bethesdawings wrote:Hello! Below is the straight answer from one of our lenders (I am a mortgage broker):

Honestly, not 100% sure. But if everything to you makes sense and doesn’t smell like occupancy fraud (ie. Saying it’s a primary to refi at a primary rate), then I can’t imagine that there’d be any adverse action taken. That lender will more than likely find out when a new homestead is filed. Every lender is different though, and transparency is always a good thing. MUCH better to ask for permission than forgiveness with finances 😊

To me, it sounds like something we can do. We’ll probably want an LOX to explain the point of refinancing as a primary, then 2 months later making it a rental.

More to add:

Below is the additional answer from the underwriting support team from the lender:

Underwrting guideline:

"Applications for an owner occupied transaction after closing on a previous owner occupied transaction with [Lender] on a different property within the last 12 months will be ineligible. This guideline will not apply if the previous subject property has been sold or refinanced as a non-owner occupied residence. For owner occupied transactions, the borrower warrants they will occupy the property for at least 12 months."

(Note: The above is talking about both the current loan and the new loan are with the same lender.)

However, occupancy would still be a concern if the loan was done with another lender and would need to be considered for approval on a case by case basis.

Hello! Below is the straight answer from one of our lenders (I am a mortgage broker):

Honestly, not 100% sure. But if everything to you makes sense and doesn’t smell like occupancy fraud (ie. Saying it’s a primary to refi at a primary rate), then I can’t imagine that there’d be any adverse action taken. That lender will more than likely find out when a new homestead is filed. Every lender is different though, and transparency is always a good thing. MUCH better to ask for permission than forgiveness with finances 😊

To me, it sounds like something we can do. We’ll probably want an LOX to explain the point of refinancing as a primary, then 2 months later making it a rental.

Thank you all for sharing your opinions! I really appreciate it!

We can pay cash to purchase investment property. However, many people said that we should leverage the money. Both my husband and I have stable incomes. It is not a problem for us to get mortgage loans. With the same amount of cash as downpays, we can purchase more properties. That’s why we are thinking about using leverage. I appreciate the insight of investing the money into mutual funds. It is all about diversity of the investment.

As a mortgage broker, I have seen quite a few people with 120+K annual income own 6+ rentals. Many rentals have mortgages, yet still generate positive cash flow. Hence, they can continuously use their W2 income to qualify for a new mortgage loan. With the appreciation of investment property value, they built up a substantial amount of equity over years. Of course, the bottom line is to have positive cash flow? (Some even said that, initial negative cash flow is also doable, thinking about the paid off principle and the property value appreciation)

The reason our realtor recommended rental properties in VA is that VA is more landlord friendly. I know many friends have rentals in MD. Realtor told me that in MD and DC, it is super hard to evict the renters and one might end up selling the property real cheap. Is that bad?

Please share your experience of where is a good place to get an investment property? Or it is simply a bad time to buy for now? Thanks!

Anonymous wrote:

bethesdawings wrote:We are thinking about buying our first investment property. Please advise if we should follow the 1% rent rule (rent/purchase-price)?

Our realtor sent us a couple rental properties (townhouse) in Alexandria VA. The sale prices are all around $400K with monthly rental income $2100-$2000. These properties were sold at about $330k in 2018. The price has been increased by $60K-$70k within 2 years. I research the nearby area in VA. Looks like the rent/value ratio are all less than 1%. For example, in Fall Church, Arlington & Alexandria, a rental property worths $600K is rented for about $3000/month; $400K property is rent for about $2000+.

I simply couldn't find any investment property that can get 1% rent. Are people making money on renting out these $400K~$600k properties? Will the $400K townhouse (HOA $100/month) bring in positive cash flow? We are thinking about getting a mortgage of $300K (2.875% 30 years). The PITI will be around $1400/month.

Thanks!

That mortgage payment with insurance and taxes sounds very low for a $300K loan. We had a lower interest rate and ours was still about $2K. It doesn't make a lot of sense when you look at cash down, mortgage payment, insurance, taxes and maintenance plus HOA.

