Financing

10 Replies

How can I finance for multiple rental properties at once. I want to purchase a rental property every year, though at a certain point Credit unions wont allow you to keep getting new mortgages because of debt to income ratio?

I just got my second rental and asked this same question.  I believe after you have 3 or more you can combine them and get a commercial loan on the properties,  a blanket one that covers all of them.

@Joshua Pfaff  Be a good package for the bank.  Unless you are independently wealthy... leverage your day job and savings early on when borrowing.  Having a good ''day job", retirement accounts or savings for your reserves, good records, determination and avoid showing desperation to the lender.  Your income will have to catch up with your debt.  Having a couple years of good tax returns showing rental income and consistent growth will influence your lenders decisions.  If you are rolling along looking good you shouldn't hit a limit on the # of loans a portfolio lender will give you.


Frank

Awesome, thank you both very much for your info. I now know what my next action will be.

Has anyone has ever heard of or tried getting unsecured funding thru Bug Doug Funding? After speaking with them, it seems like a reasonable approach and fair price, but I'd like to speak with someone who has used them in the past.

Though if you get the "blanket loan" do they have a set term and interest rate for them?

You don't need a blanket loan once you go over 4. You can still get loan for local banks - except they won't be 30 yr conventional loans. They'll be 5 year balloon. But they'll still be better terms than the blanket loans would be.

For the most part, only some of the hedge funds are doing blanket loans. Their rates are in the low 6's those. I'd rather go with the 5 yr balloon with the local banks.

I'm at house 33 and I'm actually finding it much easier to get loans today than back when I first started.

Keep in mind that local lenders don't really have the same guidelines as conventional lenders to they won't view debt to income ratios the same. Not only that, but if you have good rental income, you should end up with a better debt to income ratio with more rentals.

Here's how they're supposed to calculate the dti percentage:

First take 75% of your rental income and subtract your PITI for your rental properties. Then add or subtract that amount to your monthly income or debt payments depending on whether you have a gain or loss.

Then do the DTI calculation: Total monthly income DIVIDED BY your monthly debt payments (excluding mortgage payments).

Example: 2 houses with rents of 1,000/mo apiece or 2,000/mo. 75% of that is 1,500. Subtract PITI (say 650/mo per house or 1,300 total). That gives you a 200/mo bump to your monthly income.

So lets say your monthly income was 5k a month and your debt was 2k a month. You'd be at 40% DTI. But now you get to add the 200/mo to your income so its 5,200 and now your DTI is actually improved.

So the end result here is that as long as your rental properties have decent cash flow, the more of them you have, the better your dti ratio will actually be.

But be careful here too. Sometimes banks aren't very familiar with how to calculate this stuff. I recently had a bank tell me my dti ratio was too high and I was declined. I asked what the ratio was and they came back at some crazy number.

I said I've been doing this for quite awhile now and there's no way they're doing it correctly. I asked em to explain how they were calculating. Turns out they were using my actual rental profits from my tax returns and then deducting my PITI from the mortgages.

I explained to them that makes no sense. That if they're only counting my net profit and then deducting my PITI, they're essentially counting the PITI against me twice.

i.e. Lets say my rentas are 1k and my PITI is 650. On my return, my net profit may be 250/mo after repairs/vacancy, etc. But the net profit already took out for PITI (650). 250 was the actual net. Instead they were taking 250 and subtracting my PITI again and showing a loss.

Essentially, here was how that calculation actually looked:
1,000 minus 650 PITI minus 100 for repairs = 250/net. Then 250 MINUS 650 PITI Again which came out to a loss. But only because they deducted 1,300 total for PITI.

I had to go through the explanation a couple times before it clicked. Once they realized what they were doing, they fixed it. But it wasn't the first time, I had to fix an underwriters understanding of how investment properties' rental income works.  Its not something many of them deal with so you have to watch for it a bit as an investor. When it comes to underwriting, No does not always mean No. Sometimes it just means that they need some help understanding the numbers.... :-)

Alright thanks, that cleared some things up for me.

Originally posted by @Mike H. :

You don't need a blanket loan once you go over 4. You can still get loan for local banks - except they won't be 30 yr conventional loans. They'll be 5 year balloon. But they'll still be better terms than the blanket loans would be.

For the most part, only some of the hedge funds are doing blanket loans. Their rates are in the low 6's those. I'd rather go with the 5 yr balloon with the local banks.

@Mike H. 

Why do you say a 5 yr balloon loan is better than a blanket? I don't really understand how people can afford a 5 yr ballon loan. I talked to a commercial loan officer who said that was what he could offer me. How is someone just starting out supposed to pay off the mortgage after year 5? What am I missing?

BTW.... telling the bank how to do their job: AWESOME! You're the man!

5 year balloon doesnt' mean its a 5 year loan.

It means that your rate can reset after 5 years.

Basically, it typically works like this when you're dealing with portfolio lenders.
5 year balloon. Rates are between 4.5 to 5.5% depending on the lender.
Amortization period is 20 to 25 years.

The balloon term is how long the loan is locked into your rate. After your 5 years, the loan either resets the rate automatically based on some target rate (i.e. prime plus x%) or else you "renew" the loan with the lender.

But a blanket loan is typically the same thing. They're typically 5 year balloons. The only difference is a blanket loan is a loan for multiple properties. 

But they both still tend to have the same terms except the blanket loans tend to have higher rates. And, the funds running them, tend to be more invasive on your business. i.e they make you put all the properties into a separate entity, they want you to escrow your cap ex stuff,e tc.

To me, i'd rather have individual loans with the lower rates and not have to create a separate entity and not have to escrow cap ex stuff, etc.

@Joshua Pfaff   you can get conventional financing with up to ten properties. You don't need a two year history on rental income if you speak with an investor friendly  mortgage lender. Your rates will be the lowest with longer terms of you use conventional financing.  

http://www.biggerpockets.com/blogs/5110/blog_posts...

Here is a link to my blog with info on conventional financing that you hopefully find beneficial. 

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