Financing turnkey rental properties is the most difficult question to solve for a buyer with no experience in the real estate market. We all know that in a real estate investment “cash-is-king.” But, if an investor does not have that much cash in hand, finance is definitely required to meet the purchase price of an investment property.
There are many options available to finance turnkey rental properties. Among them non-recourse loans, hard money loans, and private loans are mostly popular. In conventional mortgage, the down payment is smallest and the rate of interest is also lower. In case of Non-Recourse Loan the investor puts an asset forward. In this article, our focus would be to discuss the various means of financing a turnkey rental property.
What is a Turnkey Rental Property?
A Turnkey Rental Property is a piece of investment real estate (mostly a house or an apartment) that an investor can buy and rent in a short period of time. The turnkey real estate companies are specialized in the purchase and restoration of old and distressed houses. They usually buy them at REO auctions, renovate them and rent them out to the tenants, before putting the property in the market for sale.
This type of real estate investing has become particularly popular after the 2008 bubble burst in the US real estate market. Basically, a turnkey rental property is a source of a passive income for investors. It corresponds to those investors who do not have the ambition or the ability to directly/actively deal with the purchased real estate.
They engage other companies called turnkey property management companies that will deal with the maintenance of the property. Passive real estate investments are a great way to gain a constant cash inflow over a significant period of time without doing any heavy work. Also, such investments benefit from special tax discounts.
Advantages of Buying a Turnkey Rental Property
- Location: With Turnkey Rental Property option, the potential investor is not tied to the location of the property. For a small difference in price, the investor can buy a turnkey rental property for rent that is in a better location than his own, and with that up to five times more rent. This is certainly a Win-Win situation.
- Resources: With Turnkey Rental Property investment, a potential investor, with an already checked property, usually gets a company that knows the neighborhood well and the market where the property is located.
- Investing in a turnkey rental property is cost-effective for several key reasons.
- Turnkey rental properties have proven high level of Return of investment.
- Time saving also stands out as a great advantage. An investor can find a good provider who will take care of current restoration and tenants problems. In this case, the investor gets an additional source of income without too much effort.
- Turnkey Rental Properties are restored and sold by companies that know the terrain and this diminishes the risk of the inexperienced investor who cannot deal with a property requiring rehab.
- Cheaper input investment – Turnkey Rental Properties for sale can be easily found in the best growth markets and can be easily scanned without unnecessary “wandering” in the real estate market. They are already move-in ready and rented out to qualified tenants with property management in place.
If you interested in buying turnkey rental properties at this time, you can go for the Houston real estate market. Houston has everything: the people, the diversity, the business climate, being world renowned in energy, medicine, space, and manufacturing and above all a booming real estate market.
Financing Turnkey Rental Properties
If you need financing to purchase a turnkey rental property, you must pay attention to the information given below. Purchasing a turnkey rental property is a good-call in today’s low-interest environment. As of January 2017, the interest rate for a 30-year conventional fixed rate mortgage is 3.875% with an APR of 3.946%.
For a 20-year conventional fixed-rate mortgage the average interest rate is 3.625% with an APR of 3.723%. And for a 15-year fixed rate mortgage, the average interest rate is 3.500% with an APR of 3.625% (Source – U.S. Bank).
The given mortgage will be paid monthly in arrears over the 2-year period. 30% of the total cost has to be paid as a down payment within four weeks from signing the purchase contract.
Note: The Annual Percentage Rate (APR) represents the true yearly cost of your loan. It includes the actual interest you pay to the lender, plus any fees or costs. That’s why a mortgage APR is typically higher than the interest rate.
There are three basic ways to finance turnkey rental properties – Cash, Borrow and Loan or Mortgage.
1. Financing Turnkey Rental Properties With Cash
Financing turnkey rental properties with cash is the simplest way, provided you have so much of cash in hand. It also means less paperwork and a higher inflow of money, as there are no EMIs to pay after the purchase. Cash buyers often get a discount from sellers. As a cash buyer you can also save on closing costs. You don’t need pay a bank attorney for the mortgage.
Financing turnkey rental properties with cash means you don’t need put real estate taxes in escrow up front nor pay for a mortgage application and loan origination fees. A property appraisal is not mandatory in cash purchase, which is required by all mortgage lenders. As a cash buyer, it’s up to you whether you want a title insurance or not.
A title insurance, which offers protection against problems with the chain of ownership and claims like unpaid property taxes or liens is mandated by lenders. Financing turnkey rental properties with cash is not possible for everyone, and moreover it can also eat your whole savings.
However, If you have $5 million or more in cash, you fall into a different group of investors called high-net-worth individuals. In that case if you take 10% of it out and invest into some turnkey rental properties in some of the fastest growing real estate markets, it may be a good investment for a passive rental income.
2. Financing Turnkey Rental Properties With Loan
There are multiple factors and conditions that affect on getting a loan for the purchase of a turnkey rental property.
Some of the most important factors are:
- Credit score (defines your credit rating)
- Applicant must have a SSN
- Steady income
- Solid work history
- Shortage of any of these factors could make the you not pre-qualify for loan.
Importance of Loan-to-Value Ratio For Financing Turnkey Rental Properties
A loan to value (LTV) ratio is a number that describes the size of a loan compared to the purchase price of the property securing the loan. Lenders and others use the ratio to understand how risky a loan is, and it can be used for approving loans or requiring a private mortgage insurance (PMI).
