Many know my primary focus is multifamily real estate investments. I began my journey by doing dozens of single family deals before I graduated to doing larger multifamily deals. Nonetheless, I've had the pleasure of meeting a lot of people with the desire to get started in real estate investing, and they are eager to understand how I overcame some of the roadblocks they are experiencing along the way. So, today is going to be a "Throwback Thursday", as I address one of the most common obstacles new investors run into—finding the right lender to partner with.
Finding the right lender for your single family investment properties is not as straight forward as some of the gurus make it seem. That's because most lenders are just loan originators. They give you a loan, then sell it on the secondary market, so they are subject to the standard Fannie Mae lending requirements. If you have the goal of building enough passive income to escape the rat race, you probably won't be able to achieve that by solely working with a lender subject to these requirements. But, don't go running to a hard money lender quite yet, because there is still a solution.
LIMITATIONS OF MOST LENDERS
Banks are highly regulated, and they should be, because they are lending out your deposits. The regulations set guardrails for the percentage of deposits banks are allowed to lend out at any given time. No bank has an infinite amount of money in their vault. So, once they fund a loan, they are able to sell those loans on the secondary market and get there original capital back, as long as it meets all of the Fannie Mae underwriting guidelines. This makes it possible for the bank to make an almost infinite number of loans, and they make money through origination fees and closing costs.
The guidelines lenders are subject to can be prohibitive to a buy-and-hold, passive income investor though. Here are some examples of the requirements a traditional lender selling their loans on the secondary market must meet:
- Borrower cannot have more than four financed properties, which includes your primary residence and vacation homes;
- If self-employed, you must have two years or more of history;
- Debt-to-income cannot be over 45%;
- Minimum credit score requirements;
- Non-warrantable condos are prohibited, which include...
- Communities with more than 50% of the condos being used as rentals;
- No single person or entity can own more than 10% of the units in the community;
- Condo associations must meet cash reserve and insurance requirements, cannot have more than 10% delinquencies, and must not have any pending litigation.
The first example alone is a major roadblock. Even if you meet or exceed all of the underwriting requirements, you are not allowed to have more than four financed properties (this includes your primary residence and a vacation home). It's no surprise why this can be a roadblock for up-and-coming real estate investors. You spend a ton of time trying to find a lender to have a long-term relationship with, only to lose your momentum once you no longer fit inside the box.
But, there are still lenders out there who are eager and able to partner with real estate investors. You just need to know how to find them.
THE MAGIC QUESTION
When you are screening possible lenders for your real estate deals, there is one magic question you can ask, which will save you a lot of time and pain. The magic question is:
Are you a portfolio lender?
Phrased differently, you can ask whether the lender keeps non-owner occupied loans on their balance sheet, or do they just originate, then sell them on the secondary market? A portfolio lender (a.k.a balance sheet lender) keeps these types of loans on their own balance sheet, so they are not subject to the standard Fannie Mae guidelines. This doesn't mean you are guaranteed funding, but they are able to be a lot more flexible with real estate investors they choose to partner with.
If they are not a portfolio lender, and you are a qualified borrower, you may get your first one to four investment properties financed with this lender. But, you will quickly hit a roadblock on your way to scaling your portfolio. So, save yourself the headache, and lead with this magic question.
I was very fortunate to form a relationship with a portfolio lender very early on in my journey. It was FirstBank of Colorado. So, if you investing in Colorado, Arizona, or Southern California, you might want to reach out to them.
ABOUT THE AUTHOR
Mark Walker has been an active real estate investor since 2004, so he brought a wealth of knowledge with him when he founded Luxmana Investments in 2011.
Though he started out as a part-time investor—holding a full-time job in high tech—he fully transitioned into his passion of real estate investing in 2015.
Mark now dedicates most of his time helping new and experienced investors build wealth through residential, multifamily and commercial real estate.
Learn more about Mark and Luxmana Investments at www.luxmana.com.