The first major difference between purchasing My First Property and purchasing My Second Property, is the financing strategy I'm using. While I paid ALL CASH for My First Property, I don't have the reserves to purchase this next investment outright. But, I'm fine with that. I really have no desire to buy it cash even if I could. Why?
Through my experience purchasing one property all cash, I realized the amazing power of leverage. Yes, cash flow is negatively affected with a mortgage, but your dollars can go much further, you can scale much faster, and your cash-on-cash return can be larger. Check out my post on the various Pros and Cons of having a mortgage vs. paying all cash HERE.
So, the adventure to find money began.
Luckily, as I mentioned in my previous post, I met some great connections in Indy. Through the jam-packed weekend I connected with a lender who is now a crucial, crucial component of acquiring My Second Property.
The process of getting a mortgage was a little intimidating at first...I'd never gotten one before! But, looking back, it was smooth overall. A little laborious, a lot of documents had to be tracked down, but again, very smooth. So what was the process like?
Fill out an Online Mortgage Application. This required basic contact information as well as:
-Loan information (how much are you asking for?)
-Detailed personal information
-Employment and Income information
-Assets and Liability information
-Consent and Confirmation
This all took about 15-20 minutes to compile and complete.
After submitting the online application, I got in touch with my lender and he required a few additional documents:
-Last two paystubs
-The past two years W2s
-The past two years tax returns
-Last two bank statements for all accounts
-Copy of my driver's license
He also set up a BOX account (cloud storage) so I could upload everything for his team to access instead of emailing everything over.
This step was a simple waiting game as the lender had to assess my qualifications. Within a day, I was pre-approved! I'm going to assume it helped that I'm targeting a property in the $100,000 range...and not a house in the Bay Area for $700,000.
Key Information when applying for a mortgage
-Lenders won't give out loans to financially risky individuals. A good credit score, a steady paying W2 job (being self-employed makes you a little more risky to lenders), and having a sizable cash reserve will help your case for a mortgage. Make sure these are in tip-top shape before looking for a loan.
-If you plan to purchase a distressed property...one that needs a lot of rehab work...don't assume you can get it financed. Lenders won't provide financing for risky assets.
-Keep your files and documents organized! If you plan to build a large real estate portfolio with the help of bank financing, this won't be the only time you'll be asked for a W2 from two years ago or your tax return from last year.
-Mortgage rates change daily, so if you're getting 4.5% one day, it could easily jump to 4.75% the next day. Before offering on a property, always ask your lender for the most up-to-date interest rate so you can accurately analyze it.
And with that, I'm ready to look for my next investment!
I've got a pre-approval letter in hand, a $100,000 budget, specific investment criteria in my head, and a new sense of excitement. I'm jumping in to property #2. LET'S DO THIS!