I'm posting this question on behalf of a friend who is trying to buy his next property but is being denied financing some banks / lenders.
He purchased 3 properties over the course several years before 2008 in Brooklyn NY (Bed-Stuy and nearby areas) before mortgage guidelines become much stricter. He's been shopping around for financing to purchase a 4th property. Although the rental income in each of the 3 existing properties covers all expenses (and in some cases cash flows); he's been advised that his debt-to-income ratio will not qualify him for a loan. He otherwise has a decent credit score; earns great income and has been employed for 10+ years. I don't know his exact numbers however.
Have you been in similar situations? If so, what options / methods did you use to obtain financing for the additional property? He'd like to avoid using a hard money lender. NYC investors - If you have any recommendations on a solid reputable lender / broker; and creative financing ideas; it would be very much appreciated. Thanks.
Hey @Daniel C. , I think this is an excellent post and will be following to see the answers. I would suggest, of course, that your "friend" takes the time to read/listen to Brandon's "no and low money down" and to talk to additional banks.
I have read recently that banks have the ability to give you a financing for up to 10 properties (I read that in a blog for beginners here on BP). I would just say to keep asking banks and to also ask other investors for referrals.
Sorry if I'm not too helpful. I'm new to this and trying to get my feet wet. I hope this was at least somewhat helpful.
@Daniel C. - Your friend may want to try commercial financing rather than bank financing. Debt to income is less of a factor with these lenders. I'd be happy to help you out if you want tot know more. Feel free to reach out.
Hi Daniel, your friend might want to look into Portfolio Lenders where they would be happy to evaluate him if he has enough Cashflow but is not reporting enough Income. They will go beyond just the Fannie and Freddy Mac guidelines. However, these loans can wind up being a little steeper in Rates and can cost an extra point or so to the Broker if you use one.
There are other ways that might be helpful.
Your friend can become a non-Occupying Co-Borrower with a Buyer that qualifies on Income. However, that Buyer should be related and qualified with Income. Normally, 75% of the Rental Revenues can be added to the Income so going with Multi-Family helps a lot with the qualifications.
I don't think there are any good ways to buy without Partners since the Crisis. However, those are a few of the available ways that might be left.
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@Daniel C. Your best option is to get a commercial loan. DTI doesn't come into play in commercial financing.
Just does the property cash flow.
1-4 unit. - 25% down -30 yr fixed
I'm a Brooklyn Investor for the last 2 Decades owning 6 multi-family properties currently.
I'll try to explain why Daniel's friend will PROBABLY NOT be able to go the Commercial Loan route for a 1-4 family building in Brooklyn. Please look at the Spreadsheet here:
Here is what you are asking of a commercial loan company.
Let's say you find a property in Brooklyn for $1 Million. You plan on putting down 25% or $250k.
The Mortgage, presumably would be $750k. Now, this is suspect because generally, in NYC, for these large loans, the LTV won't be at 75%. Generally, from my own research, it's at 65% or even lower. But if there is a NYC Commercial Lender for Residential properties in the 1-4 Unit range that can offer that at a reasonable rate, then please reply.
Either case, I'm going to humor the concept that we can do 75% LTV. So that means $250k down, $750k loan.
If we say that the commercial loan rate would be 6%, then the Payment of P&I would be $4,497 Amortized at 30 years. Now this is suspect too as I have been quoted between 20 and 25 years for Amortization purposes when investigating.
Either case, I'll humor that as well.
Now we'll get to the Debt Service Coverage Ratio (DSCR). Normally, the DSCR is 1.2 HOWEVER, again, in NYC for these higher loan amounts, the quotes I was getting is more like 1.25 to 1.3 at best.
Either case, I'll humor that as well!
With a DSCR of 1.2, Daniel's friend would need to cover at least a Net Operating Income (rents minus expenses) of $5,396 per month.
This is where it just doesn't work.
For a $1 Million, you cannot get a decent property in Brooklyn where you can generate that kind of NOI.
If you look at my Revenues and Expense column, you'll see that the Property must generate $3,307 for each of 2 apts in that building for $1 Million. For a 2 Unit Building these days, $1 Million doesn't go far. Trying to find a 2 Family building that averages out $3.3k per apt is VERY difficult for $1 Million.
If it's 4 apts, then you would need an average of $1,653 each apt with those typical expenses. However, I would bump up the expenses a bit more for a 4 Family and say that you would need to get around $1,800 per apt for a 4 Family.
Furthermore, 4 Family Apts with that cheap rents (for NYC, that's cheap rent), you will probably be looking at rent stabilzed apts in the building. That's something I refuse to deal with. But that's up to your friend.
Sorry, but these kinds of numbers are not here in NYC in general, unless you are buying in risky areas or Area where the appreciations is low in comparison to typically what you get in NYC. So maybe these numbers can work in say, Canarsie and Far Rockaway... MAYBE. But that's not my cup of tea.
I would say stay away from those risky areas because the NYC Tenant / Landlord laws are so biased to Tenants that I would suggest you include Legal fees in your Expense column.
Anyway, that's my 2 cents.
It really depends on the price point and what the tax returns are showing.
HI @Daniel C. Can your friend do a cash out refi on any of his current properties? I know Bed-Stuy has been appreciating like crazy. They're probably worth 50% more than he paid for them if he got them 10 years ago. Message me if you want to discuss. I use a lender that is much more flexible than traditional banks.
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