Should I take a DSCR loan or pay cash on a 210K property?
Hi all. First time poster here but really need some advice. I'm under K on a 2 BR/1 bath condo in Myrtle Beach that I've spent several months looking for. It's a good deal: 210K and I'll at worst break even in 8-9 months (and be able to use it the other 3-4) but potentially could make $$ depending on whether I pay cash or take a loan. To that end, I'm not eligible for a conventional loan so I applied (and was approved) for a DSCR loan at 8.375% with a 3/2/1 prepayment penalty. I'd almost surely refinance or pay it off in year 2 or 3 but in those 2-3 years I'll have paid approx. 13K/year in interest alone plus another approx. 5K in appraisal/closing cost/prepayment penalty fees. I have the 210K cash but it represents approx. 1/3-1/2 of my liquid net worth, with the other half being illiquid. If I pay cash my COC return will be approx. 8%. If I take the loan it goes down to approx. 2.5-3%. The ONLY reason I'd take the loan is to save some "dry powder" for my next purchase as I'd like to get 2-3 more properties in the next few years. But the thought of paying a lender 8.5% when I have the money sitting in stocks/bonds which almost surely will not go up 8.5%/year over the next several years (and potentially could go down a lot) is very unsettling. Curious what others would do in my position and also if I pay cash, how feasible would it be to get a mortgage after the fact and/or a HELOC loan in the event I wanted to raise capital for my next purchase? Thanks for any thoughts/advice and greatly appreciated.
Slight update: I've since realized I put 50% down and my rate with a 3/2/1 prepayment goes down to 8%. Or at 50% down with a 1 year prepayment penalty the rate is 8.375%. I'm inclined to go this route with the 1 year prepayment option. But curious to hear others' thoughts. Thanks much all!
@David Rosenfield I wonder if you are calculating your COC correctly. Are you including all expenses like vacancy, turnover cost, management, repairs, condo fees, utilities etc?
Using negative leverage generally does not make sense. Why would you invest at 2-3%? While the prperty will likely appreciate over the long term due to inflation, in the shorter term you are no more guanteed of appreciationa than you are in the storck market.
The idea that you plan to refinance in a year or two may not be realistic. Rates may be higher and if values drop you may be stuck with to high a LTV to get a loan.
Generally it should not be much harder to get a mortgage after the fact if you pay cash. The risk is what will happen to rates and terms. They could go up or could go down.
All in all this deal wouldn't excite me. Good luck.
Thanks Ned and yes I've accounted for all costs/expenses including management fees. And while I understand your point, the reason it excites me is because I'll plan to live there 3-4 months/year so when you factor that in the COC jumps to more like 8-10%. I own a 2 BR condo in Denver that I rent out half the year and it does 2x my mortgage in those 6 months, thus I need somewhere else to live 3-4 months/year. I love to ski (Denver) and golf (Myrtle) so getting a place in latter where I can spend 3-4 months/year and get my mortgage covered the rest (plus a little extra) seems like a win to me. I spent the last 3 months in SC/FL looking for this type of property and this is the best deal I found (I don't want a SFH as I don't want to live in one and frankly think they're riskier than condos with low HOAs for STR purposes). Thus the only question in my mind is whether I pay cash or take the loan. After much deliberation I'm leaning heavily towards a 50/50 loan with a 1 year prepayment. After a year, I'll either have used that $$ I saved to buy my next property, or if not, I'll pay off the loan without penalty. That seems like the best compromise/middle ground approach to me but curious to hear others' thoughts. Basically, it will cost me 8K in interest for a year for the right to hold onto another 50K that I'm planning to use as a down payment for next property. And if don't find that property I'll just pay off the loan in full after a year. At the 75/25 LTV however that 8K is 13K. Thus, 50/50 seems like my sweet spot.
