How do I buy a home with bad credit?
I am also a real estate investor and have learned a number of tricks (some not related to mortgages) that have helped and simplified investing. I don’t mind sharing these tips regularly. Here are a few:
– Property taxes: If possible, separate the payment of property tax from your mortgage. A mortgage payment that includes property taxes is called a PIT (principal, interest and taxes) and a payment without property taxes is called a PI (principal and interest). Also, for accounting purposes, you may find it easier to pay property taxes each year in one lump sum when they are due (usually June 30 in most areas). This will make your accountant have fewer journal entries and it will be easier to keep track of property taxes. For example, if you have multiple properties in Calgary, the city will pool all of your TIPP (tax installment plan) payments for each property. Then you need to calculate the breakdown of the total payment and assign each part to each property for tax purposes. If you can, it is much easier to pay a separate lump sum annually for each property.
– Fire insurance policy: Lenders will require that you have fire insurance and may want an annual test from you or your insurer. Similar to property taxes, insurers often bundle all of your policies (including your personal residence) into one large monthly payment. It is much easier to pay for each property policy annually by making a lump sum payment for each rental. This way, there are fewer accounting entries, less time to calculate how much of the total payment went to each property, and you’re not mixing your rental property insurance payments with your residence payment.
– HELOC at your credit bureau: Other than credit union mortgages, we still don’t see mortgages on a credit bureau report. At this time, lenders prefer to keep this information confidential with each other. However, any of your Home Equity Lines of Credit (HELOC) will show up on your credit report. If you are exclusively using a HELOC (secured on the rental itself) to purchase your long-term rentals, this can be a mistake for a number of reasons. You will have many “maxed out” HELOCs on your credit report, which will often affect your credit score negatively. Also, when your lender adds the cost of interest each month to your HELOC (shown on your statement), this added interest causes your HELOC balance to “go over the limit” for a couple of weeks. Any “over the limit” amount on a credit report can really lower your credit score. So if you have multiple HELOCs, convert some of them into mortgages or pay off the balance in a few thousand dollars to really improve your credit score and keep you healthy.
– The fastest filter to analyze a potential rental: Without a doubt, a cash flow analysis (recommended at some point for sure) should be done when reviewing the possible prospects of buying a rental property. The initial and fastest filter for me is to simply take a factor of 0.005 to measure what I need in the relevant rent for a purchase price. To simplify this explanation: if a property sells for $ 100,000, you better be able to get at least $ 500 in monthly rent (.005 out of $ 100,000). You can easily divide the purchase price by 2 and remove 2 zeros. I find this easy math without a calculator on any property ($ 400,000 needs $ 2000 rent). This quickly filters out really bad income-earning properties (for example, a $ 1,000,000 home may only get $ 3,000 in rent, but you really need at least $ 5,000 or more to cut it down). This is simply a first filter and not the only analysis you should do. If you qualify through this filter, it may still be a negative cash flow property if other factors (for example, an expensive condo fee) have not been fully taken into account. If a property passes through this filter, perform your most advanced full cash flow analysis.
– Keep your bank accounts where they are now: If you are satisfied with your bank accounts, keep them in that bank. If you are applying for a mortgage at Scotiabank, for example, you will generally not be required to open a bank account there. Scotiabank will simply debit your current bank account at your current lender each month for your mortgage payment. On a different note, there are some very good banks that offer free banking for personal bank accounts. There are also some banks that offer companies (if you own your properties in a holding company) decent savings interest on any balance you have.
– Maintain a Healthy Reserve Fund – I recommend at least 3 months of expenses reserved in a bank account for each of your properties. In the event of a rainy day (a few vacant months, unexpected expensive repairs), the reserve fund will allow you to sleep much better at night. There is tremendous power and security in long-term real estate. It is important to have the “staying power” to get through any storm on the road by having this strong safety net.