If you are new to RE investing you may be confused with many of the acronyms out there.   There is no way to fit them all into a blog post ( learnrei.com ), so for this round, I will focus on financing.

If you want any chance of financing your deals, or negotiating with a seller or sellers agent, you need to know the lingo.   Not only do you need to know the lingo, you need to understand the meaning of these terms and how they affect your investment.   By knowing the rules of the game, you can apply a strategy to meet your goals.   OK, lets start out easy….

Interest Rate for investment property

This is the rate of interst that the bank charges you for borrowing their money.   This rate can vary depending on many factors, such as borrowers credit, loan term (or length of loan), type of property, etc…   You can find many different interest rates out there for investment property, so you need to shop carefully.   When dealing with property that is not your primary residence (non-owner occupied), you need to be careful and read the fine print on the loan you are applying for.   Make sure that the loan officer has history of ACTUALLY closing on a similar type property within the last few months.   Do not take their word for it, or accept that they did a deal like this a year ago!   A great rate that never makes it to the closing table gets you nowhere.  

ARV   – (After Repaired Value)

This is a very important and highly misunderstood term in real estate investment.   All of the properties that I buy are distressed and need repairs to make them “homes”again.   When evaluating a deal, I analyze what the property will be worth after I make repairs to it.   I do this by searching the MLS for comparable sales of SIMILAR properties that were sold in good to excellent retail condition.   If I determine there is enough potential in the deal, I will offer to buy it.   My lenders will usually require an Certified Appraisal to back up my comparable sale analysis and get a independant third party opinion.   Since the property is not currently in retail condition, I will submit my list of intended repairs and the Appraiser will take that into account when determining value or ARV

LTV – Loan to Value

Loan to Value is simply the loan amount divided by the current or after repaired value of the house.   In these times and for non-owner occupied properties, 70% LTV is about the highest a lender will loan.   There are exceptions, but this is a good rule to start from.   Many banks will not loan based on the after repaired value of the property, but there are a few out there that will.   It is important to note that value is usually determined by an appraisal, especially when a bank is involved.

DSR – Debt Service Ratio

Debt service ratio is basically your cash flow number.   You divide your income from the property (usually the rental income), with all of the expenses assoicated with that property.   Expenses are usually mortgage payments, real estate taxes, real estate insurance, maintenance budget, association dues, any utilities due by the owner.   Banks want to make sure that your investment will provide you with positive income and therefore suggest a ratio of 1.15 to 1.25 as the threshold to lending.  

I am not a banker, but I have been to the closing table many many times.   Let me know your thoughts and thanks for reading.   Of course, you can also send suggestions for other topics for me to write about.

Dan Shafron

learnrei.com