Bought my first house hack and looking to buy more
Hey everyone I had the great opportunity to buy my 1st house hack a few months ago. While I am living here I am making around $200 after all expenses. But in reality I am making $800 because I was paying $600 in rent last year. I just wanted to put that out there because I have been able to find some good deals around me. I want to buy more property but I don't have an income that qualifies me for another loan. I was wondering if there are any loan products that allow me to use my current house as collateral for my next house. I have signed leases for the next 10 months showing what rent I will be collecting from the property. I am obviously new to this and trying to get creative while being a D1 college athlete. Would love to know what yall think!! Thanks!!
Probably your best bet would be some kind of hard money or asset based loan. You could try a DSCR loan, but they wouldn't count your rent by the room leases, they would look at "market rents" as if you were leasing the entire property to one tenant.
For hard money and asset based loans, they only check your credit score. They don't much care about your income or personal finances. Of course, the interest rates will be higher, which may destroy your cash flow, but buying another house solves that pretty quickly.
Good luck!
#2 Starting Out Contributor
First of all- congratulations on buying a house and doing it in a way that will set you up for your future endeavors.
@Ben Firstenberg is right! A DSCR loan would solve the income qualification issue. Already having tenants in place with leases also speeds up the process. What market are you investing in?
Quote from @Abbey Humphreys:I am investing in my college town of Jacksonville, Alabama. I play baseball here and the student population is growing rapidly. The college has a real housing shortage problem with all the new freshman coming to the school. They are building 3 news dorm right now. So once these students move out of the dorm they have no where to live so I am able to charge a higher rent by renting by the room.
First of all- congratulations on buying a house and doing it in a way that will set you up for your future endeavors.
@Ben Firstenberg is right! A DSCR loan would solve the income qualification issue. Already having tenants in place with leases also speeds up the process. What market are you investing in?
Quote from @Ben Firstenberg:
Probably your best bet would be some kind of hard money or asset based loan. You could try a DSCR loan, but they wouldn't count your rent by the room leases, they would look at "market rents" as if you were leasing the entire property to one tenant.
For hard money and asset based loans, they only check your credit score. They don't much care about your income or personal finances. Of course, the interest rates will be higher, which may destroy your cash flow, but buying another house solves that pretty quickly.
Good luck!
@Ben Firstenberg I have not used a DSCR loan before, why would they not look at the rent by the room rents that I have leases signed for? I am only renting to students in my town because we have a lack of student housing. The "market rent" will be much lower if I was renting to just a family. Is there anything I could do about this? Rentals here only pencil out by using the rent by the room strategy.
Thank you so much for helping out!
Hi Michael,
I've used a Group Lease in this scenario among all your renters to qualify the income for a DSCR loan.
Hope that helps.
Quote from @Michael Dallas:
Quote from @Ben Firstenberg:
Probably your best bet would be some kind of hard money or asset based loan. You could try a DSCR loan, but they wouldn't count your rent by the room leases, they would look at "market rents" as if you were leasing the entire property to one tenant.
For hard money and asset based loans, they only check your credit score. They don't much care about your income or personal finances. Of course, the interest rates will be higher, which may destroy your cash flow, but buying another house solves that pretty quickly.
Good luck!
@Ben Firstenberg I have not used a DSCR loan before, why would they not look at the rent by the room rents that I have leases signed for? I am only renting to students in my town because we have a lack of student housing. The "market rent" will be much lower if I was renting to just a family. Is there anything I could do about this? Rentals here only pencil out by using the rent by the room strategy.
Thank you so much for helping out!
Good question. It's kind of just "the way it is". The lender needs to assume the worst case scenario, where you default on your mortgage and they're forced to foreclose on you. In this hypothetical, they now own the property they don't want and they're SUPER lazy so there's no chance they're going to go to the effort to rent each of the rooms. So they calculate a "base case" scenario, where they own this property and are renting it as a standard LTR.
@Michael Dallas to add clarity as to why rent by room strategies make it very hard for financing is most business purpose loans are sold on the secondary mortgage market and the end buyers do not buy rent-by-room on boarding home style operations on residential properties. If there isn't a buyer for this loan, lenders will not offer them as products for investors. Its not about whether the lender is lazy or not.
For your scenario, you can qualify for a DSCR loan based on the new property's income but down payment of at least 20% will be required for a straight forward DSCR loan.
Quote from @Jonathan Taylor:
@Michael Dallas to add clarity as to why rent by room strategies make it very hard for financing is most business purpose loans are sold on the secondary mortgage market and the end buyers do not buy rent-by-room on boarding home style operations on residential properties. If there isn't a buyer for this loan, lenders will not offer them as products for investors. Its not about whether the lender is lazy or not.
For your scenario, you can qualify for a DSCR loan based on the new property's income but down payment of at least 20% will be required for a straight forward DSCR loan.
@Jonathan Taylor That makes a lot more sense! As my first conventional loan on my house hack has already switched hands 3 times in 2 months. I can see where other banks would not be willing to buy that type of loan if I used rent by the room to qualify.
I think the DSCR loan would be a great fit but I would have to bring a capital partner onto the deal for the 20% down payment.
Kudos to getting started so early and seeing the opportunity. If you ever need some rent by the room advice, let me know! Even after moving out, you could consider continuing to rent out by the room and taking advantage of that arbitrage.
@Michael Dallas there are pros and cons to each loan option but a DSCR is one of the main lending products used by landlords. With your positive attitude Im sure finding a capital partner wont be a challenge.
Great to see you win even in this market where many are struggling to find cash flow or offset their expenses.
For the next deal do you plan on buying it as a non-owner occupied or are you planning on moving to a new primary residence and keeping this current one rented out?