SS217: The Best Financing Options for New Investors

SS217 The Best Financing Options for New Investors 1920

Obtaining financing can sometimes be difficult for a new real estate investor. In this episode, Charles discusses different financing options available to new investors.

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Talking Points:

  • When I began investing in real estate, I was self-employed, which made obtaining financing always a little trickier until I began purchasing 5+ unit multifamily properties, which are considered commercial properties where the lenders base the approval mainly on the property and its ability to service the debt versus purchasing a 1-4 unit residential property where the lenders base the entire approval on the borrower, mainly their income, savings and credit score.
  • Let’s break down the best financing options for new investors.
    • 1. FHA Loans
      • These are perfect for investors purchasing a 2–4-unit multifamily property since they can purchase with as little as a 3.5% down payment, but investors must occupy one of the units.
      • This is how I initially became a multifamily investor by house hacking a 3-unit property and living in one of the units.
    • 2. Conventional Loans
      • Conventional loans are usually best for investors with consistent income and good credit.
      • These loans usually require a 20% – 25% down payment. They generally feature the lowest rates and minimal fees, especially if you go directly to the bank or credit union offering the loan.
    • 3. Hard Money/Private Lender Loans
      • Hard money and private money loan names are typically used interchangeably, with the central premise being that they are non-institutional lenders. Yes, some hard money lenders access their capital from institutional sources, but this is not what we are talking about here.
      • The beauty of private loans is their flexibility. Many investors see hard money and private money loans as products only used for flipping properties, but there are many private lenders out there that will lend long-term.
      • One of my friends here in South Florida has financed his entire real estate portfolio of about 20 units with one private lender.
      • Perfect for investors requiring a quick close, in a unique situation, and have funds available for a down payment. The interest rates are higher, but it allows you to maneuver faster than other competing buyers. Most private loans do not have a pre-payment penalty, allowing you to refinance or sell without additional fees.
    • 4. Seller Financing
      • Seller financing is an excellent solution for investors working with a motivated seller.
      • The benefit is that buyers can create a win-win solution for both the seller and themselves. The deal structure is flexible, similar to working with a private lender. I personally feel I can pay a few percent more for a property with seller financing since I am crafting the lending package and avoiding most of the regular lender fees.
      • The one thing I have realized about seller financing is that when advertised in a listing, the terms are less than ideal, or the property is overpriced. The best way to achieve a good deal and seller financing is to find properties owned by the seller for 10-15+ years, build rapport with them, and then suggest to them and/or educate them on seller financing. It is harder to do through an agent.
    • 5. DSCR (Debt-Service Coverage Ratio) Loans
      • DSCR loans are great for investors who have money for the down payment and have a property that cash flows from day 1. Besides the down payment, the lender focuses most of the underwriting on the property and its ability to service the debt. Also, expect higher rates on these loans.
      • If you want to learn more about DSCR loans, check out episodes SS134 and SS197.
  • Obtaining a loan will be much easier if you have a job. If you are self-employed, lenders will require 2+ years of tax returns. Many self-employed people make excessive deductions, decreasing their income and making it more challenging to be approved for a mortgage. It also does not give you an accurate picture of your company’s profitability if you deduct personal expenses through your business.
  • If you have income, good credit, and a down payment, obtaining a conventional loan will usually be the least expensive option. You can go directly to a local bank or credit union to obtain the loan; there is no need for a broker. If you do, however, find yourself in a unique position where you don’t check all of the boxes, it might make sense to reach out to a mortgage broker to provide an honest assessment of your situation and help you get pre-approved for a mortgage.

Transcript:

Charles:
Have you ever wondered which financing option could kickstart your investment journey in the fastest? With over a decade of experience and hundreds of rental units under my belt, I’m here to share the options that actually work. Your first investment deal may be closer than you think. Welcome strategy Saturday, I’m Charles Carillo, and today we’re discussing the best financing options for new investors. Whether you’re just getting started or looking to take your next big step in real estate, understanding your financing options is critical. So let’s get started. When I began investing in real estate, I was self-employed, which made obtaining financing always a little trickier until I began purchasing five plus unit multi-family properties, which are considered commercial properties where the lenders based the approval mainly on the property and its ability to serve as debt versus purchasing a one to four unit residential property where the lenders base the entire approval on the borrower, mainly their income savings and credit score.