Thanks for pointing out! You are right. I miscalculate the property tax and insurance. For 2.875% 30yrs fixed, $300k loan with $400K property value, the PITIA is about $1800/month. For $2000 rent, I fear it will not bring positive cash flow, thinking about the maintenance and vacancy.

Anonymous wrote:How do you get such low rates for rental property?

I am a mortgage broker. We have lenders offer $2.875% 30yrs fixed for $300K 75%LTV investment purchase. That's why I know for sure we can get $2.875%.

We are thinking about buying our first investment property. Please advise if we should follow the 1% rent rule (rent/purchase-price)?

Our realtor sent us a couple rental properties (townhouse) in Alexandria VA. The sale prices are all around $400K with monthly rental income $2100-$2000. These properties were sold at about $330k in 2018. The price has been increased by $60K-$70k within 2 years. I research the nearby area in VA. Looks like the rent/value ratio are all less than 1%. For example, in Fall Church, Arlington & Alexandria, a rental property worths $600K is rented for about $3000/month; $400K property is rent for about $2000+.

I simply couldn't find any investment property that can get 1% rent. Are people making money on renting out these $400K~$600k properties? Will the $400K townhouse (HOA $100/month) bring in positive cash flow? We are thinking about getting a mortgage of $300K (2.875% 30 years). The PITI will be around $1400/month.

Thanks!

This is a good post. I would think loan to value would also factor in heavily, possibly as the best assessment of risk.

In our case, we recently closed through Lenderfi. $600k mortgage on a $940k house in Vienna. Excellent credit, dti, etc. 2.75% 30 year, truly no cost (ie. lender credits covered all fees and taxes). They actually wired us a small amount at closing.

Lenderfi was excellent to deal with, and just transferred servicing to Citizens.

You are quite right! I forgot to mention that LTV also matters a lot! There are price adjustments based on the LTV. For example, for the LTV between 70% to 75%, there could be a 0.25% price adjustment. However, for the same LTV, the interest rate is still higher for the high balance loan.

In addition, rates/prices fluctuate daily. Very often, prices could change twice per day. Given the current extended turn time of underwriting (especially for the refi loan. The purchase loan has a higher priority and shorter turn time), we normally won't lock the rate until the loan gets initially underwritten and is approved with conditions. If an appraisal is required, it is best to communicate with your loan originator, processor or the appraisal company to get a sense of how long it takes to get the appraisal done, before you rush to lock the rate. The appraisal itself could take two weeks to get the report ready due to the high volume of the mortgage loans recently.

Anonymous wrote:I am mystified as to why I can't snag a super low mortgage refinance rate. I've shopped around multiple lenders (both local and national) and can't find one willing to offer an APR lower than 3% for a zero-cost refinance. Meanwhile, I see daily ads and forum posts about rates in the mid-2s and falling. I have excellent credit (800+) and $600k remaining on the loan with LTV of 75%. Is it because I have a DC rowhouse and not a SFH in the suburbs? Does location matter that much? I did all the tips recommended on Bogleheads and the like, and still can't lock down a lower rate.

Mortgage broker here. The main reason for the higher interest rate is your high balance loan amount. The low rates posted in the ads are mostly for the conforming loan with loan amount <= $510,400 (2020) for primary residence. For $600K, it is considered a high balance loan and the interest rate is generally higher.

At the beginning of the pandemic, many lenders no longer wanted to take high balance loans due to higher risks. Hence, the lenders raised the interest rate for high balance & Jumbo loans. Some lenders even stop offering the high-balance & jumbo loan program. Several months later, the lender started to loosen up the high balance loan (the prices are slightly higher than the conforming loan). As for now, the jumbo loan’s interest rates still remain relatively high because of the high risk.

For a $600K loan in DMV area, as for today’s price, we have wholesale lenders who offer 2.625% with cost and 2.875% no cost (or 2.75% with some lender credit). In general, wholesale lenders offer better prices than retail lenders. However, local banks can sometimes offer unbeatable prices when they have sufficient funds and are on promotion. Currently, wholesale lenders are offering very competitive prices than local banks since wholesale lenders have larger pools of money.