.
I would suggest shopping a mortgage broker. They will have a variety of products. Or get an agent that specializes in inv. property and get their recommended lender.

It depends on your locale, but I've also had luck talking to the commercial lenders at smaller banks. They keep a lot of their loans in-house so they can have quite a bit of flexibility.

Also, the answer to #3 varies as well. There are new loan products that avoid PMI with <2 0% down. you end up paying a higher rate though. with a rental property it might not matter if it is pmi or a higher rate that you pay, they are both expenses to offset your> good luck.
posted by Wallzatcha at 4:07 PM on September 11, 2006

Maybe this is irrelevant, but in Australia, positive cash flow from rental property is very rare and only occurs in certain areas, like small country towns. Everyone still invests in rental property though, because you can claim back the difference between your mortgage payments and the income from rent as a kind of business loss. Is this unusual? Does it work that way in other countries?
posted by AmbroseChapel at 4:31 PM on September 11, 2006

First, preliminarily, don't discount the affect of straight-forward fraud on what you may be hearing is possible. Small-time investors regularly represent that they intend owner-occupancy all the time to get loan deals on SFHs and small multi-families which are explicitly barred to investors. As long as the default rates are low, banks look the other way, and brokers have no incentive to diligence this. But, believe me, when the defaults start to role in, some of those borrowers are going to go to jail and some of those brokers are going to find themselves sued for everything they've got.

Onto the world of good, legal business.

Your first problem is your choice of lender. BofA and other money center banks compete fiercely for mega corporate business, compete largely on convenience (ATM networks, online banking) for consumer business, and barely compete at all for small business products. Someone in your position is far better off working with a much smaller bank or commercial mortgage company. A commercial mortgage broker isn't a bad idea, either: they only get paid if your mortgage gets closed.

In addition to a higher LTV ratio on the first lien mortgage (i.e., a lower down-payment), a competitive small business lender will be more likely to consent to a second lien loan -- i.e., borrowing some of the downpayment. They're also likely to find ways out for your business loan from some of the annoyances which basically belong to credit-marginal consumer loans (like PMI).

Don't believe the hype about negative cash flow. The vast majority of investment property portfolios run at positive cash flow, because the vast majority of investment property is held by long-term real estate investors who bought much of their property very cheap. That's a key concept: property ownership, done correctly, is a long-term business: measured in decades better than years. Buying 100% of your portfolio at or near the market top is a dubious idea. If you insist, however, you should have a clear plan for how you can raise the rents far enough to get cash flow positive in fairly short order.
posted by MattD at 5:16 PM on September 11, 2006

Wait for the property slump, then buy. This is how people make money on property. Trust me.
posted by unSane at 7:46 PM on September 11, 2006 [1 favorite]

You can claim the loss of income on your taxes, and this is not an uncommon thing to do here in Canada. As others have pointed out, most banks won't lend you money for a home with less than 25% down due to risk. In Canada you can buy a home with 5% down if you a) intend to live there and b) you are a first time buyer. Buying a property now when prices are at their highest is probably not a good idea in terms of investment. Most people buy low and sell high. If you intended to live in the place that's another story.
posted by chunking express at 9:06 AM on September 12, 2006

I recently got an investment loan for a four-family building in NYC with 10% down. Not sure where you are, but I had a good experience with Wells Fargo. They gave us a decent deal with no PMI. However--I got an ARM, which is fine for us because we are selling in a year, but may not be fine for you.

I've done the same calculations trying to figure out how to make the rental income add up to the mortgage payment. My conclusion was that, unless you plan to resell soon, you gotta put a big chunk down. If you're putting only a small percentage down, your would-be profits are getting eaten up by the interest you're paying on a huge loan. In other words, I'm not sure that animal you speak of does exist. Would love to hear otherwise though!
posted by torticat at 9:22 PM on September 12, 2006

What unsane said, and what Matt said. I work in loss prevention at a subprime lender and see investment properties come thru all the time with varying down payments. You may want to go thru a mortgage lender that specializes in just lending and does not have any consumer banking attached to it, like one of the other posters here suggested. ABN Amro has a multifamily program, as do other lenders. Also, try putting your request thru Lending Tree first, and see who is offering programs to fit your needs. Subprime does not reqire you to have PMI BTW, but the rate may be higher.
posted by Carnage Asada at 10:20 AM on September 15, 2006

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