Investing in real estate, and not paying 100% cash? You’re not alone. Even if you could pay 100% cash, it often doesn’t make financial sense to do so. Interest rates remain near all-time lows, and your money can produce much higher yields than banks are charging. I’m not a CPA, and you should check with yours since this article isn’t financial advice.
If you need to get familiar with some terms, read this. My strategy has been to maximize yields by using a combination of cash as down payment, and bank loans/mortgages for leverage. But just how much can you leverage?
Determine Your Risk Level
It’s never a good idea to over-leverage. Whatever amount you borrow from a lender to finance a real estate purchase, ensure you can cover payments and other expenses by renting a property. If you don’t plan on renting it, renting could be a fallback plan and you’ll want to ensure potential rent can cover your monthly expenses. If you have a lot of cash and are quite conservative, a lower loan amount makes sense regardless.
Types of Loans
Banks, local lenders, and hard money lenders have a range of loan programs available. Owner-occupied homes get the highest loan to value (LTV), sometimes as high as 97%, or even higher with FHA or VA-insured loans. But non-owner occupied homes for investment is what we’ll look at.
Banks and local lenders are usually relationship-based and will offer various products to different customers. Generally speaking, the bigger the bank, the more conservative they are with real estate lending. As a rule of thumb, commercial multi-family is currently lending about 65% LTV. Depending on the condition and your relationship with a bank, they may lend up to 80% LTV. There are a variety of options in-between that you’d need to discuss with your lender.
Hard-money lenders will generally lend at 85% loan to cost (LTC), or 90% LTC for more experienced investors. They’ll check to ensure loan to after repair value (ARV) doesn’t exceed 70% or 75% for experienced investors. ARV is usually determined by an appraisal. If it’s a rental you’re holding, 80% is probably the highest LTV you’ll find.
Bridge loans are offered by hard money lenders, and you should discuss with a hard money lender if you have a short-term financing need.
A short google search will yield plenty of lenders. However, not all of them will be suitable for you and your situation. Check with your local Real Estate Investors Association for recommendations in your area. For hard money loans and rentals, my personal favorite is Lending One. They have national coverage, are easy to work with and support this website if you use this link to apply.
Mortgage brokers are a good option if you’ve exhausted all your contacts. However, they’ll charge a fee.
Loan to values varies depending on the lender, borrower, and the property. There are a lot of different options out there, and you should do your research. Build a relationship with a few lenders and you’ll get higher loan to values over time with more deals. If you don’t have a relationship with a lender yet, ask for referrals.
Have any questions? Feel free to get in touch.