Our Thoughts
Hi Derick,
Congratulations on taking your first steps toward passive income from real estate! Before you do anything else, we recommend taking our
free mini-course on passive income from rentals.
Before getting into financing, it’s worth noting that investing out-of-state, especially as a first-time real estate investor, comes with challenges. In our passive income course, we recommend getting to know a neighborhood intimately before investing in it.
Because you live out of state, you’ll also probably need to hire a property manager. Just something to keep in mind.
Financing
The cheapest way to finance your initial property purchase(s) is by borrowing a mortgage against your primary residence. Be aware however that if you default, it’s your home that’s on the line, not the rental properties!
Alternatively, you could go the more traditional route of using investor purchase financing. For your first three or four properties, you can use conventional financing for investment properties, which typically requires 20-30% down. The interest rate will be higher than an owner-occupied homeowner mortgage, but lower than most alternative financing options.
If you buy properties that need repairs, you may need a
hard money loan.
After your first four properties, conventional financing becomes more difficult. Fannie Mae does have a
program for landlords with 5-10 properties, but it has strict guidelines. There’s a firm minimum credit score of 720, and down payments for single-family homes start at 25% (30% for 2-4 unit properties).
Crowdfunding and peer-to-peer loans are another option. They are more expensive than conventional mortgages, but don’t have the same limitations on the number of mortgages you can carry.
Lastly, portfolio loans from local community banks are often your best option, after your first few mortgages.
LLCs – Good Protection or Unnecessary Complication?
Owning properties under a legal entity will make financing that much more difficult. Still, many community banks are willing to lend to LLCs, for loans they intend to keep in their own portfolios. They’ll make you sign a personal guarantee, heads up.
I personally believe that the protections of LLC ownership are rather flimsy and overstated. And they come with downsides: besides the extra wrinkles they add to your financing, they come with annual fees, and of course they complicate your accounting and tax return.
With that said, the benefits are greater when you share LLC ownership with a partner.
If you want to ask questions directly to an attorney, without breaking the bank, here’s where you can do so:
I really like this format, of showing real deals and numbers! Very helpful in giving me a framework for evaluating my own deals. Please do some more of these!
Thanks Sally! We might do these more often, we’ll just have to see what kind of questions and deals come across our desks!
I like this. I might just start sending my own deals over for analysis 😉
Haha, by all means, send them over! Can’t promise we’ll give specific feedback, but you’re welcome to send us questions any time.
I learned a lot from your analysis and recommendation! I wonder what Derrick is doing now?