Start with examining your goal for owning the investment property.
- Provide income prior to retirement?
- Use it for debt repayment up to retirement?
- Set up an annuity to supplement your income at retirement?
Knowing what you are trying to do with the property will help you determine the best way to finance it.
Every transaction is different. Is it a mixed use property? For example, a partially commercial and partially residential building, such as a convenience store or restaurant on the first floor and apartments on the upper floor(s) is considered mixed use. Is it all commercial or all residential? How many units? All of these facts are taken into consideration.
In general, the maximum loan to value should be 75%, meaning the borrower has 25% equity in the transaction. In some circumstances, the loan to value can go to 80% depending on the property. Partial owner financing can be considered, however the combined loan to value on the property can't exceed 80%.
Debt Service Coverage on the property, meaning the cash flow generated by the property after all expenses, divided by the debt service requirement on the property, should be greater than or equal to 1.2X.
We would need a rent roll for the property outlining the tenants' names, monthly rates, how long they've been tenants, and whether tenants are at will or if they have leases. If they have leases, you will need to provide copies of the leases.
We require a copy of the tax return Schedule E for the property being financed, outlining all of the income and expenses associated with the property. We need at least two years if possible.
When purchasing a property, you should consult professionals such as a lawyer and an accountant to determine the best way to take ownership for both liability and accounting purposes. Choices include individually, through a trust, a limited liability company, etc.
The property will need to be appraised, and that can take a month or more to complete. We will get quotes and, upon the borrower's approval, an appraiser will be engaged. This appraisal will determine Fair Market Value. The maximum loan to value of 75% is based upon the lesser of purchase or fair market value as determined by the appraiser. Appraisal costs vary widely.
These are just some of the items I look at when considering a loan to finance an investment property. Check out our website to see all that we can offer your business.
If you have questions or just want to chat with me about investment property you're considering - call me at 800-656-4328 ext. 2186.