Scaling up. Have too many mortgages, what to do?

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Scaling up. Have too many mortgages, what to do?

David Boroughes
Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes

I have several conventional mortgages on rental properties I own. I'd like to keep buying, but the banks are saying too many mortgages and debt to income doesn't look good (they go off tax returns, not leases for income). I heard it mentioned on here before, but not sure if this is possible. Could I portfolio some of these mortgages into one loan and thus open up the ability to qualify for additional conventional mortgages somehow? Maybe the portfolio loan is for an llc that owns the properties, or something to that effect. Any advise on how to scale up at this level would be appreciated. Thank you,

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Brie SchmidtBusiness Member
Moderator
Real Estate Broker 路 Chicago, IL 路 Member since 2013 路 6k+ posts 路 5k+ votes
5y

@David Boroughes - buy the new properties in a LLC using a commercial loan

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  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker 路 Chicago, IL 路 Member since 2013 路 6k+ posts 路 5k+ votes
    5y

    @David Boroughes - buy the new properties in a LLC using a commercial loan

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    6Reply
  • Shain Ismailovski
    Real Estate Agent 路 NJ 路 Member since 2019 路 237 posts 路 169 votes
    5y

    I agree with @Brie Schmidt, Commercial loans also look at the income produced by the rentals as a factor. 

    You could also try using private money loans 

    1Reply
  • Bill F.
    Investor 路 Boston, MA 路 Member since 2015 路 1k+ posts 路 3k+ votes
    5y

    The only caveat I would add with a commercial loan is that when you leave the Resi space and move to the commercial side, the rules to the game change and the bankers expectations of you as a borrower shift no so subtly and not to your advantage in most cases. I would make sure you have your personal and investment story tight before meeting with them. 

    Plus the higher interest rates can turn a marginal deal into a no go pretty quick, but in this environment, that's less of a concern. 

    3Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Brie Schmidt Thank you. Won't the bank still look at my DTI?

    @Shain Ismailovski Thank you. Private money for a buy and hold is too expensive.

    @Bill F. Thanks. Yeah, higher interest rates are no good. My personal mortgages are in the 4-4.5 range right now, if I can refi, I can likely reduce that, going commercial maybe close to where I'm at now which could actually work.

    0Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor 路 Kansas City, MO 路 Member since 2014 路 10k+ posts 路 5k+ votes
    5y

    If you're talking about whether you can portfolio the 10 Fannie loans you can get as an investor into one and do more, I think the answer is no. Our best luck has come from community banks who portfolio loans like this. In fact, every loan we've gotten is like that. Banks differ a lot on whether they will go only off of what was (your tax return) or grant some leeway by using a pro forma estimate of income for the next year. So if one says no, just keep asking. (Better yet, get recommendations for banks from other investors in Rhode Island.)

    Podcast Guest on Show #121
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  • Anthony ThompsonPro Member
    Buy and Hold Investor 路 Cranston, RI 路 Member since 2013 路 1k+ posts 路 1k+ votes
    5y

    @David Boroughes as @Andrew Syrios said you could try local community banks who aren't going to resell your loan (though you should ask up front because some do anyway). I've had good luck here in RI with BankNewport, BankRI, Navigant Credit Union, Harbor One (formerly Coastway Credit Union), Webster Bank and Pawtucket Credit Union.

    You mentioned two separate issues: 1) too many Fannie Mae mortgages and 2) too high debt to income. It's possible to address the first one through combining several mortgages into a smaller number of blanket mortgages secured by one property, but that doesn't really help you with the second issue unless you also get a lower rate and payment amount.

    You mentioned that they look at your tax returns rather than the rent roll/leases for the income on your properties, so you may be experiencing one of the real estate investor's paradoxes: If you do a great job maximizing your expenses and minimizing your income for tax purposes, you'll also make it more difficult to qualify for a mortgage 馃槀

    There really isn't an easy solution for the second problem, at least if you want to continue getting more fixed rate residential mortgages and want to continue to minimize the taxes you pay each year.

    This is why many of us end up being driven into the arms of commercial lenders, whose loans do adjust every 5-7 years but who also underwrite much more on the specific collateral property and less on you as an individual per se, and who focus much less on your other properties (though they do look at them generally as part of your complete Personal Financial Statement).

    3Reply
  • Tom S.
    Real Estate Investor 路 Burlington, VT 路 Member since 2010 路 2k+ posts 路 1k+ votes
    5y

    @David Boroughes  Just curious, why wouldn't your rental income per your tax returns not match the leases?  

    Certainly on the expense side there's more flexibility, you can choose to fix a major item in Jan instead of Dec to expense it in the next tax year. But income is simply the cash you receive, and generally (at least for me) extremely closely matches the leases.

    0Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker 路 Chicago, IL 路 Member since 2013 路 6k+ posts 路 5k+ votes
    5y

    @David Boroughes - They look at your track record, but not DTI. They base it off the profitability of the property more than anything and your ability to execute. FYI - We just did our 5 year refi at 2.7% on our commercial properties

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
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    1Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Brie Schmidt WOW! 2.79%? That's phenomenal. I'm going to look into the commercial aspect. Thank you 

    1Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Anthony Thompson Thanks for the note and suggestions of lending institutions. 

    1Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Tom S. Expenses and vacancy

    0Reply
  • Eric Johnson
    Lender 路 Chicago, IL 路 Member since 2016 路 653 posts 路 313 votes
    5y

    Commercial loans, infinite scalability. Got cash? Non-stop acquisitions.

    1Reply
  • Cyan Colbert
    Member since 2020 路 4 posts 路 3 votes
    5y

    As a new to the game investor would you mind sharing how many properties you purchased before the banks decided to cut you off?

