Seattle Investment Property Financing 101

Purchasing an investment property in Seattle and the surrounding area can be a stable and lucrative undertaking that provides incredible returns. Defined as a non-owner–occupied property, an investment property is anything other than the borrower’s primary residence. Examples of investment properties include fix and flip single-family homes, retail buildings, apartment complexes, industrial spaces, agricultural properties, office buildings, hotels, and even land and parking lots.

The South Lake Union condo that’s booked every night through Airbnb? That’s a fantastic investment property. The Ballard craftsman that was falling down, but a husband and wife bought, renovated, and sold it for twice what they paid? Another outstanding investment.

A condo in downtown Seattle could be a great investment property.

The advantages of having an investment property include tax benefits, experiencing appreciation in future value, and, of course, the potential to make a profit. Owning income property can increase your monthly cashflow by collecting rent as well as help you plan for retirement.

Undeniably, real estate investments do have a few disadvantages, and we’d be remiss not to mention them. For starters, your money is no longer liquid, and getting cash quickly can be difficult. In addition, the future value of real estate, like many investments, is not guaranteed to grow, so it can be risky. But in our opinion, it’s a risk worth taking.

When it comes to investment property financing, two of your main options are: conventional financing, such as bank loans, and non-traditional loans, such as private money lenders (aka hard money lenders). Depending on your particular situation, one might be a better fit than the other. We’ve highlighted two of the main differences between lending types to help you determine what works best for you as a borrower.

Credit Score & Bankruptcy

Thanks to a hard money loan, a retired borrower didn’t miss out on this investment property.

Traditionally, banks look for a credit score of 680 or better. A few large national mortgage lenders will go as low as 620. And although some of the larger hard money lenders look at them, credit scores are typically not a focal point for us.

When trying to finance investment properties, banks usually will not lend money if the borrower has had a bankruptcy in the past several years. As a private money lender, we are not concerned with past bankruptcies, because we look at value of the underlying asset and, most importantly, each borrower’s needs on a case-by-case basis.

We recently worked with a retired borrower who had no steady source of income other than from his investment properties. In addition, he had derogatory items on his credit report and a recent foreclosure. He needed a loan to refinance an existing loan that had matured and was at a high rate.

We were able to help him secure a hard money loan on a single-family rental property at a rate of 7.5%, interest only, with a 3-year term. At closing, the borrower received more than $100,000 in cash back.

Cash Down & Appraisal

In general, a bank may require more money for a down payment on an investment property. As a private money lender, we view the equity in the property as equivalent to the cash down. In some cases, we’re okay with all collateral and zero cash down.

Although appraising the property is a requirement for banks, as a private money lender, we do not require an appraisal. Not requiring an appraisal can be especially important when market conditions are changing relatively rapidly and the borrower expects the property will achieve a significant increase in value several years down the road.

An advantage of working with a private money lender is that cash down isn’t always required.

Private Capital Northwest recently provided a hard money loan on a five-unit rental property located a short walk from a future light rail station. At the same time, a change in zoning was imminent, which would allow increased height and density and, therefore, a higher use of the property.

The loan request was referred to us by a local bank whose internal guidelines forced it to decline the loan because existing tenant leases were too recent to justify the requisite valuation. In addition, while acknowledging the impact of these outside forces, the bank couldn’t consider the futuristic value of the property.

As envisioned by the borrower, the zoning changes and construction of the light rail station have taken place and are rapidly increasing property values in the area. Upon further completion of the light rail, the borrower expects to sell the property to a developer for a significantly higher price than was originally paid.

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Investing in real estate can be fun, exciting, and profitable. Don’t miss your opportunity to purchase an investment property because a bank says no. A private money lender is far more likely to find a way to help you make a purchase.