Real Estate Investor · Jenks, OK · Member since 2013 · 7 posts · 0 votes
I currently have 9 properties that are owned in a partnership with one other individual. We own the partnership 50/50. Of of the 9 properties, 6 are financed on a commercial loan together, and the remaining 3 are financed on a commercial loan together. The loans are in the name of our LLC and we personally guaranty the loans. These loans do not show up on our personal credit reports.
I am wanting to buy a SFR as a rental in my own name and finance via a conventional mortgage.
I am having a hard time determining if I am going to run into the "4 financed properties rule". Can anyone clarify this for me?
I have ownership in 10 total financed properties (my primary residence is financed on a conventional loan, and I own 50% of the 9 properties financed via 2 seperate commercial loans).
Devin -- it is understood that these are commercial/portfolio loans held by your bank. Fannie Mae doesn't make "blanket loans", and doesn't lend to LLCs.
I would highly advise that you go through a "pre-approval" process with a conventional secondary market lender, where an actual underwriter opines on your situation. Don't believe what some loan officer tells you. The rules are cryptic and most LO's just don't understand the multiple-mortgage stuff. Most LO's focus on owner/occ borrowers and have little knowledge of many of the investment property rules. Problems surface at the 11th hour when the underwriter is reviewing everything.
If possible, you should find a lender that permits up to 10 financed properties. These lenders are more sophisticated in dealing with investors, as they've consciously decided to follow Fannie's 10-property limit, unlike most secondary market lenders that apply a 4-property limits.
My understanding is that you should still have all of your FNMA "bullets" then and can borrow with them. Most folks do things the opposite way and do the FNMA loans first and migrate to commercial loans later on.
Hopefully our FNMA/conforming loan gurus can chime in soon and lecture me about this, but I think you should be able to use all of your FNMA loans still and those other loans won't count against you using them.
From the Fannie Selling Guide, holdings in LLC's DO count toward the 10 property limit.
"Joint or total ownership of a property that is held in
the name of a limited liability company (LLC) or
partnership."
Property Subject to Limitations: "Yes"
_______________________________
You will have to disclose the loans on your loan application (doesn't matter that they're not on your credit report) and they should ask if they're 1-4 unit (residential) properties. They should all up the 1-4 unit properties that are financed within your current loans (doesn't matter that they're blanket loans).
Fannie and Freddie count of 10 is applicable to residential, salable-type mortgages which are resold on the secondary market. The properties you have in the LLC sound like they are within commercial umbrella mortgages which are held on the books by the originating lender. Am I right? Did you finance those at a small community bank? To my understanding, they should have no impact on either Fannie or Freddie.
They are financed with commercial loans held on the books of a local community bank. I have an interest in the LLC that owns the properties, but no direct ownership to the properties (properties are deeded in the name of the LLC).
You should be fine then, unless you don’t meet some other qualifying criteria like debt to income, credit score, etc.
Can I ask you, though, why you focus on SFR if cash flow is your primary focus?
Devin -- it is understood that these are commercial/portfolio loans held by your bank. Fannie Mae doesn't make "blanket loans", and doesn't lend to LLCs.
I would highly advise that you go through a "pre-approval" process with a conventional secondary market lender, where an actual underwriter opines on your situation. Don't believe what some loan officer tells you. The rules are cryptic and most LO's just don't understand the multiple-mortgage stuff. Most LO's focus on owner/occ borrowers and have little knowledge of many of the investment property rules. Problems surface at the 11th hour when the underwriter is reviewing everything.
If possible, you should find a lender that permits up to 10 financed properties. These lenders are more sophisticated in dealing with investors, as they've consciously decided to follow Fannie's 10-property limit, unlike most secondary market lenders that apply a 4-property limits.
I am looking at 15% + cash on cash returns when using a conventional 30 year loan. Couple that with the opportunity to buy homes less than 3 years old at approx. 85% of current new construction cost (still building and selling homes in this neighborhood) and to me it looks like a pretty solid deal.
You are smart to look at newer structures. And if you are trying to rent them for a while, but ultimately flip them for cap gains then this is a good proposition. However, if you are going to hold onto them for cash flow, singles are not the best in that vacancies are much harder to handle in singles then multi. It’s not like you just loose the rent if it’s empty. You still have to pay mortgage, taxes, insurance, etc. So you get hit on both sides. Potentially, 1 month of vacancy kills your profit for a year. I have both, and from long-term perspective I'll take a multi any time.
You are wise to consider the cash on cash return as the definitive metric. Of all of the metrics we use to evaluate deals, this one hits home. I have a 10-unit under contract as we speak. The financing package I've put together, which involves both commercial and private money, has me leaving 2.5% of my cash in the deal. This will be well over 100% cash on cash. In this context, 15% COC is perhaps not so great...
I always remind myself that there are 2 profit centers in every RE deal: one is the bricks and lumber on top of a dirt pile, the other is the terms. Perhaps the latter is the much more important piece. I focus on terms. This is difficult because most deals out there don’t lend themselves to negotiating many of the terms that should be negotiated in my opinion. This is why I am happy if I only find 1 good deal per year – but it’s really good. I hope this makes sense to you. Look me up; we'll talk more if you want.
@Rory Compton FNMA loan limit is 10. many lenders do have a 4 count overlay though, which basically equates to they are not geared toward RE investors. Just shop around and ask lenders specifically.
applies to the number of one- to four-unit residential properties where the borrower is personally obligated on the mortgage(s);
applies to the total number of properties financed, not to the number of mortgages on the property or the number of mortgages sold to Fannie Mae;
includes the borrower’s principal residence if it is financed; and
is cumulative for all borrowers (though jointly financed properties are only counted once).
The following property types are not subject to these limitations, even if the borrower is personally obligated on a mortgage on the property:
commercial real estate,
multifamily property consisting of more than four units,
ownership in a timeshare,
ownership of a vacant lot (residential or commercial), or
ownership of a manufactured home on a leasehold estate not titled as real property (chattel lien on the home).
I would say from my experience if your property is zoned residential, whether its in llc or corp, you have always opportunity to refinance as conventional loan so that will be count in your 10 finance property.