Many of those who have successfully got their first real estate investment on track and are feeling a little better about themselves are probably considering purchasing a second one.
However, do you have any doubts or concerns about purchasing the second building?
- Loan screening may become more stringent
- Is it possible to secure the first building?
- What should I do if I fail the examination?
In this article, we have summarized the loan screening when purchasing the second building, the collateral for the first building, and the points of the repayment ratio.
If you are even slightly interested in investing in a second property, or are considering purchasing one, please refer to the points introduced in this article.
table of contents
- 1 Will the second loan go through even if the first loan has not been paid off?
- 2 Is it true that the purchase of the second building can be secured against the first building?
- 3 What is the best timing to purchase a second building in real estate investment?
- 4 Regarding the “repayment ratio” that you want to be aware of even in the second house
- 5 What to do when you fall into a loan for the second real estate purchase
- 6 It is important to purchase the first building in anticipation of the second building
- 7 Summary
Will the second loan go through even if the first loan has not been paid off?
Is it possible to get a loan to buy a second house while the first one has not yet been paid off?
Although it depends on the attributes of the individual, if the first building is stable, there is a good chance that the second building will be financed.
However, if less than a year has passed since the purchase of the first building, or if there is no experience in real estate investment in studio or room units other than the first building, the loan may not go through. Sho.
In order to receive a loan, it is most important to create a situation where the financial institution can judge that "this person will be okay to lend!"
For that purpose, the following points are mainly important.
- The first property is properly monetized (measures against vacancy risk are in place)
- Possesses a wide range of knowledge regarding management and financing
- There are specific measures and know-how to avoid risks
- I have secured my own funds to prepare a down payment
Also, if excessive expenses are suspected for the first property, it will be judged that the figures at the time of settlement may be falsified, and there is a risk that the loan will be delayed, so be careful.
Don't rush things, and after continuing stable management with the first property, why don't you consult a financial institution for a loan for the second property?
Is it true that the purchase of the second building can be secured against the first building?
You may have heard somewhere that you can use the first building as collateral when purchasing the second one.
While it is certainly possible to use the first property as collateral to obtain a loan for the second property, this method is only available if you sell the first property and have sufficient assets to finance the second property. only if there is.
If the management of the first building is in the red or there is almost no profit, it will be difficult to use the property as collateral.
When purchasing the second building with the first building as collateral, the property of the first building becomes important.
In order to receive a loan for the second building, it is of course necessary to select a property with a good yield for the first building, but it is also necessary to have a low vacancy risk, including the location.
Also, keep in mind to maintain a healthy cash flow by properly understanding the necessary expenses and monthly repayments for managing and operating real estate.
When you default on your loan, the bank sells the collateral to prevent default.
For that reason, real estate taken as collateral undergoes a “collateral evaluation”. This collateral evaluation is important when obtaining a loan for the second building.
There are two methods of collateral valuation:
Earnings capitalization method (earnings price): A method of calculating the price of real estate from the rent and vacancy conditions
Cost method (estimated value): A method of estimating the current value by discounting the decline in the value of real estate
Some financial institutions use both methods to appraise real estate, while others use only one method.
It is also important to understand how the financial institution you are considering taking out a loan evaluates collateral.
What is the best timing to purchase a second building in real estate investment?
When is the best time to purchase a second home?
It's difficult to say for sure, but one of the timings is when financial institutions are able to prepare a reassurance, such as the operation of the first building becoming profitable.
To give a specific example, if the management of the first building is in the following state, it will be easier to receive a loan.
- Almost always fully occupied (low risk of vacancies)
- Strong cash flow and sufficient funds
For sound management, it is a good idea to pay particular attention to the vacancy rate and expense ratio.
Related article:What is the best timing to purchase a second building in real estate investment?Explanation of points at the time of purchase
Approximate vacancy rate
The formula for calculating the vacancy rate is as follows.
Vacancy rate = (number of vacancies x vacancy period) / (total number of rooms x 365 days) is required.
For example, if there are 8 units in total, and 2 of them have been vacant for 2 months (62 days), the vacancy rate will be as follows.
(2 units x 62 days) ÷ (8 units x 365 days) = about 4.2%
Try to keep the vacancy rate as low as possible throughout the year.
Related article:The most scary vacancy risk in real estate investment.What are the measures and characteristics of properties that tend to be vacant?
Expense rate
The expense ratio is calculated as “necessary expenses / rent income”.
Necessary expenses include items such as:
- Management consignment fee
- repair costs
- Utilities expenses
- Brokerage fee
- Fire insurance premium expense ratio
Please note that expenses do not generally include loan repayment costs or depreciation costs.
If you need to figure out the expense ratio based on these and reduce expenses, you should take this opportunity to review it.
Secure free cash flow
Free cash flow is a measure of how much cash you have at your disposal out of your investment assets.Calculated by subtracting investment cash flow from operating cash flow.
The more cash you have at your disposal, the more healthy your business is.Conversely, if it is negative, it is no exaggeration to say that you do not know why you are investing in real estate.
Therefore, it is important to be conscious of free cash flow and continue to operate in a positive manner. If the first building or other real estate is profitable, the timing of the purchase of the second building is not so important.
