Summary: We work with a lot of new investors in our Zero to Freedom Through Cashflowing Rentals Course and invariably, with every class, we’ll see students shopping for rates with every new property purchase. This is in contrast to what we see with experienced investors who tend to stick with their lender and treat them like a trusted member of their team. Why the stark contrast? There are a whole host of reasons for shopping for lenders, and we cover these in this article!
You’re a new investor.
You found a property you think is going to be a great investment.
Your next step is to get a loan.
So what do you do?
You decide to go shopping for lenders who give you the lowest rate and the cheapest loan, right?
Wrong.
This is where many new investors make their first mistake.
Experienced investors know that a relationship with a lender is more important than shopping for rates. Experienced investors also know that not all lenders are created equal. Some are more investor-friendly than others.
Now, this doesn’t mean that an experienced investor never shops for rates. There may be exceptions. But in general, experienced investors go shopping for lenders, then stick with them. Their lender is an integral member of their team.
Why?
Before we dive into reasons an experienced investor tends to stick with their lenders, here are a few caveats.
In this article, I’m only talking about investment properties and NOT primary residences. It may make sense for you to shop for rates for your primary home because it’s a one time purchase. You’ll probably hold onto the property long term.
Also, I’m mainly talking about residential loans. Loans for rental properties that are one to four units. I’m not talking about commercial loans because oftentimes investors will go through loan brokers, who shop your deal to multiple commercial lenders.
With those two caveats out of the way, let’s dive into some reasons why you may want to consider sticking to your lender rather than shopping around for rates:
Shopping for rates isn’t worth your time
Investors typically buy multiple properties in a short period of time. They are also less likely to hold onto them for a long time.
For example, we are holding our properties for much shorter time periods than before, so we can trade our smaller properties for larger properties using tax deferred exchanges and use bonus depreciation to create massive paper losses to shelter our W2 or 1099 income.
So for us and many investors, the shorter hold time means that shaving a half point off of your loan is less significant financially.
For example, let’s say you get a $250,000 loan. At 4.5%, your monthly payment is $1,267. At 4%, your monthly payment is $1,194. This is a difference of $73/month or $876 per year. If you only hold onto your properties on average 2 years, this only amounts to $1,752.
Experienced investors know that this just isn’t worth their time. They know that they can easily make this amount up elsewhere. Also, the additional benefits listed below far outweigh the savings you’ll get from negotiating a better rate.
You may be a victim of predatory practices
There are three main ways lenders can predate on an inexperienced investor.
The first is the use of teaser rates. A lender will advertise a really low rate in order to make you a customer. They may even lose money on the first deal. However, their goal is to make money on future deals by giving you non-competitive rates.
The second is the use of hidden fees. Have you ever looked at your closing statement and wondered what all of those fees are? How easy do you think it would be for a lender to add another “processing fee”?
The third is something called bait and switch. This is when lenders use a teaser rate to get you in the door. Then they change the terms on you when you are pretty far down the process and it’s too late to switch lenders.
In combination, such predatory practices probably happen more than you think. Unless you’ve seen a high volume of loans from a particular lender or know the ethics of the lender, you’ll probably never be able to fully evaluate whether or not a lender uses predatory practices.
Save time and effort shopping for lenders
If you’ve never gotten a loan before, you should be warned. You are about to get requests for more than several dozen pieces of information from various sources. It’s also common for these requests to come piecemeal. So you’ll constantly be pinged for more and more information throughout the month-long lending process.
Now, what if your lender already has most of your information and they save your information in a file for future purposes?
Do you think that would save you time?
It sure does.
In contrast, if you keep switching lenders, you’ll have to keep fulfilling the same requests for information from multiple lenders.
The best lenders operate 7 days a week, 365 days a year
Most lenders work traditional business hours with no weekends or holidays. So that’s only 261 working days out of 365. This means they aren’t going to be there to service you for 114 days or nearly one third of the year. Then think about the typical 8-hour workday. Do you think it’s possible deals show up during the other 16 hours of the day?
You bet they do.
Do you know why some people get deals and others don’t?
Our lender is available every day of the year and at all hours. They know that if a deal shows up during non-working hours or on a weekend/holiday and you can’t get a pre-approval letter, that might make the difference between locking up a deal and losing it.
Improve your chances of getting funding
If you are getting your very first investment loan and you have a steady W2 job with little debt, the lending process is going to feel like a breeze.
