Saturday, March 22, 2014

Qualifying for a home Loan for a Rental Property

I've just been pre-approved for my third rental property and let me tell you I was sweating it.  Why?  I already own two rentals, plus my primary residence.  Leverage, using someone else's money to control all of an entity, in this case, a home, is great.  I'm sure many of you have heard of the concept of good debt vs bad debt.  Bad debt, is debt that is a liability to you, and takes money away from you monthly.  Good debt, is debt that's financing an asset purchase (or control) and produces income for you each month.  Being over-leveraged is a not a good place to be.  Banks will not lend you any more money to finance what you need (a real estate purchase or a business start-up, e.g.).  They figure you are a high risk borrower who is in danger of defaulting.

All real estate investors get to a point when they can no longer use conventional financing. Once I finalize the purchase of my third rental property, a 3 bed, 2 bath home in Memphis, TN, Bartlett area, I will undoubtedly be done with banks and conventional loans.  Although banks can use the rents from properties as income to pre-approve you, again, there will be a time when it won't matter how much rent you're bringing in, banks won't lend to you.  What do you do in these cases?  More of this on another post.

Using leverage:  I put 20% down, the bank puts 80% down, but control 100%!

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