Financing Investment Properties with a Mortgage Broker

One of the things that keep people from investing in real estate is they think they don’t have the financial means to do so. However, what sets real estate apart from other forms of investments is that you’re able to leverage your money by using loans. To educate you all on how to finance an investment property, I reached out to Fred Militello who is the proud owner of 212 Mortgage, which is a mortgage brokerage firm located in Bel Air, Maryland. Hopefully, after you finish reading this blog, you will have a better idea of how you can start building your wealth through real estate. With that being said, let's get into the questions that I asked Fred!

1. First of all, why should people consider purchasing an investment property?

So first and foremost, it would be to create a legacy for yourself or your family. There is no better wealth creation vehicle than through real estate. If you look back over the past couple of decades, most of the wealth in this country has been passed on to the next generation through real estate.

The other thing that I’m starting to notice in the Baltimore Metro area is that the home prices and what you can get for rent are very attractive compared to some other areas in the country.

For example, if you were looking to buy a home in New York City or San Francisco, you would be paying over a million-plus to maybe rent it out for several thousand dollars. However, you can pick up homes in and around the Baltimore Metro area for sometimes under $100,000 that can generate over $1,000 a month in rental income. So when you put that up against what your mortgage payment would be, your payment all in would be maybe $500 a month and you’re renting it for around $1,000 a month.

2. Why should someone use a mortgage broker to purchase an investment property?

As a mortgage broker, my job is to educate buyers to ensure that they’re making the right decisions. A lot of buyers may know how to buy a home as their primary residence, but they don’t know what is associated with buying an investment property. For example, do they know if they’re going to put it in an LLC or keep it in their name for protective reasons?

Also, mortgage brokers offer a myriad of loan products that are geared towards investment properties. On top of that, we have lower loan amount limits, and we have a wide variety of income documentation and alternative lending that could help.

3. Why is it better to purchase an investment property with a loan?

Ideally, you’d rather use other people’s money such as the bank to buy an investment property. For example, let’s say you have $50,000 and you see an investment property that’s worth $100,000. You’re not going to put all of your money into that. The bank is going to require a 20% down payment, which for this property would be $20,000. Then you have to set aside some money for closing costs and repairs. The remaining money that you have left would be used to buy another investment property. So what you’re seeing is in order to start building an investment portfolio, you really need to put your money to work in the most efficient way possible.

4. What are the upfront costs of purchasing an investment property?

Whether you’re purchasing a primary home or an investment property, the upfront costs are relatively the same. The main thing that determines how much your upfront costs will be is based on the county that you’re purchasing the property in. And there is also a slight difference in what your upfront costs will be depending on the bank that you go to.

The main difference in the upfront costs of purchasing an investment property compared to a primary home is that the bank is going to require you to escrow the entire year of property taxes; whereas on a primary home, they may only ask you to escrow three to four months worth of property taxes. Also, the bank will typically charge additional points, where each point equals 1% of the purchase price of the property.

To not overcomplicate things, a rule of thumb for how much you can expect the upfront costs of purchasing an investment property to be, which doesn’t include the down payment, is 5% to 6% of the purchase price.

5. What requirements does a mortgage broker go off of to decide whether to approve or decline someone’s loan application?

Everyone needs to know whether you’re buying a primary home or an investment property the requirements to purchase a home never changes. First and foremost, mortgage brokers want to see that you are creditworthy, so the minimum credit score that they’ll be looking for is a 660 for investment properties.

The next thing that mortgage brokers will look at is your debt-to-income ratio. They’re going to want to see that no more than 45% of your gross income is going towards your mortgage payment. A pleasant caveat here is that we hardly have issues with people when it comes to their debt-to-income because we can use up to 75% of what the property will rent out for to offset their mortgage payment.

The last thing mortgage brokers look at is the down payment. When it comes to investment properties, the minimum down payment that’s required is 20% of the purchase price.

6. Are there certain types of properties that mortgage brokers will not lend on?

Mortgage brokers handle all types of investment properties; whether they’re single-family or multi-family, they even get involved with condos, co-ops, and mixed-use commercial properties as well. The main types of properties they prefer not to deal with are mobile homes and manufactured homes.

7. What are some of the loan products that you offer that are tailored towards investors?

There are many loan products that mortgage brokers offer for investors, with one of them being a portfolio loan. If you find several properties near each other that you would like to buy, you can wrap those properties into one portfolio loan.

Another loan product that mortgage brokers offer is called a renovation loan, where you can include the costs to renovate the property into the loan.

There’s also the no ratio loan and what’s so special about this loan product is that you can qualify for it without having your income verified because it’s all based on the property’s ability to pay the mortgage from the rent it generates.

8. What things should someone do to be able to qualify for any of the loan products that you just mentioned?

I get asked this question all the time and what’s unfortunate about it is that when a client asks me that question, they are ready and willing to buy, but they might not be able to buy because they haven’t taken the time to find out the answer to that question ahead of time.

There are three things a person should do if they're looking to buy an investment property. First, they should have their credit pulled by a mortgage broker so they can get an idea of where their credit score is. Second, they have to set a realistic budget because they may want to see homes that are $500,000, which for a new investor, doesn't make sense.; after all, the cash flow is not going to be there. But not only that, they can’t qualify for that amount of money because it’s way too much out of their budget. And third, they need to ensure that they have an adequate amount of money saved up to put towards this investment.

9. How can people reach out to you if they're looking to get a loan to purchase an investment property?

They can visit my website to find my contact information and to learn more about me and my team at 212 Mortgage! Click here to visit Fred’s website.

Here’s the video version of this blog for all of my visual learners! <3