Lending vs Income Doc Scenario with BRRRR Method

5 Replies

I am a little skiddish about posting what might be a stupid question.. I am currently closing on my first rental that I bought here in California three years ago and if all goes well I should be up $120k sooner than later. I will be leaving for another state after that to pursue investing more seriously and hopefully, full time.

My question is about income documentation for the cash out refi's that I will encounter, because I sure as heck won't do all this only to arrive there and discover that I was dreaming. I am a carpenter by trade and enjoyed living essentially free in one of the units of the building I own. As such, there were several months and periods of time that I did not have income, just money saved, and went to help out my family down south. 

Long story short... (And this would be in a region/market with an avg home price of $75k and avg per capita income of about $17k) If I purchase a property in good condition outright for around $50k, and then finance another with money down and use the house I bought as collateral, is that a viable plan in any reality? I will be moving there to work on the homes myself and with others I hire and won't be employed in another way. I will perhaps be there for 6 months or so for the entire process from property search to employing a PM company. Then I will head back to California to work for a while and come back the next year to cash-out refi and do it again.

I apologize if it sounds like a foolish scenario.. I just imagine banks won't like breaks in employment and irregularities like that. I have read about things like no-doc loans, using assets as collateral for loans etc. and am just curious how that would work in a BRRRR'ing strategy or if you would hit a wall somewhere.

No-doc seems a little unbelievable, hard to imagine they still exist.. do they? My experience the first time around in real estate was that I really had to ask around... A LOT. And I learned a lot. I will never forget the first lender I went to they said no way. Many, many phone calls, meetings and inquiries later I went through the process without a hitch with a loan officer at a Wells Fargo branch that is 6 hours from where I live. So I figured I would ask around for advice in this next step in my investing journey too.

Thanks

, Zack

Banks are looking at your DTI. Your personal credit and income plus expenses are figured in, and 2 years of personal tax returns to show it.
There are lenders that will look at the debt service coverage ratio, which shows that the property makes money. You can start asking in the small local community banks in the area local to the property.
Commercial mortgages may be the way forward. @Stephanie P. might give an idea of what to expect with rates and terms, and whether this is feasible. And then there are portfolio lenders or non-am lenders who can be all kinds of flexible. 

What probably won’t work: big WF, BofA, Chase and so forth, unless you talk with the commercial side of the house. 

Thank you @Kerry Baird for the info on debt service coverage ratio and commerical lending, I will do some more digging, especially on how the loans are typically structured. Are they usually 5-15 yr balloon? I have heard it can be higher rates but much smoother sailing in some ways. I just read @Jesse Fragale's primer on commercial lending and it was illuminating. It sounds like I would fall in the regional debt category. I have also read that many of these loans are structured as 5-15 yr balloon, but they will do longer, more traditional terms without balloon payments. For the sake of not getting in over my head, I wanted to start out purchasing SFR's. But his article did not list them as elligible, although it didn't say explicitly they weren't, and I have read many threads where people say they purchase SFR's with commercial loans routinely.

Thank you for your patience as I try to de-mystify all of this! I really appreciate it.

Thanks @Kerry Baird

Hey @Zack Thiesen

Yes, as crazy as it sounds, there are numerous products out there for the self employed investor that don't require tax returns.  You can get a 30 year fixed and the seasoning period can be as low as 0 days.  In all cases, the properties have to be stabilized (no current construction and leased).

Rates and fees are higher than Fannie or Freddie (that's why it's always better to exhaust your conventional sources first), but if you don't qualify, and from what I read, you won't, these are the next best thing.  Max loan to value is generally 80% on a purchase and 75% on a refinance and the MINIMUM loan amount is 75K.  Rate ranges span from the mid 5's to high 7's with a few points on 1-4 unit properties.

Hope that gives you some insight.

Stephanie

@Stephanie P. Thank you so much for the reply! So in your example here:

"You can get a 30 year fixed and the seasoning period can be as low as 0 days. In all cases, the properties have to be stabilized (no current construction and leased)...Rates and fees are higher...Max loan to value is generally 80% on a purchase and 75% on a refinance and the MINIMUM loan amount is 75K. Rate ranges span from the mid 5's to high 7's with a few points on 1-4 unit properties."

Are you describing a singular, commercial loan product? Or are these aspects of the several different options that you mention? Apologies if I didn't catch the drift on which type of lender with that.. but good to know that several options do exist. What would someone ask for when sitting down with a lender in my circumstance? Do I just describe my circumstances and we'd go from there? Thanks again!

Originally posted by @Zack Thiesen :

@Stephanie P. Thank you so much for the reply! So in your example here:

"You can get a 30 year fixed and the seasoning period can be as low as 0 days. In all cases, the properties have to be stabilized (no current construction and leased)...Rates and fees are higher...Max loan to value is generally 80% on a purchase and 75% on a refinance and the MINIMUM loan amount is 75K. Rate ranges span from the mid 5's to high 7's with a few points on 1-4 unit properties."

Are you describing a singular, commercial loan product? Or are these aspects of the several different options that you mention? Apologies if I didn't catch the drift on which type of lender with that.. but good to know that several options do exist. What would someone ask for when sitting down with a lender in my circumstance? Do I just describe my circumstances and we'd go from there? Thanks again!

That's all in one.  30 year fixed. 75-80% ltv.  Rates from the mid 5's to the high 7's.  All with a few points.

Describe your circumstances and I can't overemphasize this part, tell the loan originator everything about the deal you're doing; where the money for down payment is coming from, if you're related in any way to the seller, how long you've been doing this, if you have any prior experience etc...