Since entering the real estate business, I’ve had more questions about fix and flips than I have about regular home buying. Now that my wife and I opened our Airbnb, those questions have multiplied. Since almost everyone I know is now curious as to how they can go about “getting” an Airbnb or buying a house to fix up and sell or rent, I figured I should probably shed some light on this subject. This will definitely need to be a multiple part series, as there is just way too much info on this topic for one post. Today, we will start with the most important part: getting a loan.
How In the World Did You Finance that Investment Property??
This question is, hands down, the one I get the most. Some people are a little afraid to ask, thinking they might offend us. So they skate around the issue, and we end up asking for them. Listen….I know it’s on y’alls minds; ask away! I quit my job and now depend on unstable self-employment income while my wife works as a Speech-Language Pathologist IN A SCHOOL (and we all know how much schools pay 😂😩). So yeah, how in the world did we afford or get approved for a second mortgage? Well this is the secret of the investment business: you don’t need documented income to acquire an investment property. 😎
There are so many different types of unconventional loans out there, it’s nuts. A simple google search of “asset-based lending,” “no-doc loans,” or “hard money loans” will produce a ridiculous amount of results. Try it, and start reading some articles and shopping around. They all offer different terms and have different requirements. One thing that most of them have in common is that they don’t base your loan on your income. In fact, you don’t even have to submit income information. Instead, they base it on the house you are trying to buy. Most of them require decent credit scores and a nice down payment, so make sure you are set in those departments, but the credit and down payment minimums are different for every lender and every situation.
Hard Money Loans
Hard money lenders will give you a loan that will cover both the purchase and the rehab. In this situation, you’ll want to purchase a house that is WAY below market value…mostly, these are off-market homes. The lender will give you a loan based on the after repair value (ARV), meaning the amount the home will be worth after you fix it up. If the ARV won’t cover your initial purchase and your rehab draw, they won’t give you the money. You’ll also want to make sure the ARV will give you a net profit once you sell the home or rent it out and refinance. If not, this type of loan won’t be worth it because the interest rates on these bad boys are insanely high. These loans are short term loans (6-12 months) that you’ll know you’ll be able to pay off pretty quickly once you fix up the house. You can either pay it off by fixing and flipping or by holding on to the property as a rental. If you decide to hold on to the property, you can refinance after six months to get a MUCH lower interest rate. The refi value will be based on the renovated home’s appraisal amount. So, say you purchased the home for 60k and put 40k into it. Your renovated appraisal could be somewhere around 140-170k (depending on quite a few variables). When you refinance, you will get a loan for 75-80% of the appraised value. This cash will then pay off your purchase and rehab costs and put some money in your pocket for your next purchase. Since you are renting out the property, the rent money received will cover your new loan expense. There are so many different hard money lenders and they all have different programs to meet different needs. I suggest contacting Mark Abbruzzese at Next Bridge Funding to see how he can help you.
Maybe you aren’t into fixing and flipping but you do want to acquire a fairly turn-key property that you can rent out to a long-term tenant or host as an Airbnb. In this case, if your income doesn’t support two (or even one) mortgages, then you’ll want to get a rental loan that bases its lending decision off of what’s called DSCR (debt service coverage ratio). You don’t need to submit any income verification for this type of loan. Instead, the lender looks at how much rent you will likely receive each month for your property, and divides that amount by your total loan costs. If that equation produces a number over 1 (every lender has different requirements, though; some require a minimum of 1.25), they will give you a loan. So, if typical rents in your area are $1400 and your total loan costs are $920, your DSCR is 1.52…..you will get a loan! 🙌🏻 Now, you can’t use this type of loan to get yourself your own vacation house because the lender will make you sign an affidavit saying that you won’t live in the home. These loans are strictly for investment purposes. Also, a downside to this type of loan is that the interest rates are higher than regular mortgages. So, if you can do a regular loan, do it. If you can’t, though, these loans will provide you access to the investment world that your traditional income (or lack thereof) can’t give you. Also, if your income situation does improve, you can always refinance this loan to get a lower rate. Check with your lender for prepayment penalties. You’ll probably have to hold this loan for a designated period of time to avoid extra fees. Keep in mind, too, that you’ll need a hefty down payment to acquire this type of loan: usually 20-25%. While there are thousands of lenders who offer DSCR loans (even traditional lenders are now entering this game), I suggest checking out Kiavi, an online lender that provides both rental and fix and flip loans.
So, it’s actually much easier than you might have thought! Just get your credit together and save up a little cash to have some skin in the game and you can purchase your first investment property! If you are worried about the credit part, just do some shopping around. All lenders have their own minimums, and some are pretty low. 🙌🏻 (Just remember that better credit = better interest rates.) And if you are worried about the cash part, we will talk about some ways around that in another post. 😉
Full disclosure: We acquired the loan for our Airbnb home through Kiavi. For our specific loan, they required a 720 minimum score, a 100k minimum loan amount, a 20% down payment, and a 6% interest rate.