How do you get multiple mortgages with BRRRR?

15 Replies

I'm curious about using the BRRRR method and how the bank preapproves an investor with multiple mortgages. When you're ready to purchase additional properties - how do you get approved for the additional debt with your 2nd... 3rd... 4th.. (and beyond) homes?

I understand that you prove legitimacy as an investor with consistent, on-time payments, but how does that formation of trust begin? And what sort of purchasing timeline can you have (# of mortgages you get in the first few years)? 

@Samantha W. It's not based so much on just trust as it is documentation. Ideally, as you progress as an investor, you will qualify based on your tax returns. As most investors collect properties, they form an LLC (or multiple LLCs) that will flow through your schedule E on your personal returns. When your starting out, you can also use a signed lease and proof of deposit to prove rental income. To qualify for rent on the property you are purchasing, the appraiser will do a rent schedule to determine fair market rents for qualification.

Jeff Dulla, Lender in IL (#031.0024775), CO (#100055471), FL (#LO24291), IN (#19621), MI (#207322), MN (#MN-MLO-207322), and WI (#600802)
(708) 531-8322

@Samantha W During the approval process, banks take into consideration your debt to income ratio. With income producing properties your debt can be offset by rental income (you will need to provide the rental roll).

Max number of loans is 10 (hopefully 25 in the near future). You can bypass that limitation by establishing a commercial loan and consolidating all the loans into one larger (portfolio) loan.

In summary, find a property with positive cash flow and don’t let "limitations" stop you from building your rental portfolio because there is usually a work around. Best of luck!

Originally posted by @Samantha W. :

I'm curious about using the BRRRR method and how the bank preapproves an investor with multiple mortgages. When you're ready to purchase additional properties - how do you get approved for the additional debt with your 2nd... 3rd... 4th.. (and beyond) homes?

I understand that you prove legitimacy as an investor with consistent, on-time payments, but how does that formation of trust begin? And what sort of purchasing timeline can you have (# of mortgages you get in the first few years)? 

It's all numbers when dealing with loans that verify your income. Either you qualify or you don't; trust comes when the underwriter looks at your credit report and sees that you pay people back.

Bottom line is if the numbers work with your taxes, a comp rental schedule while factoring in a vacancy loss, the income works.

Stephanie 

@Jennifer Ramsey is there talk of raising the limits on numbers of loans to 25?  I hadn't heard that.  Any real chance that it may happen?  It would be great as the terms are so much better than commercial terms.

@Samantha W. in theory, as long as you have your down payment you should ALWAYS be able to afford a rental property.  In theory, the rent you receive from your property will counterbalance the new mortgage.  At least, this is how Fannie Mae and Freddie Mac underwrite their mortgages.  Fannie/Freddie are the loans we want to try to get in the beginning since their terms are so good.  But they are also the agencies that limit us to 10 mortgages type of thing.  So once we are established, and maybe maxed out their loans, then we use portfolio or commercial loans to fund our deals.  And you can use portfolio/commercial loans sooner if you like but in general they have higher rates or some other feature that isn't as good as a Fannie/Freddie loan.  So as long as you have the assets to purchase multiple properties you should be ok...in theory at least.  Feel free to ask more questions if you need. Thanks!

Andrew Postell, Lender in Texas (#392627)
817-873-0621

I have a similar concern for the first few properties obtained without years of tax returns. If you are personally guaranteeing mortgages and are on the note as the borrower, yet monthly income is going to your LLC(s) which were set up after closing, how will underwriters view your Debt to Income ratio? Each property has it's own LLC and bank account for which rents are deposited and expenses paid, but if one does not extract money from these business accounts, how can you keep increasing personal debt without increasing personal income? I understand that a signed lease is one method but you cannot even use rent deposits as they are being made to a business account that, on paper, has nothing to do with the proposed new loan. Is that correct?

Thank you for the insight, @Andrew Postell  - Building up to a portfolio loan is definitely the goal. What do you think about the questions from @William Henning ? I'm also very curious as to how you can be given multiple loans from underwriters. Is there a way to prove that you will be bringing in the rental income if you have an LLC?

@William Henning and @Samantha W. this is no problem. Using an LLC is for liability purposes. When purchasing a property, the property can be absolutely vacant, and Fannie/Freddie will use the rental income from that property to qualify you. If you currently own properties, and they aren't reporting on your tax returns, then we just use the executed lease to show the rental income. It doesn't matter what bank account the income goes to or what LLC the property is under. As long as you have that lease, you are good. BE VERY CAREFUL THOUGH - a bank may not follow this rule.  There is this thing called "overlays" in the mortgage industry.  An overlay is a rule that a bank puts on TOP of the Fannie/Freddie loans. Usually very big banks have overlays and that's why we talk about using smaller banks.  So when you are interviewing lenders, ask that specific question - "how do you use rental income when it's not on tax returns" - and see what they say.  If they say "we use the lease", then that is a good response.  It should not matter where that income is deposited just as long as you have a lease.  Hope this helps!

Andrew Postell, Lender in Texas (#392627)
817-873-0621
Originally posted by @Andrew Postell :

@William Henning and @Samantha W. this is no problem. Using an LLC is for liability purposes. When purchasing a property, the property can be absolutely vacant, and Fannie/Freddie will use the rental income from that property to qualify you. If you currently own properties, and they aren't reporting on your tax returns, then we just use the executed lease to show the rental income. It doesn't matter what bank account the income goes to or what LLC the property is under. As long as you have that lease, you are good. BE VERY CAREFUL THOUGH - a bank may not follow this rule.  There is this thing called "overlays" in the mortgage industry.  An overlay is a rule that a bank puts on TOP of the Fannie/Freddie loans. Usually very big banks have overlays and that's why we talk about using smaller banks.  So when you are interviewing lenders, ask that specific question - "how do you use rental income when it's not on tax returns" - and see what they say.  If they say "we use the lease", then that is a good response.  It should not matter where that income is deposited just as long as you have a lease.  Hope this helps!

 What if you only have one year of rental income on tax returns?

I am currently on rental #6 all but one using conventional fannie/freddie loans. When i first started and did not have my rental income reporting to schedule e yet, leases were used. If there was no lease, they would use the estimated rental income from the appraisal. With each property my dti has gotten better since the properties are cash flowing so i have no issue qualifying for income. One thing to be aware of is the reserves requirement once you have multiple financed properties. 

Originally posted by @Andrew Postell :

@Eric C. one year of rents on tax returns is totally fine.  Again, a bank may have an "overlay" but Fannie/Freddie are totally ok with 1 year of rental income being on your tax returns. 

 I guess I need to find a lender to work with in CO that can do it off 1 yr for rental income.  

@AndrewPostell and others, thank you for your assistance. More specifically... I have a property in TN that is deeded to an LLC. The lease has the property management company name on it. The articles of the LLC that owns the property do not have member names, only a registered agent. There's effectively no trail that shows this is my money except for the underlying ownership of the LLC bank account. But I can still use this lease without my name on it as proof of income? No tax returns filed thus far.

@William Henning I'm not sure about your state but here in Georgia the Articles also include who the members are in addition to the registered agent.

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