Real estate investing seems really complicated. Especially for busy professionals with tons of other stuff going on in their professional (and personal) lives. That’s the reason that most physicians give me for not investing in real estate. One of my goals with this blog is to simply and demystify the process of real estate investing to show that it can be done to great advantage even by full time doctors like me. With that in mind, today’s post is going to walk through the process of obtaining an investment property mortgage.
Why focus on an investment property mortgage?
figuring out how to get a mortgage on an investment property isn’t always the first hurdle that comes to potential investors’ minds. (That is usually reserved for concerns about fixing toilets in the middle of the night!)
But it is a really important aspect of being a successful real estate investor.
The reason is pretty simple. One of the reasons that real estate investing is so powerful in building wealth is because you get to use OPM to build your wealth.
And what is OPM…OPM = Other People’s Money. In the case of a mortgage, this is generally the bank’s money.
By using OPM, you can pay 25% for an investment property but make gains, including cash flow, equity pay down, and tax advantages, on 100% of the property value.
That’s a huge advantage! You can see exactly how advantageous in this example for one of our properties: One Year Real Estate Deal Analysis of Investment Property #2
So you can see why being skilled and facile at securing a mortgage for your investment property is really important!
So let’s break it down.
5 steps to obtain an investment property mortgage
Beginning at the beginning…
1. Shop around
In general, you can get financing like a mortgage for an investment property from a few places including:
- Big name banks
- Smaller local, community banks
- Lending companies
- Mortgage brokers
Technically, mortgage brokers get them from the same 3 places above but they just do it for you.
All of these are great options. What I recommend doing is talking to a few big banks, local banks, lenders, and brokers. What I look for upon initial conversations are things like:
- Do they work with investors?
- Are they familiar with investing lingo?
- What loan/mortgage products do they offer for investors?
- Are they easy to work with?
- Are they available/easy to get in touch with?
- How their interest rates are running?
Related Post:
5 Important Questions to Ask Your Investor Real Estate Agent
Do not however that interest rates will be different when you actually buy the property than they are now. But I still ask and use these rates as a rough estimate when running numbers.
2. Get a preapproval
The next step as you get ready to actually buy a rental property is to get a preapproval.
A preapproval is a document that a lender, bank, or broker will give you saying that you will be able to carry a mortgage for a certain amount. This will be based on your finances and things like debt-to-income ratio, etc. Your lender will figure out how much they are willing to give you based on this information.
This preapproval shows your real estate agent and sellers that you can secure financing for the cost of the property that you are looking at. It is a necessary item before making an offer.
Two side notes however:
- Residential investment properties (1-4 units) use a residential mortgage. These always require a preapproval. Commercial properties (>4 units) use commercial mortgage that are based more on the finances of the property than the finances of the buyer. Because of this, some lenders don’t give out preapprovals for commercial properties.
- I’ve found it helpful to obtain preapprovals for amounts much greater than the actual price of the property. This shows you have strong finances and will close. So for properties in the $200k range, we ask for preapprovals in the $500k range at least.
Once you have the preapproval, you can start shopping!
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
3. Keep your lender in the loop
At this point, you have found a property and put an offer in. I always let my lender know ahead of time when we plan to even just put in an offer. This just helps keep them in the loop and keeps things moving smoothly when/if the offer is accepted.
If not before putting an offer, certainly as soon as your offer is accepted, let your chosen lender know.
If you have an inspection contingency, you will now get the inspection done and negotiate any changes to the offer based on the outcomes. Let your lender know about these changes ASAP.
An uninformed lender means delays in closing which is bad for you because:
- You can’t start cash flowing until you close
- Your reputation as a buyer that will close on time is important
So, let them know all the details ASAP and you can move on to step #4…
4. Invasion of privacy
I say invasion of privacy half-jokingly. But this is the time when the lender will be asking you for all (and I mean all) of your financial information.
In general they will request,
- 3 months of all bank statements (with explanations for any large deposits)
- 3 months of all investment/brokerage statements
- Home mortgage statements
- Any investment property statements
- Tax returns
- Pay stubs
- Letters explaining any past addresses or other perceived anomalies
- And more…
This is a tedious time. But it’s necessary. Lenders got into trouble in the 2008 housing crash by not doing all this due diligence on borrowers.
What I recommend is knowing where these documents are electronically ahead of time and heaving them ready. Fire them off all at once and as soon as they’re asked for. Again, you don’t want delays.
5. And the appraisal
The lender will also order an appraisal at this point. They need to make sure they are not loaning you a value greater than what the property is worth.
If the appraisal comes back low, you either need to negotiate a lower price with the seller or make up the difference in cash.
If the appraisal comes back high, great! You are buying with equity already in the property!
6. Double checking your numbers
Once this part of the process is done, your lender will send you some closing documents to review.
Included on these documents will be things like:
- Your final interest rate
- Closing costs
- Mortgage principal and interest amounts
- Estimated escrow amounts
Always go back to your initial property analysis (like this one) and put in the actual numbers and make sure everything still works.
There shouldn’t be any surprises because you should have been conservative in your estimates and also have had relatively accurate numbers from talking to your lender ahead of time. But it still feels good to see the final numbers and be comfortable with them.
In a worst case scenario, if the numbers suddenly don’t work because of some unlikely massive and unexpected change, you could try to use the financing contingency to get out of the deal. But this is a bad look and should be avoided with good due diligence well ahead of this point…
And, as a final point, you can always change lenders at any point in this process is something goes south with your current one.
7. Then waiting…and waiting…and waiting…and then…you close!
Waiting to finally close on your investment property and mortgage can seem like an eternity. There is a lot of waiting that goes on.
But eventually, after running through all these steps, you will close!
You meet with your attorney, the seller’s attorney, and usually a representative for the lender. Then you sign a bunch of documents and hand over the rest of the funds due (closing costs and down payment). The bank will tell you when the first payment is due (usually a month later) and how to pay. Keys are exchanged and voila! You now own an investment property!
And then the real fun begins!
These 7 steps to get an investment property mortgage are important. But I can’t lie…they’re not the most exhilarating.
But after you finally own the property, you get to kick things into gear and have fun! Selenid and I always try to minimize the time between closing and renting out the units to maximize cash flow. It becomes a fun game.
This means:
- Planning and repairs ahead of time
- Getting your team in place and ready to act (contractors, handymen, painters, etc.)
- Getting ready to advertise and set up showings for the apartments
By preparing for these things ahead of time, you can move quickly and smoothly after closing to get your rental properties up and running and making you passive leverage income!
Now that you know how to get a mortgage for your investment property, make sure you are comfortable with getting it up and running after closing, managing it in an automated and hands-off fashion, and maximizing your cash flow!
You can also check out my real estate guide for physicians and learn the 3 tough lessons we have learned as real estate investors.
What do you think? Have you used financing for your investment properties? How was your experience? Any tips? Let me know in the comments below!
Hi Jordan,
Are you borrowing money from banks in your personal name for your investment properties then converting them to your business entity or are you creating a mortgage in the name of your entity outright from the start? Appreciate your input.
Lisa
We have so far invested in 2-4 unit properties so we are able to borrow in our own name, getting better rates and making the process easier. We then quit claim the properties into our LLC down the line. In doing this, we make sure to inform our lender before so the due on sale clause is not an issue. For larger (>4 units) properties, you will need a commercial loan under an LLC.