Charles:
So let’s break down the best financing options for new investors. Number one, FHA loans. Now these are perfect for investors purchasing a two to 40 unit multi-family property, since they can purchase this with as little as three and a half percent down payments. But investors must occupy one of the units. This is how I initially became a multifamily investor by house hacking a three unit property and living in one of the units. Number two are conventional loans. Now, conventional loans are usually best for investors with consistent income and good credit, and these loans usually require a 20% to 25% down payment, and they generally feature the lowest rates and minimal fees, especially if you go directly to the bank or credit union. That’s actually lending the money, offering the loan. Number three is hard money. Private lender loans and hard money and private money loan names are typically used interchangeably with a central premise being that they are non-institutional lenders.

Charles:
Yes, some hard money lenders access their capital from institutional sources, but this is not what we’re talking about here. Now, the beauty of private loans is their flexibility. Many lenders see hard money and private money loans as products only used for flipping properties, but there are many private lenders out there that will blend long term. Now, one of my friends here in South Florida has financed his entire real estate portfolio of about 20 units with one private lender. Now perfect for investors requiring a quick close and a unique situation and have funds available for a down payment. The interest rates are higher, but it allows you to maneuver faster than other competing buyers. Now, most private loans do not have a prepayment penalty allowing you to refinance or sell without additional fees. Number four is seller financing. Now, seller financing is an excellent solution for investors working with a motivated seller.

Charles:
Now the benefits is that buyers can create a win-win solution for both the seller and themselves, and the deal structure is flexible. Similar to working with a private lender, I personally feel I can pay a few percent more for property with a seller financing deal. Since I am crafting the lending package and avoiding most of the regular lender fees, the one thing I have realized about seller financing is when advertised in a listing the terms are less than ideal or the property is overpriced. The best way to achieve a good deal on seller financing is to find properties owned by a seller for say, 10 to 15 plus years. They’ll rapport with them and then suggest to them and or educate them on seller financing. It’s harder to go through an agent and do this. It’s better to go directly to the seller and negotiate and educate them.

Charles:
Number five is DSCR loans or debt service coverage ratio loans. Now, DSCR loans are great for investors who have money for the down payment and have a property that cash flows from day one. Besides the down payment, the lender focuses most of the underwriting on the property and its ability to surface a debt. Also expect higher rates on these type of loans. If you wanna learn more about DSCR loans, checkout episode SS 1 34 and SS 1 97. Obtaining a loan will be much easier if you have a job. If you’re self-employed, lenders will require two plus years of tax returns. Many self-employed people make excessive deductions decreasing their income and making it more challenging to be approved for a mortgage. It also does not give you an accurate picture of your company’s profitability. If you deduct personal expenses through your business, if you have good income, good credit in a down payment.

Charles:
Obtaining a conventional loan will usually be the least expensive option. You can go directly to a local bank or credit union to obtain the loan. There’s no need for a broker. If you do, however, find yourself in a unique position where you don’t know and you don’t check all the boxes. It might make more sense to reach out to a mortgage broker to provide a honest assessment of your situation and help you get pre-approved for a mortgage. I hope you enjoyed. Please remember to rate, review, subscribe some, make comments, and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then. You always

Charles:
Want to invest in real estate but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties in great locations that provide us with consistent passive income while we wait for appreciation in the future and take advantage of tax laws while we’re waiting. And unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out and invest with harborside.com. If you like the idea of investing real estate. If you like the idea of passive income, partner with us at investwithharborside.com. That’s investwithharborside.com.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and our subject to all applicable laws. Please consult an appropriate tax, legal, real estate, financial, or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of syndication Superstars, LLC exclusively.

Links Mentioned In The Episode:

  • SS134: What is Debt Service Coverage Ratio (DSCR)
  • SS194: Real Estate Investment Traps to Avoid

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