Everything You Need to Know About Getting a Mortgage for an Investment Property

We have talked about how powerful it can be to invest in real estate with a mortgage loan for leverage. (Missed the article? Read it here.) 

 

That’s all well and good, but how do you get a mortgage loan on an investment property like a turnkey rental house? Is it like getting a mortgage for your personal residence? Is the process different? Are the requirements different?

 

Here’s what you need to know about the process of getting your first mortgage for a turnkey rental or any 1-4 unit investment property:

1. You Will Probably Get a Conventional Loan

A conventional loan conforms with the underwriting requirements of the Federal mortgage banks, FNMA (“Fannie Mae”) and FHMC (“Freddie Mac”). By conforming to these standards, Fannie and Freddie will insure your mortgage, reducing the risk for the lender and opening you up to the best-available terms.

 

FAQ: Are the interest rate and terms different for an investment property loan? 

Yes. The interest rates for an investment property are higher than for a primary residence. That being said, they are quite uniform across lenders. Our preferred lenders will give you the best rates, subject to your credit and qualifications, of course. Your introduction to them is part of our offering. 

2. Investment Properties Aren’t Eligible for a VA, FHA, or USDA Loan

If Fannie/Freddie loans are available for investors, what about the loan programs insured by the Department of Veterans Affairs (VA), Federal Housing Administration (FHA), or the US Department of Agriculture (USDA)? Those loans have even better terms!

 

Unfortunately, they are also available exclusively to people who intend to use the home as their personal residence. In other words, they are off-limits to a turnkey rental or other investment property.

3. You Will Probably Need to Put 20% Down

Depending on the loan program they qualify for, most qualified buyers only need to put 3-5% down on their personal residence. Sometimes it’s as much as 10%. Sometimes, it’s as little as 0% with a VA loan. 

 

With investment properties, however, the lender will almost certainly require you to put 20% down — and the rates get better when you put more down. Duplexes and multi-family properties require at least 25% down.

 

The rationale is that people will work harder and make more sacrifices to keep their personal residence. In contrast, borrowers are more likely to walk away from an investment property if the going gets tough. After all, they don’t live there.

 

As such, lenders want you to have more skin in the game, a bigger equity cushion, and greater security that if they have to foreclose on the house, it won’t be less valuable than the loan balance.

4. You Will Need Stable Income

Lenders only want to write mortgage loans to borrowers with stable incomes. After all, how else can they expect the borrower to make the payments?

 

What about the rental income from the property… does that count? Not really. On paper, you just need the kind of stable income — wages, salary, investments, pensions, annuities, etc. — that makes you look like a qualified borrower for a loan of this size.

 

FAQ: What if I already have a mortgage on my own home? Do I need double the income to get double the mortgages?

Not necessarily. You just need to check the boxes for a borrower on this kind of loan. As you build a relationship with a lender and a track record of success as a landlord, it will get easier. Your lender will start “rubber-stamping” your turnkey rental loans. 

 

But, at some point — a dozen or more properties in — your lender will max you out at 10 conventional loans. At that point,  it will be time to consider refinancing into a portfolio loan or expanding into commercial real estate to grow your empire. 

5. You Will Probably Need a Higher Credit Score

For a personal residence, mortgage lenders can usually get a mortgage loan done with a credit score as low as 620. With FHA loans, the minimum is even lower — in the 500s. The terms may not be the best, but you can still get the loan.

 

For an investment property, you will probably need a higher credit score. 680 or higher is best. If that’s not you, you may need a co-guarantor with a better credit score.

 

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Need help getting approved for your investment property mortgage loan? We can help! Reach out to MartelTurnkey and we’ll get you pointed in the right direction, including an introduction to our preferred lenders who know our business very well.

Announcing the World’s First Tokenized Real Estate Fund, by Martel Invest!

Invest in real-world, cash-flowing rental properties for as little as $50

 

Rarely does something truly exceptional happen in the business world. That’s especially true of real estate. Acquiring property and renting it out for cash flow? That business model hasn’t changed since the Middle Ages.

 

Well, MartelTurnkey is thrilled to announce something completely new — the MartelInvest Token, the world’s first tokenized real estate fund.

 

What does this mean? It means we’re using the power of blockchain — the disruptive technology behind cryptocurrency, NFTs, and smart contracts — to make it possible for anyone, anyone in the world, to invest in US rental property for as little as $50, regardless of their income, credit, or net worth. 

 

No big deal, right?

 

I’m sure you have a lot of questions, so let’s get into it …

 

What is a token?

A token is simply a discrete digital asset, built on a specific blockchain and defined by a smart contract or specific project.

