How to buy rentals
Many investors ask me what is the best way to purchase rental properties. Usually, finding investment properties isn’t the problem, it’s financing the properties.
The main difference between buying “hold” properties (rentals) and buying investment properties to rehab and resell is financing. For flip properties, you only need to borrow for 6 to 9 months typically. For rentals, your financing will be the traditional 30-year term.
When we started investing in 2005, banks made up to 8 home loans per qualified borrower. So, I got 8 home loans in my name, then Jim got 8 in his name.
Today, the large financial institutions continue to offer the cheapest long-term financing available, so I recommend that you start there. Check with national lenders, local banks, and don’t forget credit unions. See what financing they offer, how many rental loans they will make, and how you qualify.
If your goal is to own a lot of rental properties, don’t pay cash for the properties; it is better to have a mortgage. Financing is available at 10, 15 and 20 years, but opt for 30-year mortgages. Keep your monthly payment as low as possible to get as much cash flow as you can at the start of your property. Once you have a large enough portfolio and enough funds coming into your business, you can always pay off the loan early, but you can never request a reduction in the amount of your mortgage payment.
Another advantage of the mortgage balance is that you can claim the interest deduction on your taxes. Rentals offer so many tax deductions that you need especially if you are doing trades and wholesale deals.
You need cash on hand to qualify for additional mortgage funds, so don’t invest more than necessary in any property you plan to keep. For years, we turned over all the properties we invested a lot of money in, everything that needed rehab, and kept only the properties that had very little of our own money tied up.
Eventually, you’ll use leverage to build your portfolio, borrowing against the principal you accumulate in your rentals over time. We have borrowed against our properties more than once to get the funds we needed to purchase more.
How do you find the funds to purchase rental properties? Do you plan to pay them off early or wait and let your tenants pay off the mortgage in full over time?