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Why You Should Buy An Investment Property Without a Mortgage

Should you buy an investment property without a mortgage? The answer is a resounding yes.

This is what you should do instead, if you can.

FOUR WAYS TO BUY AN INVESTMENT PROPERTY WITHOUT A MORTGAGE

1. Consider paying cash. If you don’t have the cash, then save until you can get the cash.

2. If you don’t have the cash, consider a personal loan from the bank. The interest rate will be much higher than a mortgage, but you’ll have to deal with less red tape when it comes to securing the property.

3.  If you don’t have the credit or income that would approve you for a personal loan, consider a hard money-lender. Their interest rates and fees are much higher than the bank but with this method you again get to escape the red tape of the mortgage underwriters at the bank.

4. If you’re buying a property from an actual person who is a distressed seller (i.e. divorce, job loss, distant home owner), consider a method called creative financing. This involves buying a property using owner finances, subject to the existing financing, or leasing to own.

With any of the cases above, you can acquire your property, fix it up, and THEN refinance it into a mortgage that is amortized over 5 or more years.

Last case scenario, use a mortgage.

Here is why:

When you buy an investment property, you want to close and have the deed assigned to you as soon as possible.

In my particular case, I have to close on my investment property by May 13th else, I’d need to request another extension (I originally requested an extension to close that moved me from 29 April, 2014 so the BANK could have time to put my mortgage package together). I put the house under contract on March 26th.

Well, the appraisal came back last week and it stated that I need to have a few things completed on the investment property before the lender should approve the loan such as verifying that the hot water runs, installing a safety rail on the stairs, fixing a broken window, and installing all electrical coverings. You can see these things in the pictures in this post.

Now, one week prior to the closing date I have to scramble to get these things fixed.

The most frustrating thing is that the window has to be ordered and, if not in stock, will likely not be available for installation until after May 13th.

What’s even more frustrating about this situation is that the repairs pointed about by the appraisal is all apart of the $12,000 in renovations that are already set to begin on May 14th, the day after closing.

Apparently, the underwriter has to protect the bank’s interest so these “safety” concerns much be fixed.

So, I have two choices.

MY PERSONAL TWO CHOICES

Choice one: The easiest but least convenient choice is to request an extension from the seller…again.

This will push a lot of my dates to the right, inconvenient the contractors who are working on other jobs, and possibly interfere with another close that I have for my future primary residence that’s also preparing to close this month.

The biggest problem with this choice is that I’m an emotional, whiny elitist who throws his middle finger up at the system when it doesn’t play by my rules (Step one is admitting you have a problem. Check.).

Choice two: Try for a personal loan.

Since I don’t have enough cash to pay for this home in full, I still need a loan. So, I’m requesting a $64,000 personal loan at a rate of 8.49% with a payback period of 7 years. The fixed payment will be around $1,100. I don’t care. I’m pissed. Full rationality does not exist in my current irrational state of being.  But here are my initial rational thoughts without thinking through ALL THINGS.

I can refinance the property for $100,000 (after repair value of $150,000) and pull out every cent that I soak in this house.

I can wait to sell the property for 60 days or,

If I can’t refinance or sell the property to recoup all of my money for whatever reason, I can easily rent it out for at least $1,175 monthly to cover the cost of the personal loan.

On paper, this options sounds great.

CUT OUT THE MIDDLE MAN

This entire situation is a catalyst to save even more of my money so that I can easily cut out the middle man in the future. In this case, the bank’s loyal underwriting team is the middle man.

So there you have it, the reason why you should buy an investment property without a mortgage is so you can cut out the middle man, who is a HUGE obstacle in many cases.

In the future, I want to purchase all of my investment properties using cash and THEN use the bank to refinance, if I must.

 

Comments

  1. As we discussed separately, the problem you’re having is because you’ve chosen the wrong entity to be your “middle man”. A “standard mortgage” is designed for home owners not investors so the last minute scramble to fix things is a function of that rather than it being the system is broke or frustrating. There are mortgage products out there designed for investors. But on to the other major issue…

    The problem with buying cash then refinancing with a standard mortgage is the “seasoning” requirements to get into a refi. As of my last check it was 6 months seasoning requrement to do a “cash out” refi (that means using the proceeds of the mortgage to pull your equity out of the property).

    Many non institutional investors wouldn’t like to have that large sum of cash tied up in a property–potentially missing out on other acquisition opportunities, depleting their cash reserves for qualifying for a mortgage, and basically “putting all their eggs in one basket” with hard earned savings.

    The age old debate many make at this point is the risk of leverage to increase purchase power vs. the safety of non-leveraged asset.

    That’s every investors own decision.

    • Ahh, yes, the seasoning requirement.

      You’re right. But wouldn’t the seasoning requirement exist even if I use non-traditional financing?

      Also, I actually am using an “investment loan” product with Wells Fargo, which is why I’m pissed based on principal. I could easily have the closing date extended. Trust me. The seller (a debt collection agency for the bank) is more interested in having this thing off their books than to tell me no. I just didn’t want to do it. I don’t want to wait. I have too many other things going on. I want this property on the market time now.

      My financing didn’t fall through at all.

      I already spent $1,700 to have the home ready for the appraisal and I’m not willing to spend another dollar to satisfy a bank requirement that I don’t agree with, if I don’t have to…because I’m an elistist.

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