 

Bitcoin is a kind of token. So is an NFT — in fact, NFT stands for “non-fungible token.”

 

We have created the MartelInvest Token network to include 1 million total tokens.

Is the MartelInvest Token an NFT?

No, it isn’t. “Non-fungible” means it can’t be swapped one for another without any loss of value. Think about swapping one house for another. What if one house has more square footage? Fewer bathrooms? They aren’t equal assets.

 

The MartelInvest Token, on the other hand, is fungible in the same way a dollar bill or a cryptocurrency token is fungible. One dollar bill is worth just as much as any other dollar bill. One bitcoin is worth just as much as any other bitcoin. One MartelInvest Token is worth just as much as any other token on the network.

What am I investing in? Is this “virtual real estate?”

No, it’s not virtual real estate. Much has been made about “virtual real estate” in the “Metaverse.” If you’re leery about buying property that only exists on a computer, I don’t blame you. It’s a very new, unproven business model.

 

But the MartelInvest Token is backed by actual real estate in the real world. We’re building a portfolio of 400-500 rental houses in real US cities — the same business we’ve been in for five years, so we know what we’re doing.

 

Think of owning a MartelInvest Token as being similar to owning a share of a REIT — a share of stock in a company that owns 400-500 rental houses.

How do I make money with the MartelInvest Token?

The portfolio of rental properties in the MartelInvest Token fund produces cash flow. Every month, we divide up the cash flow and distribute it proportionally to the token owners. You can own as many MartelInvest Tokens as you want, and owners of twice as many tokens will get twice as large a share of the cash flow. 

 

When we sell or refinance a property in the fund, token owners get a percentage of the proceeds proportional to the number of tokens they own.

 

We are selling each MartelInvest Token for an initial offering of $50 per token. Yes, that means you can invest in a portfolio of real estate for as little as $50, and your risk is spread out across 400-500 properties. There’s no credit check; you don’t need to apply for a mortgage. 

 

We’re also working on creating an open exchange for the MartelInvest Token by the end of the year. Once active, token owners can buy and sell the tokens to each other. At that point, the price of the MartelInvest Token will be set by the open market. It could end up being worth much more than $50 at that point.

 

Even before the open market goes live, we plan to go the extra mile by having every property in the portfolio appraised monthly and assigning an intrinsic value to the token, based on the total appraised value of the real estate in the portfolio, so you know how much your $50 token is actually worth based on the real assets backing it.

How does MartelInvest make money on the transaction? What’s your end?

Simple — token owners get 80% of the cash flow. Martel gets 20% as a fee for our service of building and managing the portfolio.

Is the MartelInvest Token a liquid asset?

Yes! That’s one of the beauties of it. Real estate is notoriously illiquid — selling a house takes a lot of time and money. 

 

As mentioned earlier, we’re working on an open exchange for our tokens. Until then, if you ever need to liquidate your tokens, you have the option to sell the tokens back to us. 

Why blockchain?

Blockchain technology has many advantages over traditional finance and investing tools. Here are just a few that apply to real estate investment:

Low transaction fees. Tens of thousands of dollars can be transferred anywhere in the world for fees as low as pennies. With the large dollar amounts changing hands in a real estate transaction, this really adds up.


Speed. I can’t tell you how often I have sold a house on Friday and waited until Tuesday to get the money. Blockchain transactions run 24/7 and are usually processed in seconds.


Transparency. Every asset and transaction sits on the blockchain for the world to see. Compare that to REITs or syndications, most of whom do their work behind closed doors.


Trust. Each blockchain exists on thousands, even millions of computers. It’s nearly impossible to do something shady with everything in the public eye with millions of computers to corroborate every transaction.  

Who can buy the MartelInvest Token?

At the moment, we are only authorized by the SEC to sell to accredited investors — net worth of over $1 million excluding the personal residence, or individual income of $200k+ or joint income of $300k+.

 

This does put the kibosh on the idea of “real estate investment for the masses” … but we’re working on it. We hope to make the MartelInvest Token available to anyone, regardless of income or net worth, within six months … so stay tuned!

How can I buy the MartelInvest Token?

Glad you asked! Go to martelinvest.com — the network is live, and the MartelInvest Token can be purchased for $50 apiece and transferred to your wallet within minutes. You can start collecting cash flow as soon as next month!

Should You Invest in Real Estate with a Mortgage?

When we talk about real estate investing, we almost take it for granted that an investor will use a mortgage to buy the property. After all, many people don’t have the available cash needed to buy or renovate a house or commercial property outright.

