Best Loan Options for Investment Properties

Uh, Patriot Nation, I know what you're thinking. You've got you and your family in a pretty good spot financially. You own your home, but now it's time to take the next step. You're thinking about buying an investment property for the first time, and that's a great choice. In this video, we're going to talk about the three best loan options to acquire investment properties. So, if that's of interest to you, let's kick off this rodeo right now. I'm Kevin Fagan. I'm the mortgage patriot on your side nestled here in the Hill Country above San Antonio, Texas and serving all you proud Texans and all you great folks all around the country. So, as usual, a very important topic here because we're going to talk about investment properties. As you may or may not know, 20 to 25 almost 30% of the existing sales now in the United States are to investors. And it's not just big companies. It's individuals that are that understand the benefits of owning rental real estate, investment properties. But today, we're going to talk about the three best choices to acquire real estate with financing options. We're going to talk about conventional loans. We're going to talk about DSCR loans. And then we're going to talk about home equity lines of credit. Some people call them HELOCs. We'll explore all those different options, tell you what the benefits and what the advantages are versus disadvantages on each one because they all have their separate advantages and disadvantages, and we're going to wrap it all up at the end with an example, uh, and you're going to walk away feeling like you understand quite a bit. And, uh, hopefully I can help you secure those properties. So, let's get into that content right away. If you would please hit the like and subscribe below and maybe even add a comment, it really helps with the YouTube algorithm, of course, as you know, and brings my content up to the forefront. And you'll see some examples here. Investment strategies that I've done uh videos on before. FHA, how to acquire investment properties using an FHA loan. Investment property purchase using a VA loan. Now, spoiler alert, those require living in the home first. Those are primary home loans. So, you have to move into those homes first and then typically move out after a year or so. So, that strategy is specific to those to those videos. Uh we're going to cover a pure investment strategy now where you already own your home, you're intent on staying in that home, but now you're going to be buying uh an investment property and renting it out to, you know, obviously other tenants. So, as I mentioned, there's really three best loan options to acquire investment properties, and that is conventional loan, DSCR loans, and HELOCs. So, we're going to talk about conventional loans first because that's uh typically the lowest interest rate among the three choices. So, you want to try to start there and if you can qualify, great. In terms of credit scores, it's going to be pretty much the same across the board on all three choices. But obviously, the higher the credit score, the better your pricing will be. But typically, investment property start off at least 660 to 680. 660 to 680 on your credit scores. As as you go higher, your pricing gets better. Uh, secondly, we let's talk about income documentation. Relative to the other types of loans, with a conventional loan, you need two years, two years of income documentation, meaning you need to show W2 returns or tax returns, personal tax returns for the last two years. U if you cannot show that, then we have to go through the other options. But again, you want to try to do this because you want to get the lowest rate. So two years of income documentation is required on the conventional loans. And lastly, in terms of down payment, another reason why you'd like the conventional loans because it's got a lower down payment than the others. In the case of conventional loans, it's about 15% to 20%. In other words, you have to put 20% down. They're going to give you an 80% loan. But there are some that will go as high as 85% loan to value. So, in other words, you have to come up with 15%. So, in the example, if you're trying to buy, say, a $250,000 uh rental home, you're going to have to come up with a down payment of about 37,500 plus closing costs. So keep that in mind. So your out of pocket depending on what you negotiate in terms of seller concessions could be anywhere from say 40 to almost $50,000. So that's a pretty good chunk of change, but um obviously as you know the benefits of owning rental property, appreciation, tax benefits and so on. Uh it makes it worth your time. So let's talk now about option number two, DSCR. We'll compare that to conventional. So let's talk about DSCR loans. What does that even mean? DSCR that stands for debt service coverage ratio. Okay, what does that mean? That just means what is the rent relative to all your costs that are associated with owning that home. So, let's take an example. If your rent, for example, you buy that $250,000 home in our previous example, your rent from that is $2,200. What are all your costs? Well, you have principal, you have interest, you have property taxes, you have property insurance, you have HOA dues. Uh that pretty much covers all the costs. Let's say your costs are 2,000. So you're taking in as rent 2,200. Your cost are 2,000. That ratio is 1.1, meaning rent to debt service coverage. Any ratio that's one or better is considered good. And most lenders that offer DSCR loans will allow you to go forward on the basis of a one ratio or better in terms of rent versus the cost. Now, what are the benefits of the DSCR loan? We'll start with the