Financing Investment Property, 2009

I thought an updated post about financing investment propery would be timely given the extreme lending conditions of the moment.  While conditions seem to be slightly improving lately in the overall market, investor financing remains tough.  Many lenders have moved on to the hungry owner occupant loans which often have thinner files than us real estate investors.  This is despite investors filling in the gap and consuming the foreclosures when no one else was.

But let’s face it, owner occupant loans are a lot easier than investor loans, and certainly much quicker.  This means your lender can do 2 owner occupant loans in the time it takes to do your loan.  More profit for them and time saved.  This means investment homes are on the backburner.

So to survive in 2009 as an investor, you’ll need to get creative, be persistent, and find the right lenders.  Because they do exist.  Here are a few of the hot buttons in 2009.

Cash Out Loans – Investors are still calling asking if we’ll give them cash back in order to buy investment property.  That scenario has become the Dodo bird of our industry.  Fannie Mae requires all parts of the transaction to be documented and further many lenders have overlays so to find a lender allowing cash out is like finding a needle in a haystack.  You’ll probably waste a lot of time looking for this loan when you could be findingyour next deal.

Zero Down Financing - This actually still exists.  The problem statement is that in order to do this, you having to get the home 5% cheaper than before.  Fannie Mae is underwriting at 75%  refinance instead of an 80% meaning you’ll have to buy the deal cheaper on the dollar.  This often means digging into cheaper homes which can increase investor risk.  Also you’ll pay significant closing costs in order to structure these deals.  Consider this.  These deals still exist but they are often the homes with the highest appraisal risk.  Which leads me to my next point.

Appraisal Risk – With the new Home Valuation Code of Conduct (pdf attached), the lenders are having to use Appraisal Management Companies, meaning they don’t get to pick the appraiser out.  This has been a huge blow to much of the creative structuring that has been done in the past to get the zero down deals or cash back.   The risk here is that if your home doesn’t appraise for what you thought it would then you’ll need to bring cash to the table.  Often unexpected.  Rule of thumb in 2009 – Expect the unexpected, when financing your investment property.

Skin in the Game – Cash is king in 2009.  Having cash available to purchase and finance investment properties is becoming the standard.  The more the better.  Did you know that the average investor brings $25,000-$30,000 to the table on transactions?  This is a national average and that 74% of all transactions are traditional transactions via downpayments of 10-20%?    Many properties offered by Investor Nation are in the $3500-7500 down range.

Know What You are Doing, or Know Someone who Does – This is a good mantra for 2009.  The opportunities seem to be everywhere.  Carefully executed due diligence will separate the wheat from the chaff this year.  Financing your investment property is going to be tricky. Just because there are 10,000 REO’s on the market in particular city doesn’t mean they are deals.  In fact everyone seems to be selling a deal these days.  Investigate before you deal.

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