Quick question, I am new to this subject, but right now am thinking of investing in a rental property. The problem is that I just bought my house a little more than a year ago. So I want to know, for the rental property, how much income do I have to have for the bank to even consider giving me any financing. As far as cash on hand I got about 80k, but my income is only about 3200 per month, gross. And my current mortgage is already 1150.

Is it better for me to just go in with cash? Is there a way for me to get started with this dream or anyone know a better approach?

They weren’t 203(k) loans. Several years ago, I assisted a friend in purchasing a property financing the repairs with a 203(k). To my recollection, the 203(k) is for owner-occupants.

As to finding a bank to finance on the basis of improved value, I have two basic suggestions. Ask around and call around. If you know someone who has invested in residential real estate, ask who he used for financing and whether he financed improvement costs. Look up lenders in your area and start dialing. Forget larger retail lenders. You want smaller banks that don’t resell their loans. Set up a few meetings with the people that handle commercial real estate loans in these smaller lenders. If you have any track record with real estate investing, have that information available for your meetings. Even in the telephone conversation, ask direct questions. Tell them you’re planning to purchase a property, your criteria in terms of purchase price to improved value, etc. And if you’ve identified a specific property, prepare a detailed list of repairs and your estimated costs. In our case, we identified a portfolio lender who loans on this basis to approved investors, and we absolutely provided the bank with our estimate of improved value and comparable sales to back it up. After the first property, this same lender financed another three for us in the following year and a half.

Good luck!

“At its core, the question of how much you need to begin is really a question of return and risk–both your perception of risk and your tolerance. In our case, we felt comfortable with using high leverage because we had experience that gave us confidence that risk resulting from error in projecting rents or assessing improved value was low. However, we also had other resources that we could draw on–whether credit or income from the day jobs–that provided options if some of these risks came about.”

I like how you explained that. Very helpful. Thanks.

For terminology, a portfolio lender could be banks, credit unions, and hard money lenders providing non-secondary market financing. We, however, have not dealt with nor needed hard money loans (more for the house flipper with considerably higher rates).

Great question on the interest rates and closing costs. But let me beg off on that one until a future article.

Are you talking about local banks and/or credit unions? Does that description included hard money lenders? And with the lenders you’re working with, how much higher are the closing costs and interest rates?