 

But some do. Some investors do have that much cash. So why do so many of them still take on heavy debt to buy their real estate investments?

 

We don’t like to take anything for granted, so let’s interrogate the assumption — should you invest in real estate with a mortgage? What are the pros and cons?

Pros of Investing with a Mortgage

 

Less Money Down. For investors who don’t have the money for a 20% down payment or renovation costs, the ability to borrow money to buy investment property is a godsend.

 

Diversify. What if you do have the cash to buy the investment outright? Should you? Most investors don’t. If they have $200,000, they won’t buy a $200,000 property outright; they might buy five properties with $40,000 down payments.

 

That way, the risk is spread out. Even if one property underperforms, the others will probably do fine and one might even overperform expectations, pulling up the portfolio overall. But what if you just buy the one property outright and it underperforms? That’s the danger of putting all your eggs in one basket.

 

Leverage. Investors talk about real estate debt as leverage. It can be a tricky concept to grasp, but once you do it’s extremely powerful. Here’s the gist — you put less money down, but the property still appreciates as much as it’s going to appreciate. If you buy a $200,000 property outright and the property appreciates $40,000, you have increased your wealth by 20%. But if you only put $40,000 down and it appreciates $40,000, you have doubled your money. The property got more valuable, but the debt stayed the same size. You can build wealth incredibly quickly by using a mortgage as leverage.

 

Deductible Expenses. Your mortgage interest is a deductible expense. Additionally, your depreciation expense is the same size whether you mortgage the property or not, so you might as well get the most property cost basis you can.

 

Principal Paydown. Over time, your loan balance gets smaller as you pay down the principal with your mortgage payments, increasing your ownership interest in the property even as the mortgage payments stay the same.

Cons of Investing with a Mortgage

 

More Risk. Once you take on a mortgage, you are responsible for the repayment of the debt. If you hit financial hard times and can’t make the mortgage payment, you risk a total loss of the investment in foreclosure. Investing in real estate always entails risk, but there’s no denying that the less you borrow, the less risk you assume.

 

Less Cash Flow. Even if you don’t hit hard times, a mortgage payment is a big expense that takes a big bite out of your cash flow. It might still be positive cash flow … but if your goal is financial freedom, it might take longer to achieve with the smaller cash flow. However, this reduced cash flow can often be offset by the tax advantages of leveraging real estate.

 

 

Overall, we believe the hype — the pros of leveraging investment property with a mortgage far outweigh the cons. MartelTurnkey can help you identify the right mix of property selection, strategy, and financing to generate cash flow from Day One … and then rinse and repeat until you don’t just have one rental property — you have a whole portfolio!

What Happens at the Title Office When You Buy an Investment Property

If you have bought a home before, you probably have some impression of a title office — an attractive storefront where you sit at a big conference table, sign a stack of documents, your realtor pops champagne, hands you a gift basket and maybe balloons, maybe asks you to pose with the keys or a gigantic “sold” sign. It’s like Chuck E. Cheese for adults.

 

Believe it or not, champagne is not required to close a real estate transaction. It’s as much for the realtor to celebrate her own commission as to celebrate your new home.

 

The closing process on an investment property is a lot different. At MartelTurnkey, for example, we’re often helping someone in Ft. Lauderdale buy a house in St. Louis. The buyer won’t fly out for the closing. For them, the “closing” is positively anticlimactic — signing a stack of documents in front of the notary public at their local bank branch. If they want to pop champagne, they probably have to bring it themselves and do it in the car.

 

So is the title office just theatre? Not in the least. Whether or not you ever visit it and get the gift basket, many people work behind the scenes at the title office to make your deal close without a hitch, nipping a dozen or more problems in the bud before you ever have to worry about them. 

 

To understand better, let’s look at some of the most important roles in a title office and how they contribute to a successful closing, whether or not you ever get to meet them.

 

1. Escrow Officer

Remember, escrow is a designated “middleman” service that makes sure both parties to a contract fulfill the duties of the contract. The buyer wires all the necessary funds, the seller signs over the title, and no one gets stiffed by someone else skipping out before their end of the contract is done. 

 

The escrow officer has fiduciary duty over funds held in escrow. Fiduciary duty means acting in someone else’s interest rather than your own. 

 

Say you wire a $50,000 down payment to escrow. That money is out of your bank account and inside a bank account controlled by the escrow officer. What’s to stop the escrow officer from flipping around and using your $50k to buy a Tesla Model S for himself rather than closing your real estate transaction? His fiduciary duty, which he agrees to in the escrow contract and can be sued for if he violates. 

