A lot of investors ask me how best to acquire rental similarities. Typically, finding investment similarities isn’t the issue, it’s financing the similarities that is.
The main difference between buying “keep up” similarities (rentals) and buying investment similarities to rehab and resell is the financing. For flip similarities, you only need to borrow for 6 to 9 months typically. For rentals, your financing will be the traditional 30 years.
When we started investing in 2005, edges would make up to 8 mortgage loans per qualified borrower. So, I got 8 mortgage loans in my name, then Jim got 8 in his.
Today, large financial institutions nevertheless offer the cheapest long-term funding obtainable so I recommend you start there. Check with national lenders, local edges, and don’t forget credit unions. See what financing they offer, how many rental loans they will do, and how you qualify.
If your goal is to own a lot of rentals, don’t pay cash for the similarities – it’s best to have a mortgage. There is 10, 15, and 20 year funding obtainable, but go for 30 year mortgages. Keep your monthly payment as low as possible in order to get all the cash flow you can at the beginning of your ownership. Once you have a large enough portfolio and enough funds coming into your business, you can always pay the loan off early but you can never ask for a reduction in the amount of your mortgage payment.
Another advantage to the mortgage balance is that you can claim the interest deduction on your taxes. Rentals offer so many tax write-offs which you especially need if you’re doing flips and wholesale deals.
You need obtainable cash to qualify for additional mortgage funding, so don’t sink more than necessary into any character you plan to keep up. For years we flipped every character that we put much money into, anything that needed rehab, and kept only the similarities that had very little of our own money tied up in them.
ultimately, you’ll use leverage to build your portfolio, borrowing against the equity you build up in your rentals over time. We’ve borrowed against our similarities more than once to get the funding we needed to acquire more.
How do you find the funds to acquire rental similarities? Do you plan to pay them off early, or wait and let your tenants pay the complete mortgage over time?