I recommend that you deemphasize the cash on cash return as you plan to live in the place for a few months. Those months you aren't making any money, but you have a place to live and get the benefit of a 2nd home. There is intangible value to that. If you put all your cash in it, your cash on cash will go down and you should see higher CoC if you borrow. Since you have the money ready to go, I would use it to purchase the place outright and immediately begin talking to banks about a business line of credit. These are much easier to get if you don't have a primary lien (mortgage) on the property. Keep the LOC open and you have your dry powder ready to go, but aren't paying interest on the money like you would if you got that expensive DSCR loan.
Thanks Benjamin and interesting strategy re the business line of credit. I hadn't thought of that. Any idea what the going/typical rate would be? A quick Google search suggests 9+%. While I do have the money "ready to go" (and another approx. 200K liquid on top of that), it's mostly in stocks/bonds which admittedly are pretty flat for me right now (ie, little to no capital gains hit). My Charles Schwab guy (obv biased) says I should pay as little as possible and take out the 75% loan. So the 50/50 split seems like a reasonable compromise. But to your point if you think I could just as easily get a line of credit/mortgage after the fact if needed, maybe I shouldn't unnecessarily pay 8% for a year or two. Frankly, my plan if I don't find another property to buy in the next year was to just pay off the loan with no penalty. In a year I'd be paying approx. 8K in interest (better than 13% at 75 LTV). So basically, my question is is it worth paying 8K for a year for the right to hold onto another 55K that I might want to use for a down payment on another property? Frankly, even if I paid cash for the whole property, I'd still have another approx. 200K in liquid dry powder, but putting half my liquidity (as opposed to say 1/4-1/3) into one property isn't enthralling to me. But your point is valid and now you have me thinking just pay cash...
This rate seems a bit high for 50% LTV - I would maybe shop this around a bit until you're sure you're getting the best deal.
Cash is always king, and it is my opinion that remaining liquid is always the best bet.
Thanks @Issac San Miguel and much appreciated! I shopped around with several lenders and surprisingly (even with my 780-800 credit score) this is the best I got (Easy Street Capital). The local lender wanted to charge me an even higher rate when I wanted to put more down, and another lender wouldn't let me close on another deal that was going to end up literally 2-3K short/year even though I was planning to use it for several months which still seemed like a win to me. If you're aware of another lender that will give me a better rate on a mere 110K loan with a 50% LTV, I'm all ears. The rate was 8% with a 3/2/1 prepayment but when I wanted a 1 year prepayment it jumped to 8.375 which is only another $27/month. But man I'm torn between taking the loan and keeping the extra dry powder or paying cash.
@David Rosenfield I'd have to know the full scenario to help with a reccomendation - feel free to DM me.
Thx @Issac San Miguel. I tried to DM you but keep getting an error message. Happy to share my "full picture" but perhaps you can try DMing me or look me up on LinkedIn (David Rosenfield). Thx much and hope to connect!
@David Rosenfield YOU don't qualify for a conventional loan or the PROPERTY doesn't qualify for conventional? There's a big difference. Have you spoken with any local lenders? I have lending partners here in Myrtle Beach that offer in-house (portfolio) loans at 7% or less. One of my clients closed on a unit last week at 6.875. BUT, it all depends on the property. If you want to send me the name of the building/community I can pretty much tell you which lender(s) will be your best bet .
@Myrtle Mike Thompson I don't qualify because I don't have two consecutive years of W-2 income bc with my 10+ years of savings I prefer a 1099 job that allows me to travel 3-6 months/year. I'm aware of the difference in condohotels, warrantable properties etc and this particular property isn't an issue but I need a DSCR loan regardless. In any event at this point I'm inclined to pay cash and then just take out a mortgage (or HELOC) after the fact if I need to raise more capital. Thx for your thoughts and I'll let you know if anything changes.
Even if rates now are pretty high, leverage your cash and take a loan will help you with your long term plans of expanding your portfolio.
