Getting a real estate loan for rental

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Getting a real estate loan
Posted by: Cathy Mar 25 2004, 02:58 PM

My husband is interested in purchasing a duplex or a small home to rent. We don’t have any cash savings, however; we do have equity in our home and retirement savings (which could equal 20% down or more). My husband thinks if we borrow against ourselves and from a lender we will be paying out more than we will get in rent. Do you have any suggestions or input on what we can do to get started? My husband is very motivated and has many friends that own rental property. He is just stuck in the “money pit”.

Posted by: loanuniverse Mar 25 2004, 07:05 PM

Do you have any suggestions or input on what we can do to get started?

I think that your husband is right. There is the possibility that when you get financing that way one might loose sight of the true cost of financing the property { the sum of the mortgage and the home equity loan }. This would result on negative cash flow if the “net operating income” is not enough to cover the debt service that will be required by both the commercial loan and the home equity loan.

However, you can take both of those into account by running the numbers. I prepared a spreadsheet that is used to show how changes in occupancy levels would affect the repayment capability of the property and placed a link to it in this page:

The little spreadsheet is very flexible. It has space for two loans, which in your case would be the first mortgage and the home equity. Make sure that you account for all possible expenses, and play around with the occupancy rates in the projections to see “what if?” scenarios. Also remember that this is an educated guess only. Even people like me that have done dozens of corporate and commercial real estate projections are usually wrong a good portion of the time.

Good luck and I hope this helps.
Author: Commercial Loan Underwriter