Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
Hello BP community,
I have observed a lot of confusion on the forums about financing options and the availability of programs for RE investors. As I have gained a ton of knowledge from the forums in my own journey, I would love to give back and answer any questions you have about the financing world. If I don't know the answer, I'm sure the community can step up and help as I am by no means the end all, be all of info.
Rental Property Investor · Centreville, VA · Member since 2020 · 6 posts · 10 votes
6y
@Jonathan Taylor
I’m very new to all this and am in the “educate thyself” phase. I currently own two properties.
I appreciate your offer of information!
What I *think* I understand:
- there are MANY ways to finance deals.
- small banks/etc can be more flexible in terms
- there is a limit (10?) to the number of bank mortgages a person can have.
What I’m confused about:
So much of what I read/listen to is experienced investors (with way more than 10 properties) talking about buying properties with a variety of creative financing strategies) and then “Refinancing” the property into a “traditional” mortgage later on.
So- what kinds of refi’s are these? Don’t they count against the 10(?) loans you can have?
What am I missing? This is never explained in the podcasts or books...
Denver, NC · Member since 2015 · 22 posts · 7 votes
6y
@Cheryl Moore Short answer, yes. Unless you find a lender who’s lending you money unsecured. The idea is that you refinance based on the much higher value such that you’re able to pull out all your hard money. End result is that you have a property with paper equity and all your hard equity back to move on to the next deal.
Arlington, VA · Member since 2020 · 12 posts · 7 votes
6y
@Jonathan Taylor putting together an apartment deal. The apartment is 40-units, purchase price is $2,063,000 with a rehab of around $400,000. Our lender will finance 100% of rehab and 70% of the note. The seller is also willing to hold 15% of purchase price. We need to come up with $300K, need someone to sponsor the loan and show a liquid net worth of $190k (no problem there). The sponsor has to have a net worth of $1.88M and previous experience in multi-family value add projects. My question to you is:
What is the appropriate equity and return a loan sponsor can expect to get for acting as a personal guarantor on a recourse loan?
The DSCR is Debt Service Coverage Ratio. The goal is a minimum of 1.25. It's your NOI divided by your principle and Interest amount. Take your expenses minus rental income.
Property taxes insurance vacancy, etc
Those numbers add up to $500 and rent is $1000 your NOI is $500.
Take your mortgage payment of only principle and interest say it's $400. 500/400 = 1.25. The higher the DSCR the better.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Melanie Lashus a few things to clarify are: you are correct that Fannie/Freddie limits the amount of conventional mortgages to one person at 10. But you said that other investors have ‘traditional' mortgages. This could mean they have a 30 year fixed rate mortgage on a property but not necessarily it was financed with Fannie/Freddie products. So thing to focus on here is, you can get a 30 year fixed rate loan on an investment property without confirming to Fannie/Freddie guidelines. This is called business purpose, lite doc, bank statement, or DSCR-based loans. All the preceding are in the same category.
Some investors refer to 30 year loan products as ‘traditional’ but not to be confused with conventional. You can close business purpose loans in entities or individuals but there isn’t a limit to the amount of business purpose loans you or your entity can have.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Carol Birnberg
A few answered your question but this is what DSCR is and how to calculate it.
PITI is principle interest taxes and insurance.
Rents collected/PITI = dscr ratio
So for the sake of simplicity. Say you total PITI expense is 10,000/month and you collect 15,000 in rents.
15,000/10,000 = 1.5. A positive number (greater than 1) means your property cash flows in the eyes of the lender. So a min ratio of 1.25 is fairly common requirement for dscr based loans.
Investor · Ft. Lauderdale, FL · Member since 2019 · 71 posts · 50 votes
6y
Hey @Jonathan Taylor - good question these days for many that seem to be in refinance mania, at what point for a modest mortgage (say 100-150k) does it make sense from a general rule of thumb to consider/to offset closing costs and general annoyances in refi's - 3/4 a point? Full point?
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Wade Kulesa
This is a tough one as land leases with less that 30 yrs remaining are very difficult to finance. You won’t qualify for conventional financing for this reason. I have two suggestions.
