Loan Pre-Approval
I mentioned a few weeks ago about our intention to purchase another rental property this Spring. After gathering the required financial documentation (statement of assets/liabilities, current account statements, etc) I was able to get preliminary information from our bank — in essence a loan pre-approval. The reason I use the word ‘preliminary’ is because I had asked the bank to not pull a credit report. Until I’m completely certain of intention to purchase a particular property, I do not want to have any unnecessary inquiries on my credit report.
We intend to use the home as a rental property, therefore the bank gave us their investor rate, which is slightly higher (about half a percent) than the primary residence rate.
- 20% Down Payment: 30-Year Fixed @ 6.675%, 0 points, and small closing costs
- 30% Down Payment: 30-Year Fixed @ 6.500%, 0 points, and small closing costs
Loan rates have certainly increased since our first purchase, which was a duplex a few years ago. However, these numbers are certainly manageable for our next rental property endeavor. I had the bank give me two rates, using a 20% down payment for one and a 30% down payment for the other. Originally I was not interested in purchasing the property with anything less than 20% as a down payment, but I may ask the bank to quote me a rate using a 10% down payment — just to see what the numbers look like.
Now that I have the rate information I need, my next step is to begin evaluating potential properties. As I mentioned earlier, I have been searching for several months and have created a list of properties that I consider great candidates for rental homes. There is one in particular that I am prepared to make an offer on today. I’ll post the details about that in the upcoming days.
2 Responses to 'Loan Pre-Approval'
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on February 13th, 2007 at 12:41 pm
Hello,
I found your website after reading a comment you posted on bankdeals.blogspot.com.
I as well am contemplating a rental property. I’m in California. The property houses 3 families, 1 single unit and a duplex. It will most likely be owner financed since they will be taxed heavily. I will not, nor any relatives be moving in. Assuming prop taxes is $6000/yr and the mortgage to be $2000/mth, how much rent do you think I must collect to be considered a worth while investment.
Maybe you can email me and we can correspond further.
on February 22nd, 2007 at 7:14 pm
I usually look at four numbers that make up the total monthly expense of a rental property: (1) mortgage payment, (2) property taxes, (3) home insurance, and (4) improvements/repairs. Even if the property is brand-new, you will still have periodic improvements and repairs that will need to be made. I put aside money each month into an “improvements/repairs” fund for my rental property. Adding all of these numbers together gives me the total monthly expense for a rental property — I’ll share the numbers on the rental property my wife and I are purchasing this weekend, hopefully.
After I know what my expenses are going to be, I then look at the market and try to determine what amount of rent I should be able to collect. Instead of simply finding my break-even point, I start by looking at the local market where the property is located and go from there. With this number, I can then determine how much profit I will expect each month — and each year.
Then take the yearly profit divided by your down payment (plus closing costs) to get your cash-on-cash rate of return. I also like to look at the rate of return that includes princial paydown on the loan. It’s up to you what number is going to make it worthwhile. I don’t have a magic number that I like to use, but it has to be a positive one — that’s for sure.
I know this may not answer your question entirely, but without all the information it’s tough for me to form an opinion. Hopefully these formulas will get you started, though. These are some of the preliminary ones I run myself.
N.W.