But what if you’re on your 8th loan in the span of 18 months?
I remember early on in our investing, we encountered lenders who would literally tell us that they couldn’t do more than 4 or 5 residential investment loans, even though you’re allowed to get up to 10 loans.
It turns out that many banks just aren’t investor-friendly. They just don’t understand how to deal with someone who already has 4 investment properties on top of their primary residence.
In contrast, an investor-friendly lender expects that someday you’ll likely hit 10 loans.
And with each loan, they often have to problem solve a new solution in order to help you qualify. You see with investor-friendly lenders, it’s not a matter of IF you’ll qualify, it’s usually a matter of HOW to get you qualified.
For us, we encountered an issue when Leti was only working half time. Our income/expense ratio was on the borderline. Their solution? Have me put the lease in my name only so they could remove this expense line item and make Leti’s income/expense ratio look a whole lot better.
There are numerous examples of our lender problem-solving solutions for our students and helping them get funding when they couldn’t get funding from other lenders.
Know how to “massage” rental property financials
Students of our course often pursue real estate professional status.
A big part of benefiting from REPS is generating losses from your rental properties so you can offset your W2 or 1099 income.
The problem with creating these paper losses is that it looks like your rental properties performed poorly. When you go through the loan process, underwriters see these losses and this oftentimes makes it impossible to get a loan.
However, investor-friendly lenders know how to “massage” the numbers so the true picture about your rental properties emerges. They do this by removing things like depreciation and one-time expenses like renovations. Once you remove these expenses, your rental properties will likely show a profit and this makes your financials shine instead of looking like they lost money.
Most lenders won’t massage the numbers in this way so it’s likely you’ll waste time going through the process and later find out that you don’t qualify for a loan.
Transferring properties into LLCs
Many rental property owners use LLCs to protect their assets.
One problem with transferring a property into an LLC is the risk of triggering the due on sale clause.
While this risk is likely overblown, it is still a major concern for many investors.
One way to potentially mitigate this risk is to work with an investor-friendly lender. This is why we’re doing an article about shopping for lenders in the first place!
Lenders who regularly lend to rental property owners are accustomed to owners transferring their properties into LLCs.
These lenders will tell you verbally but not in writing that transferring into an LLC will not trigger the due on sale clause.
In contrast, lenders who are unaccustomed to working with investors will literally scare you into thinking that the world will end if you transfer your property into an LLC.
Win more deals
Most people wouldn’t immediately think that their lender could “win” them a deal but we have encountered numerous examples of lenders helping their clients win deals.
This happened to us when we were selling one of our duplexes. We were in the middle of a 1031 exchange and needed to sell a property within 20 days.
We priced the property competitively and received eight offers.
Two of the eight offers met the 20-day close requirement and they were relatively similar.
We asked each to have their lender write us a letter to reassure us that they could close within 20 days.
One wrote a very convincing letter and seemed very experienced. The other, not so much. We chose the offer with the better lender.
Lenders can make exceptions
According to one of our mentors, Keith Cunningham (who is the Rich Dad in Robert Kiyosaki’s Rich Dad, Poor Dad), “you can’t be exceptional unless you make exceptions.”
Our lender is exceptional because they regularly make exceptions for us and our students.
For example, one time our lender made an error.
The great thing was that they acknowledged it and then they backed up their words by shaving a quarter-point off of our rate.
Try that with a lender you’ve never worked with before or with a large bank. Who do you even call to negotiate with? How many layers of administration do you think it would take to get approval for an exception.
Many of our students don’t know this but in one of our earlier classes, there were some customer service issues. Our lender decided to make up for it by waiving all of their closing costs on their next deal for every student that was affected.
This just isn’t something that would ever happen if you keep jumping from lender to lender, shopping around for the best deal.
Conclusion on shopping for lenders
Hopefully, it’s clear to you now how an investor lender can help you be more successful as an investor and why the pros don’t ever let go of their investor-friendly lender once they find a good one.
So the next time you are in the market for a loan for a rental property, do yourself a favor and find an investor-friendly lender with good ethics and a track record for excellent customer service. Shopping for lenders can be a challenge, but we hope this article has helped you!
Interested in learning more about how to build a portfolio of cashflowing real estate? Be part of the conversation! Follow our general Semi-Retired MD Facebook page and then join our physicians or professionals group! Also, don’t forget to get on the Waitlist for the next course.
