Rental Property Financing – Real World Question/Options

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Trying to get all of my ducks in a row, I spoke to a friend who is a loan officer at a small local bank and he said for rentals, all they offer is 5 year balloons (amortized over 20 years) at 8.5%. That seems pretty bad in general. I plan to use cash and pull from a HELOC for down payment.

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Sounds like he does commercial loans.

You can get a regular loan, 30 year fixed, 20% down conventional with nearly every bank.

The rates will be higher than owner occupied rates but not 8.5%, it'll be lower than that right now.

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I want to be able to grow, not necessarily ultra-fast, but at least 1-2 properties per year for the first few years then take off once we build up more funds.

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You won't turn much of a profit on these but that is a good plan/goal.

How much liquid money do you have? What do you make per year?

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Any profit i make over the next 5-10 years i want to pump directly back in to get things paid off. We have about $40k liquid and do well enough between my wife and I. High credit score. I just know i'll never get to where i want to be working a W2 job and i want to take the plunge. I want 50 properties in 10 years. I want this to be my job and to leave a legacy for my kids. I've been analyzing and reading and figuring for the past 8 years and done nothing. Time to shite or get off the pot.

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If you're in Louisiana, I'd think long and hard about even going into real estate with the insurance crisis. I've got a couple of rentals in Nola and between Ida repairs, insurance and property tax increases, HOA dues increases due to HOA insurance increases, I can't raise rents quickly enough to make money. Going backwards on cash flow compared to when I started. Terrible market right now to buy in. I've tried tor raise rents and tenants say they will have to move out-so I can keep good tenants in place at low rents or boot them and pay for repairs and float the monthly notes and expenses until the tenant is replaced 6 months later since contractors can't finish their work on the initial schedule they give. TBH, right now probably easier/better return to just do a S&P 500 fund or something like that.

Also IRS Form 8852 limits real estate losses; so if you have net income losses due to depreciation or cash flow, the IRS limits how much you can deduct on your taxes-so you could be at a cash flow loss but not be able to get income tax benefits from the cash you are paying out of pocket.

Your kids may not want the legacy. I've seen lots of friends that could go into the parents' business which is super profitable and the parents want them to but they don't care to do it. Don't create something for kids they may not want or may move away and can't manage. Markets are more liquid and probably better returns.

ETA-all were bought and initially financed as primary residences and were later converted to rentals. Insurance gets insane high when you flip it to a rental property from a primary residence. All were bought in years ranging 2011-2020. Good supposed market value appreciation-not sure if it is holding where they were 2-3 years ago. One is paid off and supplementing losses on others. First buy was a 15-year note which has about 3.5 years left (initially a 20 year balloon converted to a 15 year note a year later). Great equity position and burning through principle each month but the negative cash flow is eating me alive to the tune of $800/month.

Also note put 20% down on all.

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I want 50 properties in 10 years.

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If you actually mean individual properties, that’s quite aggressive. Do you mean properties or units?

What kind of properties are you looking for? Single family, multifamily, commercial? Also what kind of calculations or analysis will you be using to determine if a property is a good investment?

If you don’t want to put it into a Fannie loan and have it in your personal name, I’ve got some option on low doc loans. 30 year amortizations and rates are decent. Happy to run some scenarios for you.

I’ve also been in the banking industry for 25+ years. Happy to answer any questions you have and shoot you straight


Lnobles@redstickag.com

I have a good property manager that I’ve been happy with but I’m not sure what area you’re in

Pretty dead on right here. There are some “on market” deals but they are needles in haystacks. Particularly on fix and flip stuff. That being said, don’t be scared to make a low ball offer on an on market property. Don’t make it an insulting low ball offer, but the worse than can say is no! There are some people getting bad advice from realtors right now (who want to line their pockets vs help get people out of really bad situations). So make the offer, the realtor has to present it to them period.

You will not find a deal (not many) that cash flow right now in south Louisiana with the insurance crisis and rental rates flat or declining. The 1% rule is the quickest back of the napkin you can do to not waste time. Also, if you have to use bank debt, the 20 year amortization is a big no go.

Be super careful with sub-to debt. Unless you know what you are doing, the seller knows what they are doing and you paper it correctly, you will be screwed big time on a couple of potential pit falls that people overlook. Anybody that tells you otherwise doesn’t understand sub to either. Works well in some situations but….

HELOCs were good when rates were low. I got a HELOC at 3.8% but it quickly ballooned to 8.875% once rates went up. I just paid it off, but it's still there to use in case of emergencies or if rates go down again.