First, look into the land lease itself and, if you can, contact the tribe to see about extensions. This is a bit of a Hail Mary as land leases are tricky business but worth a shot. I’m not super educated on the intricacies of land leases but read up on them and see if you can figure out a work around.
Second, private or hard money may be an option as long as their terms are less than the remaining land lease. So 5-10 year options.
It’s a tough one but anyone else have input on this?
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Maria Membreno
Depends on the rate and terms of your first mortgage. If you like the rate and the term then do a HELOC as you avoid the costs associated with a refinance. But if you don't have enough equity in your home for the cost of the new property, then a refi may be in order. If the numbers work, a HELOC aid the most cost effective way to draw on your equity, if you can qualify for one.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Layne T.
Depends on the cost benefit of the refi. Most of the refis I have done post lockdown have paid off the costs associated with the loan in two years or less. Meaning the borrowers saved enough money monthly to recoup the cost of the loan within two years. These are 30 and 15 yr fixed on owner occupied primaries. So for a loan of that size, divide the savings each month by the cost of the loan.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Kimberly Carver
So to use a Fannie Freddie loan product being on unemployment does not help (as you are seeing). A good idea when approaching a loan product is use your best foot forward so sounds like the wife is the strongest borrower. If she can qualify off of her income alone, it would be a cleaner submission and approval process. Does that help?
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Anais Hawkins
Do you own your primary residence? If you do that helps and you may qualify for a business purpose loan. Borrowers who are furloughed/unemployed/reduced hours due to covid is a challenge to fit into the Fannie Freddie loan product as workers who have a reduction in income or loss of job are seen as higher risk or repaying the loan. This isn’t to say that this is fair but it’s the reality of the lending world right now.
Best bet is to look into DSCR based loans since this product does not take into account the guarantors income. Only the fico, liquidity of the borrower, RE experience and the cash flow potential of the subject property.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Claude Calixte what do you mean by parcel? Are you buying land only? If so, land is tough to finance as the value is hard to nail down so lenders are less willing to lend on it. The lenders that do ask for high LEE rates and more points to close due to the risk.
If by parcel you mean a second investment property and you are using bank statement/DACR based loans product then 20-30% is in the ballpark of what is required to put down.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Timothy Silva
Short answer, find a partner.
As much as ‘low or no money Down’ financing is all over BP, truth is you need to have enough cash to both buy and operate a property. The numbers on this specific scenario are too far apart to say with certainty that you would qualify by your self (there’s more to look into this as in FICO scores, cash in hand, etc) but preliminarily, looks like you would need a second person to help with this.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@Brian Sigmon
First off, congrats on putting this deal together. Second, this is a case by case basis. A lot depends on your relationship with the guarantor and the pro forma numbers of this project. If you are syndicating this, what are the numbers you have given to your investors? If you are doing this with close business partners, what numbers have you run?
From my experience, an equity stake of roughly 2-5% along with a certain percentage of the sale and/or monthly/quarterly disbursements have been seen in these type of contracts. I must reiterate that this is just from my experience and not to be seen as the standard as these splits are deal dependent.
Lender · Los Angeles, CA · Member since 2017 · 916 posts · 647 votes
6y
@IB Singh
Same rules apply. 25-30% down for no doc loans are the standard. For HML, you may be able to get less down payment but those are short term loans, interest only with a balloon payment.
Do you own your primary residence? If you do that helps and you may qualify for a business purpose loan. Borrowers who are furloughed/unemployed/reduced hours due to covid is a challenge to fit into the Fannie Freddie loan product as workers who have a reduction in income or loss of job are seen as higher risk or repaying the loan. This isn’t to say that this is fair but it’s the reality of the lending world right now.
Best bet is to look into DSCR based loans since this product does not take into account the guarantors income. Only the fico, liquidity of the borrower, RE experience and the cash flow potential of the subject property.
Thank you so much for the info. Unfortunately we do not own our own home. Will this affect the DSCR? Thank you so much, we'll research further.