Your loan-to-value ratio (LTV) indicates how much you will owe on the property after your down payment. The higher your down payment means lower your loan value and a lower LTV as well. If your down payment is lower than 20%, your loan-to-value ratio for conventional financing will be higher than 80%, and your lender may require you to pay private mortgage insurance.
Types of Mortgage Options For Financing Turnkey Rental Properties
1. Fixed-rate mortgages
A fixed-rate mortgage means your mortgage interest rate and your total EMI of principal and interest will stay the same for the entire term of the loan. Your EMI will not increase or decrease.
2. Adjustable-rate Mortgage
Adjustable-rate mortgages have an interest rate that may change periodically depending on changes in a corresponding financial index that’s associated with the loan. Therefore, your EMI will increase or decrease if the index rate goes up or down.
3. Alternative mortgage options
Some eligible home buyers or investors may qualify for a FHA (Federal Housing Administration) or a VA (Department of Veterans Affairs) loan. These loans tend to allow a lower down payment and credit score when compared to conventional loans.
These two options are most popular among the homebuyers in the US. FHA loans are government-insured loans and VA loans are offered by VA-approved lenders. For example, Bank of America is both FHA and VA approved lender.
Can FHA Loans Be Used For Financing Turnkey Rental Properties?
You can generally rent your FHA home if you have lived in it long enough. FHA or Federal Housing Administration loans are intended for owner-occupiers only. The FHA will not insure a loan if you are purchasing the a turnkey rental property which has tenant in place. FHA loans were created to promote home ownership.
These loans have lower down payment requirements than most conventional mortgages. Therefore, they are restricted to buyers who intend to occupy the houses they are purchasing. An FHA loan typically cannot be used to finance a second home, a rental home, a vacation home or investment property. However, there are a few exceptions to the general rule.
However, you can refinance an existing FHA Loan, if you move out of the home but continue to own it and rent it out for income. Even though you no longer lives in the house, FHA rules allow you to refinance into another FHA loan. An FHA-to-FHA refinance is also known as an FHA streamline refinance.
There is another way to use an FHA loan to buy an income property. It is to purchase a duplex, or some other sort of residence with 2 to 4 distinct units. As a owner you will have to live in one unit, making it an owner-occupied property and thus FHA-eligible, and you can rent out the other units for income.
Using this method you can potentially get to live in your home for free. Unlike conventional loans, FHA loans are available with only a minimum down payment of 3.5 percent.
Finding Lenders Financing Turnkey Rental Properties in 2020
Finding lender for financing turnkey rental properties is a not a tough job. There are numerous competing with each other in the market. Lenders like national and regional banks, online mortgage lenders and lenders for investment businesses (including real estate like rental property), all of them require some documents from buyers for check like W-2 forms, paycheck stubs, list of debts, loans assets, real estate’s titles, etc.
Click on the link to know about buying rental property with no money down.
Mortgage rates, origination fees, appraisal fees and other costs to borrow can vary substantially between lenders, and you should look until you find a lender that meets your needs. Remember, the lender you choose will affect how fast you can close and how much you need to pay for financing turnkey rental properties.
A mortgage for a non-owner occupied property carries a higher interest rate than an owner occupied mortgage as it is viewed by lenders as a higher risk. To find lenders for financing turnkey rental properties, you can go to lendingtree.com which is an online lending exchange that connects consumers with multiple lenders, banks, and credit partners who compete for business.
It is not a direct supplier of loans; it is instead a broker. Over there you can compare the loan offers of multiple lenders for free. LendingOne.com offers 30 year fixed rate loans at up to 80% LTV. Best of all they can get you funded in as little as 10 business days allowing you to compete with all cash buyers.
Another top-rated direct mortgage lender for conventional, VA & FHA home purchase or refinance loans is The J.G. Wentworth Company. It is focused on providing direct-to-consumer access to financing solutions through a variety of avenues, including mortgage lending and refinancing.
SoFI – It is a modern finance company. They partner with members to offer great service and low rates for student loan refinancing, mortgages and personal loans. You can pay as low as 10% down on mortgages up to $3M, and with no borrower-paid PMI required. You can choose the mortgage that works for you from a 15-year fixed to a 30-year fixed term. The usual down payment required by lenders is 20% of the loan amount.
Once you qualify for a loan you can proceed further in your investment goal and read this blog how to buy turnkey rental properties. When it comes to real estate, you’ll find widely divergent opinions about its importance in an investment portfolio of an individual.
Investing in a turnkey rental property is among the best investments you could make today in the US real estate market. The value of your turnkey rental property may increase to make it profitable for you to flip it in the future . But having said that, investing in a turnkey rental property does require a lot of research, planning and hard work to make the purchase a sound investment.
Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process. They are well-informed about critical factors that affect your specific market area, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing and interest rates.
NORADA REAL ESTATE INVESTMENTS strives to set the standard for our industry and inspire others by raising the bar on providing exceptional turnkey real estate deals in the U.S. growth markets. We can help you succeed by minimizing risk and maximizing profitability.
The aim of this article was to educate investors who are keen to buy and finance turnkey rental properties in the United States. Purchasing any investment property requires a lot of studies, planning, and budgeting. Not all deals are solid investments. We always recommend to do your own research and take help of a real estate investment counselor.