From single family to multifamily
Rental Property Investor · Member since 2024 · 1 post · 0 votes
Hello, I'm looking for a little bit of insight. I currently have 3 rentals. 2- townhouses and 1- 4 bedroom SFH. the equity on the 4 bedroom is around 150-160k. and the townhouses are around 55k together. my question is. How are people getting into these 500k+ multifamily deals? especially without being able to increase w2 income very fast? if I cash out refi, I'm wondering how much w2 income does the lender want to see?. would they potentially approve it for some making 60-65k a year? or do I just need to save more, increase my income and wait for the markets to cool down. Any insight on this would be appreciated.
Questions like this should be posed to an actual lender since the answers will vary across them. They are usually happy to talk about things like this, remember that they are there to write loans, they WANT you to be able to borrow from them.
Don't be distracted by what others are doing or get stressed about keeping up with them. Stretch as far as you are comfortable (maybe a little farther) and be happy to execute YOUR plan. Sometimes you need to pause for a bit and build cash toward your next deal and that is ok - make a game out of it by seeing just how tight you can make things to stash cash up to the next one.
Questions like this should be posed to an actual lender since the answers will vary across them. They are usually happy to talk about things like this, remember that they are there to write loans, they WANT you to be able to borrow from them.
Don't be distracted by what others are doing or get stressed about keeping up with them. Stretch as far as you are comfortable (maybe a little farther) and be happy to execute YOUR plan. Sometimes you need to pause for a bit and build cash toward your next deal and that is ok - make a game out of it by seeing just how tight you can make things to stash cash up to the next one.
@Walker Irby, there are several ways, but similar to what Glen said, just because one person is doing it, doesn't mean that it is the right way for you.
Ultimately, as noted, talk to lenders. Typically you will want local credit unions, small banks (not the Chase's or Bank of America's), google private lenders, etc. The thing is: you will need money down for every house, and even if you refi your current properties, you will likely not be able to tap into the final 20-30% of equity. So if you have a property with $200k, your max loan on that house will likely be $160k, meaning your $40k equity is not really accessible as a downpayment.
The biggest thing is doing deals with real upside, i.e. BRRRRs, so you can buy for say, $100k, put $50k into rehab, and have a house worth $200k+. Amend numbers accordingly, but I will say, typically, if your goal is scaling and growing your net worth and deal size, you can't be buying turnkey rentals (if you are). You need to do work (and take on the risk) to boost your returns.
I'm no lender but from my experience scaling as an investor, the lower the purchase price/number of units, the more emphasis is put on the income of the borrower. As you start to make more and larger acquisitions, more emphasis is put on the property financials and your experience as an operator. The catch is the lenders typically won't let you go from a 4-unit to a 100-unit, so you have to build up gradually.
Hello, I'm looking for a little bit of insight. I currently have 3 rentals. 2- townhouses and 1- 4 bedroom SFH. the equity on the 4 bedroom is around 150-160k. and the townhouses are around 55k together. my question is. How are people getting into these 500k+ multifamily deals? especially without being able to increase w2 income very fast? if I cash out refi, I'm wondering how much w2 income does the lender want to see?. would they potentially approve it for some making 60-65k a year? or do I just need to save more, increase my income and wait for the markets to cool down. Any insight on this would be appreciated.
We care a little bit about your W2 income on the commercial side, but not a lot.
If you make $100k/yr and have $400k in your checking account, we're also not going to question it on the commercial side. After 9/11, congress (idiots) was very concerned about Al Qaeda buying residential real estate, but congress wasn't really worried about them buying apartment buildings or shopping centers or aircraft part factories (like I said, idiots). So a lot of the PATRIOT Act nonsense that is now present in residential mortgage guidelines ("derp a lerp, what's this deposit? What's that deposit? Is this <clutches pearls and shudders in horror> gift funds or an outside investor?"), is simply totally absent in commercial lending.
Hello, I'm looking for a little bit of insight. I currently have 3 rentals. 2- townhouses and 1- 4 bedroom SFH. the equity on the 4 bedroom is around 150-160k. and the townhouses are around 55k together. my question is. How are people getting into these 500k+ multifamily deals? especially without being able to increase w2 income very fast? if I cash out refi, I'm wondering how much w2 income does the lender want to see?. would they potentially approve it for some making 60-65k a year? or do I just need to save more, increase my income and wait for the markets to cool down. Any insight on this would be appreciated.
Hi Walker,
If you use a DSCR loan on the refinance, they do not care about your W2 income as long as you have enough liquidity to cover the deal. DSCR loans look at you liquidity position, credit score, and the rent vs principal, interest, taxes, and insurance. They do not require tax returns, paystubs, or W2's. Hope this helps!
Best,
Hello, I'm looking for a little bit of insight. I currently have 3 rentals. 2- townhouses and 1- 4 bedroom SFH. the equity on the 4 bedroom is around 150-160k. and the townhouses are around 55k together. my question is. How are people getting into these 500k+ multifamily deals? especially without being able to increase w2 income very fast? if I cash out refi, I'm wondering how much w2 income does the lender want to see?. would they potentially approve it for some making 60-65k a year? or do I just need to save more, increase my income and wait for the markets to cool down. Any insight on this would be appreciated.
Hey Walker, it's a great question. Starting out, most of us (myself included) didn't know all the cool ways to buy real estate and only saw things through the traditional mortgage lenses.
1. Owner Financing is a great way to break into smaller multi-family 4-10 units when a seller is willing to carry the mortgage for you up to a few years until you can qualify for a commercial / DSCR loan to refinance them out. You'll need a down payment which is negotiable between you and the seller. Terms are completely negotiable between you and the seller. It's a great way to get started.
2. DSCR lending: This is Debt Service Coverage Ratio. Can be a residential 1-4 unit or commercial 5+ units. These loans are not typically available in your traditional banks, however their are loan brokers out there who specialize in this type of lending. They want to know if the property will cover the debt payments. For example, if the loan payment is $1000 per month and the NET revenue is $1250 per month before the payment, you have a 1.25 DSCR. That's a loan they would more than likely do. They are looking at the income of the property, not the borrower. They will consider your credit, assets and experience depending on the deal as a personal guarantor.
3. Commercial MORTGAGE loan: larger than 4 units: Commercial loans typically use a DSCR methodology for their underwriting, so very similar. They tend to look at the overall strength of the asset and the borrower, but not so much the borrower's income. However, if the asset has weak numbers, they may consider the buyer/borrower's personal strength and ability to repay in extreme cases. Usually, the borrower's personal is running in the background. Strong credit and some liquid assets provide good stability for the personal guarnator in these deals.
4. LOAN ASSUMPTIONS: Again, a lot of commercial loans may be assumable and you can try to take over the existing loan with the proper qualifications. You'll usually need a larger down payment to buy out the remaining equity from the seller.
5. PARTNERSHIPS: Partner with others to put together the down payment and equity as well as structuring the loan.
I hope that helps. The bigger the deals you do, the more complex they become. Learn to walk before you run, then learn to run with efficiency before you sprint. As you do more and more, you'll learn a lot of different ways to structure your deals and move forward.
My advice is don't go too fast and get yourself in over your head. The mistakes are extremely costly and could potentially derail you. Take your time and be patient while you're learning. It won't take as long as you think, so don't rush it.