Financing Rental Properties with No Tenants In Place (Shortsale, Foreclosure)

5 Replies

I have a question about financing for rental properties that do not have tenants at the time of sale. These can be single family homes, duplexes, fourplexes, etc. Without tenants, you cannot qualify for a Investment Property Loan since you cannot count the income from potential tenants. This leaves you with two options:

1) Try to qualify solely on personal income

2) Pay all cash, then get a cash out refinance once you have tenants

The thing is that in my area (Southern California), investment property for SFH approaches $500,000+ in the most desirable areas, and duplexes/fourplexes are $700,000+. To qualify for a loan based on my own personal income would not be feasible, especially if one already have a personal residence. And to have $700,000 in cash to buy a property is lofty.

So my question is are there any alternatives in this scenario? The impetus for the question is that the good value deals that I see are all short sales/foreclosures where there are no tenants and thus cannot rely on rental income to qualify for a mortgage. While the deals are slim, they come from time to time but qualifying for the purchase is extremely difficult without having tenants in place. 

I've read articles of people touting FHA loans and only 3% down, however without tenants in place your personal income must qualify for the loan, and with prices around $700,000 most individuals would not qualify. While it's a great idea in other areas, it is tough to pull off in Southern California. I imagine most would recommend private money lending to satisfy this need, but I wanted to see if there are any other work arounds that may be available. 10% with 2 points is an alternative, but you would still have to carry that loan for the 3-5 months it would require to fill each unit in a fourplex, after repair costs. Adding that to the down payment required, it is not an easy 3% comparable to an FHA Loan.

Any advice is appreciated. I'm trying to advance into the smaller mutlifamily market after owning a few single families, however am finding it difficult with my market. Thanks again for any input! 

@Sean H.  

We use a local regional bank for our investment property mortgage which we put 20% down.  We only have one purchased awhile back and fortunately didn't need to count the rental income as income to qualify.  (prices are lower where we are located).

We recently contacted them about purchasing another rental (with 20% down) and they said they would count 75% of the potential rental income based on the rental income portion of the appraisal.  When we get an appraisal on an investment property the appraiser does a "rental appraisal" based on the property and local current rents.  They would use 75% of this as income.  I believe the 75% is based on vacancy and repairs.  We have not purchased another investment property yet but they said they would do this.

Not sure what banks, credit unions you have looked at but maybe find a local institution that knows the market.  Keep in mind our bank does require 20% down which might be tough in southern California...

Just an idea.

A "rental appraisal" is interesting. When speaking with my broker, he said never mentioned this was possible, and essentially said I had to qualify with either my personal income or actual rental income. 

I don't think that method qualifies for Fannie/Freddie loans, so I'd have to find a portfolio lender who is not looking to sell the loan. I may be wrong but I don't think that is an available option for standard Fannie/Freddie conforming loans, which has the benefit of being ~450+ basis points lower than private money lending. 

If anyone has additional experience with this rental appraisal, please let me know.

I am not sure if that method qualifies for Fannie/Freddie loans.  We have only had the loan for 4-1/2 months and we have not been notified that it was sold.   I will say that they rent on the appraisal is $300/month less than what we are renting it for so not sure how accurate it even is....But if they count 75% of our total rent it is better than nothing.

Just our experience.

Does anyone else have any insights into this? Are the investors who are buying Duplex/Triplex/Fourplexes+ only buying ones that are currently tenant occupied, so you can use their income to qualify? I could see someone using a hardmoney loan to first acquire it, rehab if necessary, get tenants, and then refinance. However with rehabbing and finding tenants, you could be looking at 4+ months, and a hard money loan with 12% on $700,000 is incredibly expensive. 

There is also the seasoning period issue, where Fannie Mae requires a 1 year period before undergoing a cash out refinance. So in the mean time I would be paying 14% on a $500,000 loan (Property is $700,000) on a loan period of 10 years, which is $5,833.33, which is just unsustainable. 

Is that my only alternative?

@Sean H.   As @Adam Smith  best case scenario is you go with an investor friendly lender you can use 75% of the potential rental income. 

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