I am beginning to do some single-family buy-and-hold investing in the Denver / Boulder area, and want to make sure I can find lenders who can finance them based on their rental income (usually debt coverage ratio) rather than my income (as I might leave my job soon). I have one or two leads, but would love to do some comparison shopping. It has been challenging to know how to search for these types of lenders (who do not need W-2s or tax returns), so any pointers would be appreciated!
Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
6y
They do exist. I just refinanced one of my lease options in the Seattle area with a national lender. It's owned by my LLC, closed in about 2-3 weeks, and based solely on the cashflow it's bringing in (1.1 DSCR). Fully fixed and amortized for 30 years, ~5% interest rate, but comes with a 3-yr prepayment penalty. The nice thing is that they took consideration of my leased rent, which was 2x higher than market rent. Most lenders I've talked to simply take the lower of actual vs market rents.
I'll PM you the contact so you can add to your comparison. Please also share your research with us once you've compiled all the data!
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
Hi Phil, I can refer you to some good lenders, although I'm not certain they offer the product you're after. As I'm sure you know, asset-based underwriting is much more common for a commercial loan, minimum building size 5 units.
Thanks, @Steve K. I would be grateful for your referrals, even if they might not have exactly what I'm looking for. Yes, I would assume this type of loan is the main form of funding for commercial deals, but I also assumed that any SFH investor would need this type of loan at some point, once they max out at 10 conventional loans? The only other option at that point is private lenders (and seller-financing I suppose)? Or am I misunderstanding some category of loans that is common for SFH investors once they tap out of conventional financing?
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
PM'd you those referrals. What you're looking for is called a portfolio loan. Portfolio loans consolidate multiple loans into one, and typically have rates and terms that are similar to commercial loans (currently around 4.75-5%, 3-10yr. ARM amortized over 15-30yr). I believe B2R and Lima One Capital have loan products like this. I would recommend looking at some smaller local banks too. I really like Elevations, our local credit union but I'm not sure if they offer a portfolio loan. One other downside besides the higher rate and lack of a 30yr. fixed option is that having multiple properties in one loan can complicate the sale of the properties individually, or to refinance, pull cash out, pull a line of credit, etc.
Other options you might consider:
1031 exchange those SFR's for a Multifamily building(s) (This is what I would do).
Pay down the smallest mortgage to free up a new mortgage.
Use a HELOC.
Private Money/Hard Money/Seller financing.
If you're married, I believe spouses can each have ten individually, total 20.
Financial Advisor · Des Moines, IA · Member since 2017 · 173 posts · 58 votes
6y
@Phil Sharp - There are many of these types of lenders. They all have different criteria in regards to such things as: FICO, LTV; dscr; location; occupied or vacant; min. value, min. loan amount, etc...
Thanks, @Steve K. I will look at B2R and Lima One, as well as the referrals you sent. Do Portfolio loans have to be ARMs? And do they need to involve multiple properties? I have reached out to Aloha Capital and Merchants Mortgage, both local, and confirmed they offer DSCR-based 30 yr fixed loans on single properties, but maybe that is a different type of product than the Portfolio loans you've mentioned?
@Ryan O'Mara Can you point me to some of the lenders you're referring to? The ones I've reached out to (local credit unions and such) only offer loans based on personal income (DTI based on W-2s and tax statements) rather than DSCR-based products.
Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes
6y
They're called portfolio loans because the lender typically keeps them in their own portfolio and doesn't sell them on the secondary market, which means they are unique product offerings specific to that bank and don't have to conform to Fannie/Freddie rules. This creates more flexibility with rates, terms, maximum loan amounts and minimum qualifications. So there's a very wide variety of loan products falling under the broad "portfolio loan" definition. The DSCR-based 30yr fixed loans from Aloha and Merchants that you mentioned sound interesting, I'm not sure if those would be considered portfolio loans or not, but probably seeing as it sounds like the qualifications are a bit looser than a Fannie/Freddie product. In my experience portfolio loans are usually ARM's, or a hybrid such as a 5/1, and yes I think they are generally for multiple properties, 5 minimum typically but again there's a lot of variation within the category and lenders can create their own underwriting guidelines so there's no standard "portfolio loan" option. Because lenders carry more risk by holding the loan on their books, they often charge a premium rate and higher closing fees so there's usually a trade off for the benefits. It's important to shop around and consider not just the rates and terms but also any additional fees, closing costs, prepayment penalties, etc. as each portfolio loan product is different and they don't follow the standard guidelines put forth by the government-sponsored banks like conventional financing products do.
Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
6y
They do exist. I just refinanced one of my lease options in the Seattle area with a national lender. It's owned by my LLC, closed in about 2-3 weeks, and based solely on the cashflow it's bringing in (1.1 DSCR). Fully fixed and amortized for 30 years, ~5% interest rate, but comes with a 3-yr prepayment penalty. The nice thing is that they took consideration of my leased rent, which was 2x higher than market rent. Most lenders I've talked to simply take the lower of actual vs market rents.
I'll PM you the contact so you can add to your comparison. Please also share your research with us once you've compiled all the data!