Buying Your First Rental – Dealing With Financing Part One

Financing Rentals

When you first start buying rental property one of the biggest challenges you’ll have is dealing with financing.

It seems simple enough (or at least the way they portray it on TV or in slick Real Estate seminars makes it appear simple), put some money down, put a mortgage on it and away you go, but that’s only at first glance.

And on TV..

But in the real world…

Well, if it was that easy in the real world then anyone could do it!

That’s why I’m going to talk a bit about the basics of financing here.

I won’t tell you whether getting the lowest interest rate is what you need (often it isn’t), I won’t tell you whether you should be getting fixed or variable rate mortgages (I have a blend of both and it depends on my plans with a property) and I won’t tell you it’s best to put more down (it usually isn’t, but it’s a case by case situation).

I will however warn you about some potential traps you may fall into with your first property and those warnings are worth the price of admission, which is free so it’s very worth it!

Why The Basics of Financing Aren’t Basic

Part of the challenge we face as Real Estate investors is we get bunched into a different class of borrowers by the lenders, so we also have to typically follow different rules.

Of course these rules also vary depending on where you live, so make sure you have someone who can help you work through them properly and legally!

One aspect that does seem to be consistent where ever you live is investors tend to have to jump through more hoops to get financing for rentals versus a regular home purchaser. If you understand this before you get to far it does take some of the stress of acquiring financing out of the equation.

Some of these hoops and challenges could mean higher down payments, less flexible payment terms and as your portfolio grows less flexibility with lenders. So be ready and also be preparing for the future!

Now the question many new investors have is why is it so much more work? Well, according to statistics landlords are simply higher risks than home owners!

Whether it’s because so many are uneducated about the process or whether it’s easier to give up on a rental than a personal residence I can’t answer for you. It’s just how it seems to end up and as they fail, the extra burden falls on the current and upcoming investors.

I know it’s true that some investors simply get overwhelmed or taken advantage of and ultimately end up losing the ability to pay their mortgage debt which leaves them few options but foreclosure. But that doesn’t mean it’s our intent!

It’s this danger, or higher statistical danger, that causes extra hurdles for those investors who simply want to do it right.

But if you’re here and you’ve been following me for any period of time hopefully my articles and videos are helping you to avoid following into some of those situations of overwhelm or of being taken advantage of, right?

Hopefully you did say right and if you did, let’s move forward and talk about one of the first warnings.

Why The Bank May Not Be The Best Option

Welcome to the first trap/warning/mistake that new investors make with financing!

OK, perhaps it’s not a trap, but it is a misconception that your bank is out to help you. They’re advertising says it’s true, but we are far gone from the days where bank loyalty really helped you out.

I’m probably a little jaded with dealing with banks, but they do so many little things that annoy me.

Like trying to break down relationships with their main staff. There’s a reason banks tend to transfer managers so often, it’s not to provide upwardly mobile career paths. It’s meant to break up any potential relationships that could cloud sound financial practices.

I’ve had it happen to me where I’ve had great relations at the front counter, know the tellers kids names, I’m up to date on upcoming staff weddings and I even took extra steps to be remembered, like bringing in donuts on the 1st of the month when I would do big deposits.

We all like to be remembered and this went a huge way to helping us stand out from their regular memorable clients. It also helped me with little things like getting a fee for a bank draft waived or perhaps an overcharge getting wiped out, but when it comes to big manager level issues suddenly it’s all business.

My real life example of this was a bank we’d been dealing with for many years, that we had multiple accounts through and that had handled hundreds of thousands of dollars worth of transactions for us. 

We discovered we were paying a ton of extra service charges for all the accounts and I inquired with the teller if there was a chance to get the fees reduced. Due to the great rapport I was informed it shouldn’t be a problem, especially due to our high number of transactions (and likely the donuts), but I’d need to talk to an “account manager”.

This too went great as I was recognized by her and was again informed it shouldn’t be a problem, again due to our high volume, but they did this all the time for customers, she just had to get it approved by the manager…

Two days later, I was simply told no the manager wouldn’t approve it… Welcome to the world of zero relationships and all business. And yes I did move all my accounts within sixty days, so now they moved from $800 per year worth of service charges to zero, and I quit delivering donuts!

Part two of the problem is banks also like to cap their risk. They don’t like over extending themselves to any one individual (note this doesn’t qualify to those that don’t need to borrow money, banks love to loan those people even more money!).

This results in you potentially having an easy time getting your first rental property mortgage. Then for property number two the hoops become more varied and tighter to get through.

Finally somewhere between property three and five they simply tell you that you’ve reached your capacity with them and they won’t loan you anymore money.

Now, you have all your properties tied up with one lender and no leverage. they control all your options so you have to start fresh somewhere else.

That’s Why I Recommend…

It’s due to those types of issues that I recommend you look into dealing with a mortgage broker if you’re serious about investing in Real Estate, oh and not just any mortgage broker.

You’ll want to find a broker who is familiar with Real Estate investors and dealing with financing of rental properties.

If you’re not familiar with the role of a mortgage broker the easiest way to explain it is to think of them as someone who deals with many lenders and banks, versus a bank who traditionally only offers there in-house mortgage products.

This can open the door to a variety of different options and products involving your mortgage and a mortgage broker who is experienced with investors can warn you in advance which products fit your needs best.

An example of this is variable mortgages versus fixed rate mortgages. Variable rate mortgages fluctuate with the bond market while fixed rate mortgages stay at a fixed rate for the term of a mortgage. Both are important, but they also have different applications depending on your investment plan.

If you’re in a market where values are increasing quickly variable mortgages give you more flexibility with less penalties typically if you decide to break your current mortgage early and refinance or sell to acquire some of the equity for another purchase.

Sharing your investment plans with a knowledgeable broker can ensure they fit you with the products that save you money not just up front, but on the back end too!

Another bonus of having access to a broader width of lenders is more flexibility if you continue to expand.

You’re able to have your “eggs” spread to multiple baskets.

Now if you start having challenges with one lender it’s not quite the deal breaker anymore and you’re not feeling quite as locked in anymore.

Trust me, this can be stressful as I’ve run into situations where one particular lender changed their policies a couple weeks before a renewal. This forced me into a situation where I had to sell the property and since I dealt with a broker, I was able to let my broker know I wouldn’t deal with that lender anymore.

With a large portfolio tied to one lender, this would have been a major headache.

Dealing With Financing Overwhelm

I’d really hope to provide a nice concise article about financing, but I find my self explaining more than I anticipated (might be due to the amount of information I need to cover!) and including more and more information.

All this financing stuff can really get overwhelming!

So I’ll stop here and make this part one of my financing series versus article.

While you’re waiting for part two (and possibly part three), why don’t you leave me a comment with some of the challenges you have faced with financing, or with banks!

Also, let me know if you’re currently using a broker or dealing directly with the bank and the experience it’s provided you with!

Looking forward to your feedback.

Part Two & Three Of This Series Is Up!

You can find it here,

Dealing With Financing – Part Two Terminology

Dealing With Financing – Part Three Financing Strategies