credit scores. credit scores again are about the same as on the conventional side about 660 680 but again the higher you go the better more acceptable it is uh in terms of what your qualifying your income qualifying documents are in terms of the conventional loan where you had to supply two years of history the DSCR just waves all that all they care about is the rent coming off of that that property so we mentioned 2200 versus the cost of 200 that's all they care about so you can literally buy a home using a DSCR loan as long as the rent covers the that debt service and of course you can come up with a down payment which we'll talk about next. But that's the beauty of the DSCR loan is so sometimes if you are a self-employed individual and you don't maybe show enough income on your taxes. Lots of self-employed people, you know, they're maximizing their benefits from from a tax standpoint, which is all, you know, absolutely valid. Uh, but when it comes now time to try to buy something that, hey, well, my taxes only show 50,000, but I really make about a hundred. Well, lenders don't care about that, right? They're only looking on what your taxes are. So, the DSCR loan circumces all that. And you can purchase a home using the DSCR. Let's talk about the down payment. Down payment on DSCR is a little higher. There are some that are 15%, but that's rare. Uh, but mainly are 20% down or 25% down. So, you do require uh a larger down payment on a DSCR loan. But again, the great advantage is uh you don't have to show taxes, you don't have to show income, you only have to prove rent versus your versus your actual cost. So that last type of loan that you could consider uh is what we call a home equity line of credit. Okay, great. What is that? It is a loan based on the equity amount in your existing primary home. So, for example, let's say you've owned your home now for 20 years and you're free and clear. I know this doesn't apply to a lot of people at all, but uh if it does, then you can pull out, let's say your home is worth $400,000 and you want to have access to a credit line of about $200,000. Picture it like a giant credit card, but it's collateralized by the equity of your home. In either case, you would qualify similar to a conventional loan. Your credit scores have to be about usually about 680 or higher. A lot of the big banks have actually pulled out of that market, but there's still some available to you, especially as a first lean. So again, your credit scores need to be about 680 or 700 better. And in terms of income requirements, yes, you will need to show your two years of history, much like like your conventional loan does, but there is no down payment because all you're doing is accessing the value that you already have in your home. So, that's one of the giant advantages of having a home line of credit. Now, the other giant advantage is once you do get qualified for it, and let's say you're qualified for $200,000 line of credit is you have access to that immediately. So, in other words, if you're trying to buy that $250,000 home that we had in the earlier example, you have to go through all the the qualifying nature for the prior two conventional and the DSCR loans. That could take 30 days. But if you've already got your HELOC set up, you're literally just writing a check to buy that home. The ability to close quickly within a HELOC is tremendous. And that gives you distinct advantages because you can get a better negotiation to say, "Hey, I'll buy this house for $250,000. It's going to take me a month or I'll buy it. You know, which one is stronger? Well, I'll buy it for $230,000. It will close next week." Sellers like that. Trust me. So, the HELOC has its own distinct advantages. We'll get into an example combining all three showing you advantages and disadvantages right now. So let me quickly summarize all these three loans uh compared to each other. So we have the conventional, we have the DSCR, and of course we have the HELOC. And so the conventional loan in terms of the the credit scores, all of them are going to need at least a 660, probably 680 or better, but at least a 660 going forward. Uh in terms of income purposes on the conventional loan and the HELOC, you're at the show two years of history. So what's the So the advantage of the DSCR loan of course is you do not have to show any income at all as long as you can meet that DSCR ratio of one or higher your rents to your expenses. The DSCR loan is the way to go. Okay. In terms of down payment, the lowest down payment is going to be shown on the conventional side at 15%. On the DSCR, it's going to be 20 to 25%. And the HELOC doesn't really have a down payment. So you're just accessing once again what's already in your equity in terms of your home. So the advantages are you using the convention a loan uh if you can qualify for it because it's going to have the lowest rate. Use the DSCR loan if you are especially a self-employed you just have a complicated tax return and you really want to just avoid all that mess you go with the DSCR loan. If you've already got a free and clear property or lots of equity in your property then HELOC may be the way to go. One, the advantage of the HELOC is the speed at which you can close. The conventional and the DSCR loan require about a month to try to work through the loan process, but again, already working through the HELOC process and you already have that in place, then you can write a check right away and you can close within a week and that gives you tremendous negotiation advantage. So, I hope all that makes sense to you. I can walk you through all this, help you finance your deals. I'm the mortgage patriot, Kevin Fe on your side. Make it a great one.