2. Title Agent

The title agent is a specialized kind of insurance agent who procures title insurance for the transaction. The premium for this insurance is one of the closing costs on the transaction.

 

What does this policy insure against? The possibility that you might hand over the entire purchase price to the seller … only to discover that you get no property in return. The seller might have no right to sell that property. Maybe there’s a competing title. Maybe the seller is just a charlatan trying to sell the Brooklyn Bridge, take the money, and run.

 

This kind of thing is rare, but it does happen, and a lot of money is at stake. Attorneys and researchers at the title office are supposed to catch these problems before money leaves escrow, but in the event that the title company makes a mistake, the buyer and the lender can claim any losses against the title insurance policy. 

3. Closing Agent

As I mentioned above, attorneys and researchers at the title office are tasked with making sure the property has a clean title and the seller has the right to sell the property, before any money leaves escrow. The buyer must also wire enough funds to escrow to cover the purchase price and all closing costs needed to complete the transaction. 

 

The closing agent (or settlement agent) is the person responsible for reviewing all this title work and the settlement statement to make sure everything is in order before the transaction closes. She is the “last mile,” the final stamp of approval on the documents before they are presented to the buyer. 

 

If you go to your closing in person, the closing agent will be the one presenting you the documents at that big conference table. If not, the agent will courier the documents to you with indications of where to sign and notarize them.

 

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Ideally, the title office takes most of the legal hassle of buying real estate off your plate. If you want even more of the hassle off your plate, reach out to MartelTurnkey. We cover not only the legal due diligence but also the physical and financial due diligence for you. It’s the easiest way to build a portfolio of profitable real estate investments. We’ll even pop some champagne with you if you’re in town!

4 Tips to Identify the “Path of Progress” … and Then Use It to Buy Properties that Appreciate

If I had to write “Real Estate Investing for Dummies,” I would begin and end with this advice — “Buy property in the path of progress.” If you buy in the path of progress, you can make almost every mistake in the book — buy high, negative cash flow, etc. — and still come out ahead.

 

You see, every city has a “path of progress” — a zone where the city is intentionally targeting its economic development according to a “Master Plan.” Whether or not they succeed depends on the competence of the managers in charge … but if they do succeed, property in the path of progress will almost always appreciate rapidly. This goes for the commercial property as well as the condos and single-family homes nearby.

 

On the flip side, most cities have zones of decline — parts of the city neglected by economic development plans and left to stagnate. Real estate tends to flatline or even decline in value in these areas. You might reap some cash flow, but building wealth in these zones is an uphill battle.

 

If you want to build real estate wealth quickly, buy in the path of progress. So how do you identify this magical zone? Here are four tips to find the path of progress. If you live far away from the target city, all of these tips can be exercised through phone calls, online search, or on-the-ground foot soldiers.

1. Follow the Construction

The path of progress is paved with bulldozers and construction cranes. Economic development often involves the tearing down of old commercial structures and the building of new ones. This represents a significant economic investment, so the city and its developers won’t make that investment unless they expect a big payoff.

 

The city often offers cash incentives to build in the path of progress, so if you see a lot of construction in a particular neighborhood, you can deduce that the city is probably holding out a pretty big carrot to the developers. You can look up online or call for a list of construction permits and look for the same Zip Code to keep coming up. You may even be able to discover where in town the city is offering development grants. New malls, offices, apartment buildings, and condo developments are a great sign. 

2. Follow the Curbs

The city is responsible for restriping and rejuvenating the curbs in commercial and residential neighborhoods. They set the schedule, and neighborhoods outside of the path of progress tend to be neglected in this regard. Want to find the path of progress? Find out which neighborhoods are at the top of the city’s list for curb restriping. 

3. Follow the Chains

Starbucks, McDonalds, Target … national retail chains do extensive research into the path of progress before they open a new store. Following announced future openings for major chains is like cheating off their paper in a high school test — only it’s totally allowed and not at all unethical. 

 

By contrast, if national retailers are leaving a neighborhood, it’s a bad sign. They have the name recognition; the only reason for the franchise to fail is economic decline. 

4. Follow the Artists

The cycle of “gentrification” is pretty well-documented — artists move in for cheap rent, start hosting shows and popups, the neighborhood becomes “cool,” other people start wanting to live there, and the next thing you know — Whole Foods comes knocking. If there’s a “rough” part of town near the city center that has become a favorite haunt for “artsy” types, it might be time to buy before the neighborhood catches fire.

 

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One of the best things about investing with Martel Turnkey is that we do the research for you. We have extensively researched the paths of progress in our target markets and buy assets primed to rise with the tide. These four tips give you the tools you need to check our work!