Regarding the “repayment ratio” that you want to be aware of even in the second house
When investing in real estate, one of the most important things to consider is the ratio of income and expenses to repayment.
There are two indicators to see the repayment ratio: “repayment ratio” and “DSCR”.
Let's take a look at each one here.
What is the repayment ratio
The repayment ratio is a figure that shows how much of the repayment amount of principal and interest to the bank accounts for the rental income.
The repayment ratio is calculated by the following formula.
Monthly (annual) repayment amount ÷ Monthly (annual) rental income × 100%
If the monthly rent income is 120 million yen and the repayment amount is 30 yen, it will be 25%, and if it is 20 yen, it will be 16%.
If the repayment ratio rises due to a shortage of funds, such as a decrease in rental income due to vacancies, the risk of not being able to repay the loan increases.
Ideally, the repayment ratio should be less than 50%.
What is DSCR
DSCR is an abbreviation for "Debt Service Coverage Ratio", which translates to "principal and interest repayment coverage ratio" in Japanese.It is also referred to as "NOI (Net Operating Income)", which means net operating income.
This is an index that shows how much of the loan can be repaid with the income obtained from real estate, and is mainly used by financial institutions to determine whether or not to lend.
DSCR is calculated by the following formula.
Gross operating profit ÷ repayment amount of principal and interest = DSCR
For example, if the annual total operating profit of a property is 1,200 million yen and the annual principal and interest repayments are 800 million yen, the DSCR will be 1,200 million yen ÷ 800 million yen, which is 1.5 times.This means that the profit is 1.5 times the repayment amount.
The higher the DSCR number, the more likely it is that you have enough money to pay back, so it would be ideal if you could keep at least 1.2 or higher.
If the figure is less than 1.0, it will be difficult to get a loan because it is judged that "repayment is difficult" with income from real estate alone.
Let's try to manage the first property while being aware of the repayment ratio and DSCR value.
What to do when you fall into a loan for the second real estate purchase
When purchasing a second real estate property, it may not pass the loan screening.In such a case, it is not recommended to ask for a loan from another financial institution as it will affect your credit.
First find out why you didn't pass the screening, and once you know the cause, focus on improvement measures. It is most important to aim for the sound operation of the first building.
Even if you have cash on hand and seem to be operating in the black, if you have fallen, you should think that there was a reason for that.
One of the relatively likely reasons is that the business feasibility is judged to be insufficient.
In real estate investment, in addition to individual attributes, business feasibility is also subject to examination.In addition to whether the business plan is firmly established, one of the judgment indicators is whether it is possible to secure stable rental income in the future and whether measures against vacancy risk are sufficient. is.
If you go into the review with a vague business plan, you may not pass the review even if you are operating in the black.To avoid this, create a business plan that will convince the loan officer when you face a re-examination.
Please check your credit report
Credit information will also be one of the check items in the examination.
In recent years, cashless transactions have progressed, and the number of cases where credit information is damaged without knowing it is increasing.If you fail the examination, why don't you ask the credit information agency that you will request disclosure of information just in case?
Also, please do not apply for re-examination immediately after failing the first examination, but wait for a certain amount of time before applying.If you apply for re-examination without waiting, it may hurt the other party's impression.
It is important to purchase the first building in anticipation of the second building
If you are thinking of purchasing a second property, the strategy from the stage of choosing the first property is very important from the point of view of the ease of obtaining a loan and the ability to use the first property as collateral.
Therefore, let's aim to maintain the cash flow of the first building by itself.
Cash flow is the amount of rental income minus necessary expenses and repayments, so it is important to hold down the amount that will be deducted.Calculate the expense ratio using the method described above, and think about how you can reduce where the ratio is large.
You can also keep your monthly repayments low by setting the loan tenure as long as possible.As a general rule, you cannot extend the borrowing period once set, so please check carefully when signing the contract.
While striving for stable real estate management, it is important not to neglect efforts to broaden our knowledge.It is necessary to acquire general knowledge of accounting, basic knowledge of management and financing, and the flexibility to respond flexibly to the risks associated with increasing the number of properties owned.
When purchasing the first property, everyone tends to be cautious and study well in advance, so many people tend to think that they can manage it themselves.However, there are not many examples of successful real estate investments on their own.
Real estate management can be difficult.
It will be a shortcut to success to discuss with a professional at the time of purchasing the first building and develop a strategy with the second building in mind.
Related article:What is the expansion strategy you want to be aware of in real estate investment? Why is the first building the most important?
Summary
This time, when purchasing the second property, we introduced whether the loan screening is strict and the points of the repayment ratio.
Even if the loan for the first property is in the middle of repayment, it is possible to obtain a loan for the purchase of the second property by using the first property as collateral.However, in order to get a loan, you need to get credit from the financial institution.
To that end, it is important to ensure that the management of the first building is sound, maintain a low vacancy rate throughout the year, and have free cash flow on hand.
Since the financial condition of the first building is important, it is a good idea to consult with a professional when purchasing the first building.Please try to operate in such a way that the financial institution thinks that this person will be okay to make a second loan.
At Rich Road Co., Ltd., we will consistently support all aspects of investment real estate, from complete beginners to experienced people, from a wide range of real estate selection, loan consultations, post-purchase management, and renovations.
