buying property , loan and collateral

Question

If one owns a property that's worth 200K, is it possible to get a loan to buy a second rental property for 100K, given one owns the first property outright, using it as collateral? Does this person need good credit and a regular job to do so? What are the requirements? Is it sufficient to prove a regular source of income (like investor money or gifts) for the past x amount of years rather than employment income? How does poor credit affect this situation if at all?

Answer 1

The only real answer to this question is, "it depends." Lending practices vary, especially for commercial (rental) purposes. The only real way to get a specific answer to this would be to ask someone at the institution(s) you're considering borrowing from. However, there are some general points relevant to your situation:

• If you're taking out a loan on a rental property, lenders will generally be happier if that property is your collateral on the loan, not your current property. So, the real question would be, if the new property has a purchase price of $100k, is it assessed at a high enough value to meet any loan to value threshold the lender has? If the bank thinks that property is only worth $80k, they will likely not want to lend you $100k to buy it. Of course, you could take out a home equity loan against your current property - for $100k - and buy the second property with "cash," but there is some inherent risk in that. If this current property is your own residence, and something causes you to default on the loan, you'll lose your house. Most people would consider that a worse outcome than defaulting on a loan and losing a rental property that you don't personally live in. Also, interest rates for a first mortgage on the new property will likely be lower than a equity loan on your current property.
• Lenders like proof of a stable cash flow large enough to support loan payments. For people buying their primary residence, that's usually done through proof of income from employment. For commercial lending to purchase rental property, it may be based on rental income. Gifts or investor money aren't generally considered stable long term income in either case - especially since they can imply that some other party may want to claim some ownership stake on the property - i.e. if someone gives you money as an "investment" in the property, and you use that money to make monthly payments, will the other party try to claim that they own a percentage of the property? If so. that would reduce the share the bank may get if you default.
• Credit score is used as a predictor of risk on a loan. People with a lower credit score represent a greater chance of default (regardless of cash flow or income). Banks don't like to lend to risky people, especially on something big like a mortgage. Even if they do decide to lend to someone with a poor credit report, they may give you a high interest rate (as an offset for the higher risk). It's also usually the case that lenders considering a mortgage or other large loan will be very interested in the details of your credit report, not just the credit score. They may look in detail at how you behaved with other similar loans (i.e. if you had a mortgage in the past, did you ever make late payments?).

Answer 2

If one owns a property that's worth lets say 200K, is it possible to get a loan to buy a second rental property for 100K, given one owns the first property outright, using it as collateral?

Typically you'd either qualify for a new mortgage for the new property, or you'd mortgage the property you own outright (cash out re-finance) and use the money from that to buy the new place.

Does this person need good credit and a regular job to do so or what are requirements? is it sufficient to proove a regular source of income (like investor money or gifts) for the past x amount of years rather than a job income? how does poor credit affect this situation if at all?

Non-job income is factored in by lenders, but it can be discounted. For example, when I buy a new rental property the bank only counts about 70-80% of my rental income toward loan qualification. A poor credit score can prevent you from getting a loan at all, or can result in you getting an undesirable interest rate. The more you can put down the less of an issue credit score becomes.

The best thing to do is talk to some lenders about your specific situation and see what they can offer.