Investment Property Loan Pitfalls to Avoid in 2015
By Paul Esajian on June 5, 2015
Are you prepared to dodge these investment property financing pitfalls?
Capital is plentiful for real estate investors in 2015. New mortgage programs and lenders are rapidly coming online for investors. In fact; in many ways it is far easier for property investors to get loans for rental properties and fixing and flipping houses than it has been in a long time. Even easier than for regular home buyers looking for loans. That doesn’t mean there aren’t financial dangers lurking for investors. So what should you be watching out for?
Not Choosing Loans with Pre-Payment Penalties
In the past pre-payment penalties hit a lot of investors and homeowners hard. But this is actually a great time for buy and hold investors to opt-in for pre-payment penalties. If you are buying rental property to hold indefinitely, and can get a lower interest rate for 30 years, with a penalty for only the first 3 years, it’s a win. Otherwise you are being penalized for decades for not having one. But, real estate investors need to be very diligent in reading the fine print. Most residential pre-payment penalties have been pretty standard; 1 to 5 years long, with 1% to 3% of the balance as a penalty. However, commercial lenders (who now loan on single family rentals) often have very complicated pre-payment penalty calculations. This can be a page or more of factors that determine the penalty. In some cases it could be hundreds of thousands of dollars.
ARM Loans
With interest rates low, but headed up this is not the time to be trending toward adjustable rate mortgage loans. If you can’t afford the property, or the numbers don’t work at long term fixed rates today, odds are that they won’t work when you try to refinance at much higher rates in 3 to 5 years from now. These loans work best for short term holds, or when rates are set to decline.
15 Year Loans
Shorter term loans can often be alluring to residential borrowers. They can promise being mortgage free sooner, and lower interest rates than long term fixed rate mortgage loans. However, they also come with higher monthly payments. This can be counterproductive for income property investors seeking cash flow. It may be better to take the long loan to maximize cash flow and flexibility. When there is a surplus the balance can be paid down early voluntarily, effectively reducing the overall interest paid.
Balloon Mortgage Loans
While balloon mortgages can offer better cash flow than other short term mortgage loans, they also have early maturity dates. Lenders can be a little too overly optimistic when painting a picture of the refinance market in the future. There are no guarantees where rates, LTVs, and values will be then.
Ignoring Non-Recourse Loans
Non-recourse loans mean that you aren’t personally guaranteeing or liable for the mortgage. The property or borrowing business entity is. This is the best type of loan to get for investors if you can. They are out there, and while LTVs may be lower they are worth investigating.
Checking Release Provisions on Blanket Mortgages
Blanket mortgages are being pushed hard by hedge fund backed lenders. They do come with great advantages in efficiency and operations. However, it is crucial to understand how releases work to be able to unencumber individual properties and sell them off. Check the fine print. Check the fine print. Check the fine print.
Failing to Negotiate
It’s always worth trying to negotiate a better mortgage deal on your investment property. 90% of the time you should be able to get a little better rate, get fees cut, or get other terms adjusted if you just ask. It never hurts to ask. Every penny counts and you shouldn’t be giving away more than you ought to just because you were being too shy. The worst they can say is no.
Negotiating too hard
Negotiating is smart. But there is a point at which it becomes counterproductive. Just like when sending out lowball offers on properties. Mortgage shopping to get the best deal is one thing. Beating a loan officer down to the point where they are losing money by doing your loan isn’t helpful. They might agree to cut fees and more. But at some point your loan will get tossed to the bottom of the pile. And it doesn’t matter how good the offer if you loan never gets closed and you lose the deal. It’s just common sense. Help your mortgage pro earn well for doing an awesome job and they’ll make sure our loan and getting you a great deal is a top priority.