Investment Property And Borrowing Power

I recently read an article about an investors observation on increased borrowing power through owning investment properties, in a 2.5 year window. While I agreed with their overall sentiment, (investment property ownership equals asset growth) I felt the article a little over optimistic in the actual amounts lenders are willing to lend, given the increase in assets and extra income from investment properties. You can read the article here. My main concern with the article is the relatively quick time line in getting to the one million dollar borrowing power bench mark.

I have a few rental properties, have owned rental properties for over two decades, have excellent credit, have equity build up in all the properties, and I am just getting to the point where a lender might make a 500K or better loan to me. Here are a few clarifying points I would like to make:

  • Equity in Investment Property is Not Considered an Income Asset:
    In most non-commercial loans the equity in a property is not used to obtain your debt to income status.
  • You Must Have the Liquid Assets to Cover the Loan Costs:
    Chances are that once you buy an investment property you will have used up a good amount of the money you saved up to purchase the investment, the rest will likely be used as a cash reserve to cover missed rents and repairs. This means that the next property will need to wait until you build up new cash reserves, build up equity and refinance with cash out or sell for a profit and buy a more profitable investment property. either way this takes years.
  • Rental Income from Investment Properties is Discounted:
    Lenders view rental income in cash flow terms. There will always be an assumption of vacancy calculated into there estimate of income drawn from rental income, regardless of the true vacancy rate. Typical is the assumption that rental income for each unit is discounted by a 25% vacancy rate or higher. If you are doing much better then that average for most or all of your rentals, this factor can be a negative impact on your ability to borrow.
  • You Need to Show a Good Track Record in Mortgage Payments:
    It takes time to build up good credit history. When it comes to large sum loans like a mortgage, lenders will want to see a few years of mortgage payment history before lending to most property investors.

The above points are not meant to discourage new investors, but rather to show a more realistic time line in building up a descent property investment portfolio. Put in simple terms, if you manage to save 20K a year and want to purchase a 6 unit rental property on the market for 400K ( a low value in my area), you are looking at a 5year wait just to come up with the down payment. As you acquire more property and have years of equity build up, you will have more buying power, but that 1 million dollar loan is not going to occur in 2-3 years, more like 10+ years, (for conventional lenders).

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