You can refinance later on in 1-2 years or whenever rates go down
If your credit is above 740, you should be sub 8% on that loan. That holds true at 720+, more than likely too. Assuming you have 740+ credit, a 1-year PPP at 55% LTV would be around 8.125%. If the DSCR is over 1.25x, then a lot of lenders will reduce the rate by .250% bringing your 55% LTV 1-Yr PPP loan to 7.875% at worst. And with a low LTV, I wouldn't pay more than 1.5% in origination fees.
Thanks @Mark Munson but I wasn't really looking for another lender/better deal. I primarily wanted to know if people thought I should take a DSCR loan (be it at 7 or 8%) or pay cash. After learning I can get delayed financing up to 6 months after close (for a lower rate than DSCR) and/or do a cash out refi at the same rate as DSCR, I'm likely paying cash now. Seems silly to pay 6 months of interest when I have the cash and don't need to use it until next purchase which I haven't identified yet.
Quote from @David Rosenfield:Understood. If you don't have a deal yet or don't plan to within 6 months, then of course pay cash. It is really difficult to answer without another deal to review. If you had another opportunity in hand, then you could weigh whether that opportunity will out yield the cost of the capital on the refi. I typically won't buy anything with a sub 20% CoC return.
Thanks @Mark Munson but I wasn't really looking for another lender/better deal. I primarily wanted to know if people thought I should take a DSCR loan (be it at 7 or 8%) or pay cash. After learning I can get delayed financing up to 6 months after close (for a lower rate than DSCR) and/or do a cash out refi at the same rate as DSCR, I'm likely paying cash now. Seems silly to pay 6 months of interest when I have the cash and don't need to use it until next purchase which I haven't identified yet.
Gotcha and makes sense/that's what I'll plan to do. And this Myrtle Beach property is a unique one in that I want/plan to live there a few months/year and eventually have as a retirement home. So a 8-10% COC plus 3-4 months of living there seems like a good enough deal to me. Thx again for your thoughts and glad to hear cash seems like the move for now.
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With money as cheap as it still is (historically), I wouldn't deplete my hard earned cash. I'd find more than one property and deploy my cash to make it make more money for me. Laying out that much cash on a condo is frightening considering at any moment it could become unwarrantable (through no fault of your own) and lose value.
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Thanks Stephanie and while I get your point I've since come to realize I can get delayed financing up to 6 months after closing or a cash out refi after that. Considering I'm sitting on the cash anyways and haven't yet identified my next property, my current inclination is to pay cash and then pursue one of those approaches once I identify my next property. Even in 6 months I'd save 5-10K in interest, closing costs etc. And the condo is off the beach in secured community so while I get your point I feel pretty confident nothing terrible will happen in the next 6-12 months.
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Quote from @David Rosenfield:
Gotcha and makes sense/that's what I'll plan to do. And this Myrtle Beach property is a unique one in that I want/plan to live there a few months/year and eventually have as a retirement home. So a 8-10% COC plus 3-4 months of living there seems like a good enough deal to me. Thx again for your thoughts and glad to hear cash seems like the move for now.
If you plan to live there and if you have lot of cash position, I would use cash.
If you plan to live there and but you dont have lot of cash position, I would use low LTV DSCR just like your way of thinking. ( I have the same scenario lke you last year and go with 50% DSCR route).
If you plan to live there for retirement anyway, then cash is better and forget that CoC calculation, generally DSCR is for development or for short term investment only.
Thanks Carlos and those were my thoughts exactly. Much appreciated for making me feel better/more comfortable!
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Another option:
1. if you have liquid cash 1 mil and house is 210k only: you go to local CU and ask for a secured loan, the rate is only 2% for 4-5 years.
2. if you have portfolio of stock worth of 1 mil , lets say dividend rate is 4-6% annually ; you took 25% margin as loan which is 250k, their portfolio loan is 6%. Basaically you borrow the money from your own money for very little interest.
No need to bother with all DSCR if your liquid is much higher than house price.