If you are more successful than I am then you may not need a banker. I say need in the sense of absolutely requiring one, not in the sense of you really, really should be using one. Because, even if you are more successful than I am you still should use a banker.
Come on, do I really need a banker?
You might have one million dollars sitting in your mattress (because you don’t need a banker, right) and you might find someone who is willing to sell you a property for $250,000. Perhaps you are able to do that four times and now you’ve invested all your surplus money into properties. They begin producing income right away. But you don’t need income, remember? You already have income. What you need is equity. That income is simply cash and doesn’t produce for you. I suggest buying twenty properties instead.
How am I going to buy 20 properties with a million dollars?
Leverage. That is one of the great things about real estate. You can borrow money at a relatively low interest rate. This is almost expected in our country. You even get tax breaks for it. That certainly won’t be as easy if you purchase stocks.
The friendly banker can give you a loan for these properties, or multiple loans for these properties. I have an established reputation with my bank and I am able to get loans with 80% LTV. LTV stands for Loan to Value. That means that the bank will put up 80% of the purchase price of the property. The other 20% is what you might call a down payment. This is the cash you have to come up with so that you own part of the property. The bank requires this amount so that you have skin in the game, so to speak. You will be less likely to walk away from an under-performing property because you will lose that money. Because of the risk of investors walking away, banks are extremely hesitant to increase the LTV unless you have a good track record. You can only get this by doing many deals with the same bank or having good financials to rescue your property when times get tough.
Whatever LTV you can get, you will have much more capital (cash) left over to purchase properties. Your income from the properties will be quite a bit less because a large chunk will go to paying back the bank. This will occur for the term of the loan, which for me, is 20 years typically. But, in 20 years, I’ll have these mortgages payed off and will be retired from the Emergency Room, able to use the income when I need it. In 20 years, my 20 properties will be making much more income than the four purchased with cash.
Hopefully I’ve convinced you to find a banker by now. You probably have one right now for your personal finances rather than keeping paper money in your bed. That bank is where you start. You are also going to go around to at least five other banks. You will offer to move your personal finances over to these banks because the bank will give you a better deal if you do this. Don’t move more than once or twice though.
You can’t establish a track record if you are moving around a lot. You also will have a reputation of shopping. Banks are restricted in a lot of ways by the government and they won’t be likely to give you amazingly better deals than the bank down the street. We are looking for tenths of percentage points here and it is better to find someone you work with very well and not worry about the tiny amounts in the future. Because of this, I don’t shop loans around unless the properties are very different from those which I own now: SFRs and small to medium MFRs. I don’t think it is worth moving for a tiny interest rate improvement. What you should negotiate is on the terms of the loan.
Tell me about the terms.
My mortgages all take the same form: They are a 20-year amortization, which means that the payments are principal plus interest which each change each month but are calculated to give the same total payment over the course of 20 years. They are paid monthly. They have a 5 year term. You might know this as a balloon. This means that the interest rate is fixed for 5 years and then will need to be refinanced at that time. This isn’t ideal, because if the interest rates go up, as they have been doing, I will be paying more after 5 years. At that point, I may need to find another bank, pay the increased rate, or sell the property. My interest rates vary from 4.5% to 5.5%. These terms are extremely important and need to be factored into your deals.
Find a bank, ask for the commercial banker, and have a nice long chat about what you are interested in purchasing. You will need to write up a PFS (Personal Financial Statement) and give three years of personal tax returns, and probably proof of employment to the banker. He then can give you a ballpark yes or no for the loan you need on the type of property you want as soon as you have a deal and are ready to make an offer. On commercial loans, the bank doesn’t typically give a preapproval letter like you might have gotten for your house. The bank won’t approve your loan until it knows the details of the individual deal that you find. We will talk about the PFS later.
I’ve actually done all my mortgages through the same bank. I initially shopped around and found a better deal. I presented this to my banker, who matched the terms. Since then, I haven’t shopped around for mortgages for SFRs, as the only changes to the terms are the increases in interest rates that the Fed has done. I purchased an MFR and shopped around and the terms were very similar. I put an offer on a medium-sized MFR recently and shopped that around as well. No bank was able to beat my bank. FYI: I didn’t get that property. If you ever change the type of deal you are looking for, such as SFR to MFR, that is a good time to shop around. I don’t believe that you need to find the lowest rate every time but realize this is a controversial issue. I just don’t think a tenth of a point over 20 years amounts to that much in the whole scheme of things. More important is a great relationship with a bank.
I made the mistake of having a bank account for every property when I started out. I thought it would be easier to follow my financials; I would just use a debit card and each transaction was automatically logged (as long as I picked the right card). This made for a huge headache at tax time. And, honestly, I want to have 100 properties. I’m not carrying around that much plastic. Since then, I moved everything back into a single account one by one. I had set up ACH transfers for my SFR tenants (which I recommend doing). The ACH transfer is an automated account-to-account transfer that happens for a set amount (the rent) at a set time every month. It is great to not have tenants forgetting, but if they overdraft, it takes 5 days for me to get notified and in the meantime, it looks like I have the funds. Well, one month this happened. I got a chargeback but had expected I had the funds to make a repair. The check I wrote over-drafted. That evening I got a call from my commercial banker telling me what had happened. After I got over the embarrassment I was pleased that the banker said the bank would simply front the funds so I could transfer them over the next day. There was no fee. This would only happen with a good relationship. That is worth more to me than tiny interest rate differences.
Find your banker and keep him. You should be able to email the banker with the stats of a deal of which you are looking and he can get back to you quickly with some ballpark terms.
Finally, we will look at your real estate agent.
