How You Can Finance an Investment Property

Now that you have a foundation for why investing in real estate might be the move for you and now thanks to Mollie, a great starting point on what to look for…now we need to talk about financing that investment property. So let's talk investment financing. 

Picture this…. My best ringmaster voice. 🥊

ANNNNDDDDD…in the corner we have the rough tough, incredibly smart, number machine…DeDe Stoner!! 

(You could picture it couldn’t you 😏) 

In all seriousness, when I reached out and asked DeDe, a local lender with Guild Mortgage, to answer a few questions for the blog, I was hummmmbled by her reaction. Not only is she incredibly talented at what she does, she is always looking for ways to educate the public about the lending world. When you’re more educated, you can make better decisions….especially when it comes to investing in real estate.

Let’s dive in 🌊

Here’s a little bit about DeDe and why you should listen up!  

DeDe Stoner has a very extensive financial background; a Bachelor's Degree in Finance from Montana State University Billings, 11 years in the banking industry and 16 years in the mortgage industry. (ie. She knows her stuff)

She leads with integrity & passion and she believes a mortgage should be a step in helping people achieve their financing goals. As an avid supporter and believer in homeownership, it is her passion to help people invest their money for their future. 

She was kind enough to answer a few questions for us ⬇️ 

 1. What is the biggest hurdle you see people have to overcome with financing investment properties? Down payment is the biggest challenge, as investment properties require a minimum of 15% down for a single family home, & 25% down for multi unit(2-4 unit) properties.

2. How would you advise someone to finance their first rental? One of the questions I ask is, are you comfortable making the house payment in case of vacancy or the renter is not making payments? This could be a significant financial burden for some, we definitely do not want to see someone have a financial hardship with trying to make multi house payments.

3. Are there any specific programs you like for investment properties? I am not aware of any specific programs for investment properties, we work with the traditional conventional/conforming program for most properties. FHA, VA & USDA do not allow for investment property purchase...I am open to learning if you have a secret program to share with me =) (I so wish I did…. I do not 😆)

4. What has been going on with investment loans in the past few months? As with all mortgage loans, interest rates are increasing, which factors into a property’s cash flow. A higher down payment can help with getting a lower interest rate, if an investor were interested in seeing those options & penciling out if it makes sense to put more cash down upfront or buy down to a lower rate. Sometimes it doesn’t make sense to front more money versus keeping it in the bank or invested elsewhere. 

5. What do you predict will happen in the next year? Interest rates are on the rise, this will make payments higher, which in turn will make rent payments higher. I see more clients getting interested in the rental market because we have such a high demand for housing in our area - that does not appear to be declining any time soon.

6. What types of qualifications does one need to qualify for an investment property? Qualifying for an investment property is a lot easier today than it used to be...we used to have to show a 2 year history of being a landlord to use rental income for qualifying, those guidelines have loosened over the years. We can use current rents being received as qualifying income for that particular home, which helps a buyer qualify with the new payment w/o penalizing them for not having any rental income history. 

 Qualifications can vary with each person...the minimum credit score requirement for a conventional loan is 620, however, to get an approval with a lower score, the down payment requirement will be larger. This amount will depend upon multiple factors, including

-debt to income ratios 

-reserves(available funds in an account-savings, checking, 401k, retirement etc to show as extra funds available to make monthly payments). 

Let’s pretend someone has a 740 credit score-for a single family home, the minimum down payment for a single family home(1 unit) is 15%, for 2-4 unit properties, the down payment goes to 25%. The higher the down payment, the more favorable interest rate options/terms. Interest rates & the costs for the interest rates(discount points) are higher for an investment property than for a primary home. The more units a home has, the bigger the impact on the interest rate & fees. 

Reserves are also required for investment properties...meaning, a buyer will need to have access to available funds in an account to make payments if they were to lose their jobs. This amount depends on how many properties someone owns & can be a certain number of months of the full monthly payment(principal, interest, taxes, insurance) to a percentage of the total mortgages a buyer has, not including their primary home. 

When we are qualifying a buyer for a new investment property, we can take into consideration the rents being received on the property currently, or, if the buyer has a rental agreement in place, with the security deposit & first months rent verified as deposited, we can use 75% of that monthly rent. We use 75% of the current rent to allow for vacancies throughout the year. 

Once someone has acquired rental properties & are reporting the income on their tax returns, then we go off how they write the income off on the taxes. 

Something to keep in mind, if an investor writes all the income off as expenses, telling the IRS it is taking all of the rental income to keep the property going & there is nothing left for profit, that is also telling the bank there is no income left to make the payment. This can be a catch 22 as an investor.

7. What's the most creative way you’ve seen someone purchase investment property? People are very creative when driven, LOL! I have seen buyers partner together to purchase a rental, withdrawals or loans taken from retirement accounts/investment portfolios, refinancing current homes &/or current rental properties to use the equity as a down payment for the new rental or taking a home equity loan or line of credit against current homes, taking advantage of the equity gains & using the equity to purchase new investment properties.

8. If you could give a first time investor one piece of advice, what would it be? Because I come from a financial viewpoint, I ask clients this question...if the renter stops making payments, if there are vacancies or you have to make significant repairs to the home, are you financially comfortable covering these scenarios? It is easy to look at the good part of having investment properties, & many are very successful with them. I have also worked with clients who were financially ruined due to bad renters. Getting into investment properties is a great retirement plan, especially when the mortgage is paid off, it’s important to look at all angles & make the decision that best fits you financially.

If you have any specific questions for DeDe - feel free to send her an email at dstoner@guildmortgage.net. You can also check out her website here!