High Debt to income and Refinancing for a BRRRR

Rental Property Investor · Honolulu, HI · Member since 2017 · 38 posts · 9 votes

I live in Hawaii and by virtue of owning real estate here my debt to income ratio (DTI) is pretty high. My question is would I be able to BRRRR using a HELOC to purchase out of state real estate? Would the bank be concerned that I have a high debt to income ratio when I'm trying to refinance a property? Would it be a better strategy to BRRRR using the HELOC completely under my LLC?

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Account Closed

Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes

@Erik Pacpaco the bank would most certainly be concerned with your high DTI when refinancing a property. If the property cash flows adequately enough, however, it shouldn't have a negative impact on your DTI ratio.

Going under your LLC wouldn't make this any different, since you're the managing member. Unless, of course, your LLC is established enough that it can be considered its own operating entity, which is uncommon in this situation.

Also, a conventional lender won't usually let you buy under an LLC. You would have to buy under your name, then quit claim to an LLC, which means you'd still have to qualify individually. The other approach is commercial financing, but they're going to look at your personal "cash flow" and the property's cash flow as well, which is a degree more conservative than the conventional lender you're already having a bit of an uphill battle with.

Your case is one example of why BRRR deals don't really work as well as everyone makes them out to. Usually these BRRR properties don't cash flow enough post-refi to be worth keeping. If you find a good, discounted deal that you can really generate some equity in, I would sell it and use the flip income to fuel the purchase of already stable, cash flowing properties. The extra revenue from selling off underperforming equity positions really helped me accelerate my investing career.

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
7y
Talk to your bank about different options. If your debt to income ratio is high, it will affect your ability to get a loan.
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Hideyuki Gojima
Rental Property Investor · Long Island City, NY · Member since 2018 · 82 posts · 18 votes
7y
@Erik Pacpaco
As you are already aware, DTI is one of the most important metrics that lenders check. So most likely you will not be able to secure the loan.
If you have some other financial resources that you can back up, maybe you have a shot at a private lender. Its all about the negotiation I think.
Never say never! Good luck!!
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Caleb Jordan
Lender · Arlington, TX · Member since 2018 · 465 posts · 184 votes
7y
Originally posted by @Erik Pacpaco:

I live in Hawaii and by virtue of owning real estate here my debt to income ratio (DTI) is pretty high. My question is would I be able to BRRRR using a HELOC to purchase out of state real estate? Would the bank be concerned that I have a high debt to income ratio when I'm trying to refinance a property? Would it be a better strategy to BRRRR using the HELOC completely under my LLC?
You could also look at an a more asset based lender. A commercial lender or hard money lender that has buy and hold loans is an option you could look into. They often don't factor DTI or at least don't give it as much weight. They will be mostly concerned with the cash flow of the individual property.
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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
7y
@Theresa Harris and @Hideyuki Gojima There is a wide range of investor friendly loan products designed for self employed borrowers. They don't qualify the loan on DTI at all. The rates are a bit higher but nowhere near hard money and you'll still get 30 year terms. They base the loans off of the borrower's FICO, experience, and the property's DSCR.
They're designed for experienced investors who either have 10 conventional mortgages already or investors who cannot qualify based on DTI but check every other box.
@Erik Pacpaco Vesting in an LLC is also not a problem with these. However, you'll still have to personally guarantee the loan.
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Erik Pacpaco
OP
Rental Property Investor · Honolulu, HI · Member since 2017 · 38 posts · 9 votes
7y
Thank you all for the great feedback. I'm wondering if there'd a benefit to purchasing a property and rehabbing the property with cash thru my HELOC? Would make banks who I approach for refinancing look at the ARV and that the rents well or would they focus on my financials?
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Erik Pacpaco
OP
Rental Property Investor · Honolulu, HI · Member since 2017 · 38 posts · 9 votes
7y
@Alex Bekeza So when refinancing a BRRRR property that was rehabbed with a decent ARV and is renting out well, would the lender still care about my DTI?
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Alex BekezaBusiness Member
Lender · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
7y
@Erik Pacpaco
On a conventional loan, yes its the main qualification.
On a commercial or "asset based" loan, no. The commercial loans will only care about FICO, experience, and the property's cash flow.
[email protected]818-606-8823
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Account Closed
Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
7y
@Erik Pacpaco the bank would most certainly be concerned with your high DTI when refinancing a property. If the property cash flows adequately enough, however, it shouldn't have a negative impact on your DTI ratio.
Going under your LLC wouldn't make this any different, since you're the managing member. Unless, of course, your LLC is established enough that it can be considered its own operating entity, which is uncommon in this situation.
Also, a conventional lender won't usually let you buy under an LLC. You would have to buy under your name, then quit claim to an LLC, which means you'd still have to qualify individually. The other approach is commercial financing, but they're going to look at your personal "cash flow" and the property's cash flow as well, which is a degree more conservative than the conventional lender you're already having a bit of an uphill battle with.
Your case is one example of why BRRR deals don't really work as well as everyone makes them out to. Usually these BRRR properties don't cash flow enough post-refi to be worth keeping. If you find a good, discounted deal that you can really generate some equity in, I would sell it and use the flip income to fuel the purchase of already stable, cash flowing properties. The extra revenue from selling off underperforming equity positions really helped me accelerate my investing career.
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Account Closed
Rental Property Investor · Sacramento, CA · Member since 2015 · 1k+ posts · 893 votes
7y
I would also like to note that, from experience over about 50 deals in the last year and a half, that every institutional commercial lender I've worked with does in fact look at the buyer's cash flow, assets, and liabilities... not "just the property" as many seem to rumor.
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Duc Ong
Real Estate Agent · Honolulu, HI · Member since 2015 · 450 posts · 196 votes
7y
@Erik Pacpaco I agree with @Account Closed in that your DTI is still going to be a factor when you go for the long term debt. I would shop around for different lenders and figure out what they require before doing the deal. Unless you buy for a significant discount, you may have some equity left in the deal after Refi. Another option is to pull the HELOC to go in as a JV partner with others, or as a passive investor in a syndication.
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Mike Della Rocca
Member since 2019 · 4 posts · 0 votes
7y
How do I transfer my home into a trust? I would like the beneficiary of my trust to be my LLC.
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