Many investors ask me what is the best way to acquire rental properties. Usually, finding investment properties is not the problem, but financing the properties.
The main difference between buying “retained” properties (rentals) and buying investment properties to rehabilitate and resell is financing. For investment properties, you only need to borrow for 6 to 9 months usually. For rentals, your financing will be the traditional 30 years.
When we started investing in 2005, banks were making up to 8 home loans per qualified borrower. So, I got 8 home loans in my name, then Jim got 8 in his.
Today, large financial institutions still 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 rentals, don’t pay cash for the properties; it is best to have a mortgage. 10, 15, and 20-year funds are available, 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 sufficient funds for your business, you can always pay off the loan early, but you can never request a reduction in your mortgage payment amount.
Another advantage of the mortgage balance is that you can claim the interest deduction on your taxes. Rentals offer so many tax cancellations that you need especially if you are doing bulk drafts and offers.
You need cash on hand to qualify for additional mortgage funds, so don’t sink deeper than necessary into any property you plan to own. For years, we traded in all the properties that we invested a lot of money in, anything that needed rehabilitation, and we only kept the properties that had very little of our own money invested in them.
Over time, you will use leverage to build your portfolio, borrowing against the capital you build up in your rentals over time. We have borrowed against our properties more than once to obtain the financing we needed to acquire more.
How do you find the funds to purchase rental properties? Do you plan to pay them off sooner or wait and let your tenants pay the full mortgage over time?