A lot of investors ask me how best to acquire rental properties. Typically, finding investment properties isn’t the issue, it’s financing the properties that is.
The main difference between buying “hold” properties (rentals) and buying investment properties to rehab and resell is the financing. For flip properties, you only need to borrow for 6 to 9 months typically. For rentals, your financing will be the traditional 30 years.
When we started investing in 2005, banks would make up to 8 mortgage loans per qualified borrower. So, I got 8 mortgage loans in my name, then Jim got 8 in his.
Today, large financial institutions still offer the cheapest long-term funding available so I recommend you start there. Check with national lenders, local banks, and don’t forget credit unions. See what financing they offer, how many rental loans they will do, and how you 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 is 10, 15, and 20 year funding available, but go for 30 year mortgages. Keep your monthly payment as low as possible in order to get all the cash flow you can at the beginning of your ownership. Once you have a large enough portfolio and enough funds coming into your business, you can always pay the loan off early but you can never ask for a reduction in the amount of your mortgage payment.
Another advantage to the mortgage balance is that you can claim the interest deduction on your taxes. Rentals offer so many tax write offs which you especially need if you’re doing flips and wholesales.
You need available cash to qualify for additional mortgage funding, so don’t sink more than necessary into any property you plan to hold. For years, we flipped every property that we put much money into, anything that needed rehab, and kept only the properties that had very little of our own money tied up in them.
Eventually, you’ll use leverage to build your portfolio, borrowing against the equity you build up in your rentals over time. We’ve borrowed against our properties more than once to get the funding we needed to acquire more.
In January 2014 we started our HomeVestors franchise (the We Buy Ugly Houses people) which now generates the cash to pay off the rental properties we own. It’s been the perfect evolution.
And be sure to check out my book, The Essential Handbook for Landlords, for help when you do own rentals.
How do you find the funds to acquire rental properties? Do you plan to pay them off early, or wait and let your tenants pay the full mortgage over time?