    1Reply
  • Kenneth GarrettPro Member
    Investor 路 Florida Panhandle/Illinois 路 Member since 2016 路 4k+ posts 路 3k+ votes
    5y

    Commercial Loans look at the profitability of the investment. DSCR (Debt Service Coverage Ratio) of 1.25 or better. Depends on the bank. @Brie Schmidt what a phenomenal rate. I've not been that fortunate, but low 4% range is possible. Still a great rate. No DTI. Mortgages don't show up on your personal credit. They still run your credit. You'll want to be 680 or better. 730 plus gets you the best rates. You can get these loans on SFR and everything else. It must cash flow that is where DSCR comes from. NOI/P&I.

    3Reply
  • Brie SchmidtBusiness Member
    Moderator
    Real Estate Broker 路 Chicago, IL 路 Member since 2013 路 6k+ posts 路 5k+ votes
    5y

    @Cyan Colbert - you can have up to 10 conventional loans.  But like others have said, if you are writing off as much as possible to reduce your tax liability you are also reducing your income and may not qualify as you grow.  

    Podcast Guest on Show #132
    Second City Real Estate4.821 Reviews
    WebsiteView Page
    2Reply
  • Khaled El DorryPro Member
    Casselberry, FL 路 Member since 2016 路 111 posts 路 54 votes
    5y

    @David Boroughes are you maxed out on 10 loans? Have you considered paying off one loan or 1031 exchanging a few properties?

    1Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Eric Johnson That would be ideal. Thanks

    @Cyan Colbert I was shut off after 3, then we started getting mortgages in just my partners name, then they shut her off after 3.

    @Kenneth Garrett Can you elaborate on what you mean by 'mortgages don't show up on your personal credit'?

    @Khaled El Dorry Not maxed out on number of conventional, but no longer qualify b/c DTI ratio by tax returns. I am considering trying to refi one to pay off another, but even if that works out the larger payment produced will result in this same problem for me with the next. I've 1031'd before, but very hard to make that work out in this environment, my current portfolio has really good cost basis, and I'd couldn't duplicate the returns with an exchange at this time.

    0Reply
  • Cyan Colbert
    Member since 2020 路 4 posts 路 3 votes
    5y

    Brie Schmidt & David Boroughes  Thank you for the reply!

    0Reply
  • Kenneth GarrettPro Member
    Investor 路 Florida Panhandle/Illinois 路 Member since 2016 路 4k+ posts 路 3k+ votes
    5y

    @David Boroughes

    Since the mortgages are based on the performance of the asset and it's your LLC or other entity taking out the mortgage, it's not you whose name is on the mortgage. You will still need to personally guarantee the loan.

    0Reply
  • Adam Martin
    Rental Property Investor 路 Member since 2020 路 1k+ posts 路 1k+ votes
    5y

    I got turned down by all the lenders near me on my last purchase and ended up talking to a commerical lender who was happy to work with me. I barely had to explain my strategy or what I was trying to do because he already knew. All he cared about is I had a track record, my units were profitable on my schedule E after he put the depreciation back in, the new property cash flowed, and I had cash reserves. Easiest closing I have had by far, he wanted a Tax return for the schedule E, Rent Roll, and personal balance sheet. The downside is it is a 5/1 arm so I didn't get a locked rate and they only go to 20 years so my payment was higher than I would have liked but I'm just paying it off faster and can refi faster. I also don't have a LLC since I self manage and any decent lawyer will sue me anyway and pierce it.

    2Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Account Closed You said it! Prices are sky high and returns low. If I can make 7% on a buy and hold (whether buying for cash or 25% down and financing the rest) than its a great deal around my parts. 

    @Kenneth Garrett Interesting, I always thought the llc would flow through to my tax return, are you talking about an 'S' corp? Would like to hear more details on how this would be separate and not show up for loan qualification purposes.

    0Reply
  • David Boroughes
    OP
    Rental Property Investor 路 Newport, RI 路 Member since 2015 路 72 posts 路 48 votes
    5y

    @Adam Martin Thank you for the reply. So the commercial lender was fine with you having the property in your name? Didn't require it to be put in an llc? What rate? Any more details you can share would be helpful.

    0Reply
  • Kenneth GarrettPro Member
    Investor 路 Florida Panhandle/Illinois 路 Member since 2016 路 4k+ posts 路 3k+ votes
    5y

    @Account Closed

    You will need to provide the LLC documents and your operating agreement. You are correct they will want to know your experience. Every lender is different. It's not a shell, the law allows you to create an entity. Many investors create a LLC for the purpose of holding property. If it's your first one you may need to partner with an experienced investor. After the first one you'll be good to go.

    0Reply
  • Kenneth GarrettPro Member
    Investor 路 Florida Panhandle/Illinois 路 Member since 2016 路 4k+ posts 路 3k+ votes
    5y

    @David Boroughes

    The LLC does flow through on your tax return, but that has nothing to do with how a mortgage is reported. When holding property in an LLC, the LLC is holding the property. I have done this for years. To be clear, the interest rate is higher. So you may want to buy in your personal name until either your DTI becomes to high or you exceed to many mortgages in your personal name. If you want to scale quickly you can do a combination of the two. Most banks won't count the income from rental property until after two years of tax returns showing income. If you take all the advantages of the tax code it will hurt you on the income side. You will need balance when it comes to income.

    0Reply
  • Sean McCluskey
    Rental Property Investor 路 Newport Beach, CA 路 Member since 2017 路 218 posts 路 138 votes
    5y

    @Brie Schmidt Do you mind sharing the name of your lender? That鈥檚 a phenomenal rate

    1Reply
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