Any agents working with REI that owner occ then make rental?

Question

I'm a real estate broker in Northern Colorado and have been focusing on working with clients that owner occupy first then convert properties to rentals (we've been calling them Nomads).

Any other agents out there been working with clients like that and might be interested in sharing strategies, tools and resources?

Thanks.

James

Chris Mason · Answer

Hi @James Orr,

I call them nomads too. :)

It'll be worth your time to have them working with a minimal overlays lender that can count departing residence rental income regardless of equity position or prior landlord experience.

You as the expert in marketing real estate can be a huge help: you will want a lease signed and security deposit made in time for underwriter review, prior to releasing financing contingency because hypothetical tenants and hypothetical rental income will not cut it. Specified move-in date on the lease to be a few weeks after the scheduled close of escrow. Getting that in time for underwriter review prior to financing contingency removal is huge -- you don't want to put a $30k EMD on the line over chasing $75 extra per month in rent.

If you pair those two things together (minimal overlays lender local to you + you getting that tenant/deposit quickly) you could very well have a niche value add area that not a lot of other agents know how to serve, in your area, much less how to serve them well. If working with James Orr and his go-to lender means I can buy a $450k home, whereas everyone else I'm talking to caps me at $150k (due to hitting my DTI with full PITI of both homes), obviously I'm going to be working with James, right?

Trivia: there's a deal in escrow right now where the wife lost her job three days after going under contract. Dead deal, right? Nope. Departing residence rental income, and an agent busting his butt to market the rental unit and find a tenant quick-like-and-in-a-hurry, saved the deal. It helps that I always work for minimal overlays firms (specifically for this type of deal-saving added flexibility) and I identified the solution, but the agent got to be the hero in the eyes of the homebuyers too, for marketing the property, finding that tenant, and getting that security deposit so quickly.

Chris Mason · Answer

Hi @James Orr,

Underwriting will flag that. How can someone move into the unit I'm living in, before I'm even scheduled to close escrow on my new place and move out? It needs to make sense.

Re: Qualifying the property and calculating rental income.

Fannie Mae actually has multiple ways to calculate rental income. To keep things simple, qualify the old property thusly:

If [ rent * 75% - PITIA ] yields a positive number, owning the departing residence will not impact DTI in a negative way. If it does, get tight with the lender.

James Orr · Answer

Thanks @Chris Mason!

> Underwriting will flag that. How can someone move into the unit I'm living in, before I'm even scheduled to close escrow on my new place and move out? It needs to make sense.

Yes... we're suggesting they find a tenant (with the lease subject to them being able to find a replacement home).

> Re: Qualifying the property and calculating rental income.

> Fannie Mae actually has multiple ways to calculate rental income. To keep things simple, qualify the old property thusly:

> If [ rent * 75% - PITIA ] yields a positive number, owning the departing residence will not impact DTIin a negative way. If it does, get tight with the lender.

Perfect. That's what we do, but when we model it we know the price of the home they'll be buying, so we can give an income number too.

Thank you!

James

James Orr · Answer

Thanks Chris.

First, thank you for the excellent reply.

> I call them nomads too. :)

Awesome!

> It'll be worth your time to have them working with a minimal overlays lender that can count departing residence rental income regardless of equity position or prior landlord experience.

Yes... I have actually modeled *part* of this. I did not take into account prior landlord experience and we don't count the equity they have.

What I do though is figure out how much income would be required with the following assumptions:

• We use 75% of gross rent from each property
• We subtract the full mortgage principle and interest payment for each property
• We subtract the full monthly HOA for each property
• We subtract the monthly utilities they are paying on each rental property (often this is zero since tenant pays in most cases)
• We subtract monthly property taxes for each property
• We subtract monthly insurance for each property

Then, we divide by .45 for debt to income to find out how much income they'd either need to offset and "carry" this negative cash flowing rental or how much income this property contributes and therefore how much less income they need to earn.

Does that seem right to you?

Here is a chart showing the minimum income required assuming the borrower has no other debt with them buying a new house each year for ten years. They live in the house for the first year then convert it to a rental.

In the model above, the property value is going up 3%per year so you're buying properties that cost 3% more each year. Rent is also going up 3% per year. You're putting 5% down on each property (remember this is as an owner occupant).

> You as the expert in marketing real estate can be a huge help: you will want a lease signed and security deposit made in time for underwriter review, prior to releasing financing contingency because hypothetical tenants and hypothetical rental income will not cut it.

Yes, I totally agree. We recommend our Nomads start marketing to find their tenant at least 60 days prior to a lease ending or prior to them moving out and converting their primary residence to a rental.

> Specified move-in date on the lease to be a few weeks after the scheduled close of escrow.

We'd even recommend sooner if possible.

> Getting that in time for underwriter review prior to financing contingency removal is huge -- you don't want to put a $30k EMD on the line over chasing $75 extra per month in rent.

Yes. In our market we rarely see $30K earnest money, but why risk even $3K earnest money.

> If you pair those two things together (minimal overlays lender local to you + you getting that tenant/deposit quickly) you could very well have a niche value add area that not a lot of other agents know how to serve, in your area, much less how to serve them well.

Yes, that's what we're finding.

> If working with James Orr and his go-to lender means I can buy a $450k home, whereas everyone else I'm talking to caps me at $150k (due to hitting my DTI with full PITI of both homes), obviously I'm going to be working with James, right?

I would hope that's not the only reason, but yes.

> Trivia: there's a deal in escrow right now where the wife lost her job three days after going under contract. Dead deal, right? Nope. Departing residence rental income, and an agent busting his butt to market the rental unit and find a tenant quick-like-and-in-a-hurry, saved the deal.

That's super interesting. Had not thought about that as a way to possibly save the deal.

> It helps that I always work for minimal overlays firms (specifically for this type of deal-saving added flexibility) and I identified the solution, but the agent got to be the hero in the eyes of the homebuyers too, for marketing the property, finding that tenant, and getting that security deposit so quickly.

Yes. I would agree with that as well.

Thanks again for the reply. I do appreciate it.