Mortgage banker helps clients invest in income property

Mortgage broker: Harry Sessa Purchase price: $500,000 Loan amount: $375,000

Background: Investing in multifamily properties is one strategy of gaining additional income. If it is done right, it can generate a monthly income, just like a stock that provides a dividend.

The benefits of the additional income can be substantial and should be reviewed with your accountant before making a decision on purchasing an investment property. Many financial planners consider investment properties an excellent supplement to investing in stocks.

But investing in a rental home isn’t as simple as buying a stock. Choosing the right property, maintaining it and dealing with tenants takes time and effort.

Harry Sessa’s clients had purchased a single-family, owner occupied property two years ago and financed that home through Sessa’s company. They contacted Sessa recently with the idea of purchasing a multifamily property near one of the major universities in Connecticut. This is logical thinking on their part because properties around universities typically have strong demand.

They asked Sessa to pre-qualify them for a four family property they had in mind. In order to qualify to purchase the investment property, they needed stable income to cover the loan for their owner occupied property as well as for this new property.

In order to use the rental income to help them qualify, the bank requires verification of rental income for each of the units. Many potential investors don’t realize lenders only include 75 percent of the gross rental income to allow for vacancy loss and ongoing maintenance issues.

The property Sessa’s clients were being prequalified to purchase only had two of the four units rented. The lender can use the fair market rent from the two units with active leases as they would still be in effect after the transfer of title. In order to determine the rental income of the remaining two units, the bank would rely on the appraiser’s valuation of market rent.

Another consideration is whether or not the “title” to the investment property should be kept in the individual buyers’ names or set up as an LLC. The benefit of a “Limited Liability Corporation” is to provide protection to the LLC owners by limiting the owner’s personal liability.

Some lenders will not allow the ‘title” to be held in an LLC, but Sessa’ s company, United Bank has a program which allows for LLC’s to purchase properties up to 12 units.

Of course all the normal mortgage paperwork has to be in place such as good credit, enough money for the down payment and reserves and steady income above and beyond the rental income. While Sessa’s clients ultimately did not purchase the particular property they were initially looking at, they are now prequalified and ready to make offers on similar properties this fall.

Harry Sessa, Private Mortgage Banker NMSLR 632510, (203) 494-1478