Dispelling The Myths of Investors Financing
A myth is defined as “a widely held but false belief or idea.” Well I am here to tell you that there are some pretty compelling myths out there when it comes to investor financing, and I would like to bring clarity to a topic that has created confusion for real estate investors for years!
When I made the decision to focus my career on working with real estate investors here in the twin cities, I knew there was a need for it, but what I didn’t expect was the sheer number of people that needed the help – so many investors were not getting the service they need to keep growing their investment portfolio. Many of my past clients had been real estate investors, frustrated with conflicting information they had received from banks and lenders that didn’t specialize in rental property financing, or didn’t understand the complexities behind it.
I get calls on a daily basis from clients saying, “I don’t qualify for “regular” financing, do you offer portfolio loans?” Below are some of the most common myths I hear from clients, and a comprehensive explanation that dispels each of them:
MYTH: “I’m self-employed, I don’t show enough income.”
REALITY: You don’t necessarily need to show a lot of personal income to support the growth of a rental portfolio. As you acquire properties, the rental income for each property can be used to offset the mortgage payment. The result is that investors can carry many mortgages at one time, without greatly increasing their debt ratio. Many of my clients are self-employed, or earn a modest income, and are in the process of building a self-sustaining rental portfolio.
MYTH: “I can’t use rental income until I have a 2 year history of receipt”
REALITY: FNMA allows us to use rental income immediately upon acquisition of a property. In fact, if an appraisal indicates fair market value, we often don’t even require a lease to be in place on the subject property, and can use the rental income provided by the appraiser.
MYTH: “I have more than 4 rental properties, I can’t finance any more properties with FNMA”
REALITY: In 2009, FNMA increased their limit of financed rental properties per individual from 4 to 10. Processing a loan for a client that has multiple properties is a lot of work! Many banks are more interested in “vanilla” deals, and decided not to follow suit with FNMA, and limit their own internal guidelines to maintain the “4 properties financed” maximum.
MYTH: “I bought a house with cash, and now I can’t pull cash out”
REALITY: FNMA’s Delayed Financing exception allows investors to pull cash out of homes recently purchased, up to the amount of cash they brought to the table – including closing costs. This is a great way for investors to get a property under contract and close quickly, and worry about the financing after the fact.
MYTH: “My bank already told me that it can’t be done.”
REALITY: This is the most frequently heard statement that reminds me why I chose to be a mortgage loan officer. The amount of misinformation out there is causing perfectly qualified investors to miss out on opportunities and it needs to stop. Most loan officers are self-taught. Learning the complexities of FNMA’s guidelines is like studying for the bar exam – overwhelming at best. (I love sharing this fact – did you know that FNMA has changed their guidelines 968 times in the last 6 months! WOW!) I have spent over 17 years in the mortgage industry, most of it on the other side of the loan file – underwriting, processing, and structuring. This allowed me the opportunity to become an expert on the most complex of FNMA’s guidelines, as well as find solutions to some very challenging scenarios.
Let me tell you about Mr. Carlson. He owned 8 financed properties, all of which had a substantial equity, yet he felt stuck. He wanted to buy more properties, but he didn’t have the cash on hand to meet both the down payment AND reserve requirements. He called several banks that quoted him the same FNMA guideline – once you have more than 4 properties financed, you can no longer pull cash out of an investment property. He called me, asking about my portfolio products, willing to pay a higher rate just to keep moving forward.
In a situation like this, Mr. Carlson didn’t need a loan officer, he needed a strategic financial advisor that understood how mortgages work. He needed someone to take a look at the bigger picture, understand his long-term goals and provide a solution to achieve them. After reviewing his goals, I took a closer look at his situation and came up with the perfect solution. The only thing standing in our way was that he had more than four properties financed. So, we decided to take the 4 properties with the highest equity position, cash them out to the maximum level, and use the proceeds to pay off the other four properties. By closing them simultaneously, the end result was 4 financed properties, which met FNMA’s cash out guidelines. Not only did he get the cash in hand that he needed to move forward, he now could acquire 6 more properties using FNMA financing.
The home mortgage is a powerful tool when you know how to leverage it correctly and have a clear strategy. As you accumulate properties, underwriting requirements change making the process more complex. When deciding to become a real estate investor, it is important to think about the end goal, prepare accordingly and align yourself with a mortgage professional that can think strategically with you.
To be a successful real estate investor, it is critical that you have the right team of professionals to ensure all your bases are covered. Your CPA, lawyer, Realtor, mortgage planner and financial advisor all play a vital role in making sure all your I’s are dotted and t’s are crossed, thus reducing the risk of missing critical details. Unfortunately, too many investors are trying to orchestrate this process on their own – taking piecemeal advice and trying to put together a complex puzzle. It’s no wonder investors are so overwhelmed when we meet for the first time. The most successful investors craft a powerful and compelling vision, are clear on what the vision of success looks like, and invite their strategic partners to work as a team.
As I close out this article I hope you remember one thing - In 2014 alone, over 60% of my clients were real estate investors, and over half of them came to me after being told “no” by a different lender. So, if you find yourself in a similar situation, remember the success stories I shared above and don’t let the myths of mortgage lending stand in your way. You may be surprised by the opportunities that are available to you!
Yours in success,
Kim Burke
LeaderOne Financial Corp.