Before doing too much shopping for real estate, you really need to make sure you are eligible for financing, unless you are planning to pay in cash.
Sellers will generally not consider your offer unless a preapproval letter is attached. Don’t put the cart before the horse, get preapproved before you start shopping. Otherwise that perfect property that you find will sell out from under you by the time you do get your financing lined up.
For your first four properties, financing will be relatively easy to find. It will be easiest for one that you plan to owner-occupy. Rates are higher for non-owner occupied properties. Most banks and mortgage brokers have most of their experience in owner-occupied properties. Most will assume you are looking for owner-occupied financing unless you are clear that you are looking to finance a property you are not planning to occupy. Rates are higher for non-owner occupied properties, and down payments are higher.
For these reasons, you might want to consider buying a duplex or fourplex for your first property, and live in one of the units. That way you get the benefits of low rate and low downpayment in a property that generates rental income.
As far as where to get your loan, most banks have pretty much the same rate. The main difference will be in fees and points. Always compare APRs, not base rates themselves. Tell the banks how many points you want, don’t let them dictate that to you.
Go to an online calculator and tell it how many years you plan to hold the property. If you are going to hold it a long time, paying points (prepaid interest) makes sense. If you will sell or refinance quickly, you do not want points.
Tell each bank the same number of points and term (number of years) so you are comparing apples to apples. Make sure they are estimating similar fees. Some fees are mandatory, like title insurance, pro-rated property taxes, appraisal, etc., and some fees are junk fees. You can read online about that. Just search for junk fees. Anyway, compare APRs for loan offers that have the same number of points and you will find who has the best deal.
I always get 30 year fixed loans when I can. The Federal Reserve has printed so much money that inflation is inevitable, in my opinion. There are two possible definitions of inflation–one is based on an increase in the costs of goods and services–another is based on the size of the money supply. The latter definition makes more sense to me. More money supply means money is less valuable so things become more expensive. It may not happen right away, but will happen eventually.
Real estate is a hedge against inflation. If there is inflation, you are paying back your loan with money that isn’t worth as much as the money you borrowed. So if you expect inflation, you want loans.
The U.S. is one of the only countries that has 30 year fixed loans. They are possible because of Fannie Mae and Freddie Mac. The government is currently running Fannie Mae and Freddie Mac. The difference in rates between 30 year fixed loans and 5 or 10 year fixed loans is so little that it is not worth the risk of having an adjustable rate. If you get an adjustable rate loan, when it adjusts, you may no longer be able to afford the monthly payments. The only reason to get a 5 or 10 year ARM is if you are absolutely sure you will sell within that time period. But circumstances change. You may have a temporary downturn in the market. Just not worth the risk in my opinion, to get less than a 30 year fixed rate. Your circumstances might be different.
The best rates are often at credit unions though the differences between banks will be small.
After you have four properties, things get tougher. Only some banks will lend to you if you have more than four financed properties. For example, in my area, Bank of America will only go up to four but Washington Trust Bank and Boeing Federal Credit union will go up to 10.
Note that I am talking about conventional Fannie or Freddie financing here. They will only lend on properties with four or fewer units.
After you have four units, the downpayment required may go up to 20-25 percent. At present, it is 20 percent for single family homes, 25 percent for 2-4 unit buildings. Also, cash-out refinances at one time were impossible if you had more than 4 financed properties. Such rules may come back due to the loss of liquidity caused by COVID. Do your refinancing before you buy your fifth property.
After 10, you are no longer eligible for conventional financing. But that does not mean you are done.
Consider commercial loans. Look at large banks like Wells Fargo, , plus credit unions and small farm banks. Ask about commercial loans or portfolio loans. Those are loans that they keep as opposed to sell to Fannie or Freddie. Because the bank is taking more risk with a commercial loan, they will usually want a higher downpayment, like 30%, the rate will be higher than with a conventional loan, and you will be looking at a 3, 5, or 10 year adjustable rate loan. The amortization may be over 25 or 30 years but the rate will readjust after 3, 5, or 10 years. Which means it will most likely be higher than it is now.
Note that 30 year fixed portfolio loans are usually not available. If the banks don’t want to take the risk of fixing a rate for so long, you know that 30 year fixed loans are a good deal. Get them if you can. But if you can’t get conventional financing, look to commercial loans. If you are using a commercial loan, consider 5+ unit buildings. You often get a better rental yield (cap rate) with these because the financing is not as good as with 2-4 unit buildings.
99% of loan officers are unfamiliar with anything other than conventional financing. If you want commercial financing, you have to say so and talk to the right banks. In my area, Wells Fargo, Wheatland Bank, Bank of Fairfield, and Spokane Teachers Credit Union all have commercial loans.
If you are not eligible for commercial or portfolio financing, the next option is hard money. This is usually used for flips. Points are high, interest rates are high, and terms are short. These should typically only be used as a last resort. The rates are often so high that the odds of making a profit are greatly reduced. But if you are in the flipping business, they have the advantage of being quick to close. The downside of flipping, of course, is that you could be tagged as a “dealer” by the IRS and lose standard deductions on all your properties.
Guidelines and interest rates change and down payment requirements change all the time. Talk to a mortgage broker or credit union to get the current rules.