Buying primary home after retirement and owning rental property

5 Replies

I plan on retiring early and moving to a cheaper state in ~3 years.  Our plan is to move into a rental home in the new state, sell previous home, and eventually buy a new home in the new state.

Between now and then I plan on buying some multifamily RE and am concerned with getting a good rate with the mortgage on the next primary home in the new state because 1.  I’ll have debt in the multifamily rentals and 2. we’ll have much lower income (wife will work and we’ll some hove retirement income).  If I kept my current salary when buying the next primary home, this wouldn’t be a problem but my employer won’t allow the remote work and I would prefer to stop working for money at that time.

Questions:

1.  Say I invest now in only commercial properties using loans.  Do commercial loans affect my income to debt ratio?

2. Would owning CRE or non-commercial RE using a trust or LLC be beneficial to my situation knowing I want to get a good rate as much as I can for the primary home mortgage?

3.  How can I estimate my income once I am retired in much the same way a mortgage lender would?  Currently all of my investments are in the stock market but I plan on buying some RE in the next 6 months or so.

If anyone has advice to do these events in a different order to achieve my goal, I’m happy to read what you have to say.

Hey @John Larson !

Ok so a few things here to unpack:

1) A commercial loan is normally closed under an LLC or other entity that you own or are part of. These loans are NOT normally reported on your personal credit but are reported under the entity's EIN. This is one way to help build your entity's credit history and worthiness. Much like personal credit, when you first start the entity, there is no credit history. Checking accounts, savings, accounts, credit cards, lines of credit, in general, will allow trade lines to get started and show the worthiness of your business. So to answer the question, no. Commercial loans do NOT impact your DTI when buying as an individual. As with anything, there may be exceptions out there.

2) I am not sure how being in or out of a trust as an individual or under an LLC would effect your rate... Conventional and FHA will likely always be the lowest rates you can get. Other non-agency loans are not far behind and are extremely appealing to investors. DSCR loans, in particular, only fall about 0.5-1.0% above conventional on investment properties. These loans can be closed under an individual or under an entity as well. If you have high liquidity in your assets, you could also consider an Asset based loan for your primary or investment. Both of these loans will normally require 20% down.

If you are concerned about your primary rates, you could use an FHA loan to purchase with minimal down, live in the new property for 12 months, then refinance it or rent it out. FHA is great for getting in cheap, but IMO, FHA loans are very expensive over time and not really a great choice for long term financing. If you put less than 10% down, you will pay Mortgage Insurance for the entire life of the loan, if you put more than 10% down, you will pay for 11 years; even if you put over 20% down...

Alternatively, you could use your current income and buy your primary in the new state now... there is no rule that says you can't own two primary residences...  Worse case, buy it as a second home, provided it is at least 100 miles away from your primary.  There are legit ways to do this... Second home rates are right there with primary rates... But, in case you haven't seen, rates have been trending upwards the past two weeks or so... 

3) Your retirement income can be estimated or calculated a number of ways depending on the lender, the program, and what the assets are. Asset Depletion loans may be a viable option for you as well, but they will not provide low, comparable rates to conventional. Expect 4.0%+ as of today. If you have $1,000,000 in assets, you qualifying amount would be 110% (some lenders do 105%, 115%, 75%, etc...), so $1,100,000. Divide this by 84 (some lenders do 120, 60, 96, etc...) = $13,095 in Qualifying Monthly income to be used in your DTI calculation. The rest is done much like a conventional loan, but with higher rates.

Obviously, if you are getting a retirement payout or have regular annuity payments setup, those would be used as well.  There are many forms of income and the answer is specific to you...

Hope this sheds some light for you...

Cheers!

@Nick Belsky thanks a ton for the detailed response!

Based on the answer to #1, looks like #2 no longer makes sense.

Say I wanted to go directly to CRE multifamily, would a typical lender talk to me or would it be better to have experience in the residential world first to show experience? If so, how long would you suggest I send in residential?

Given your response sounds like a beginner should start off in residential for some number of years, show you know what your doing, and then go commercial. I was wanting to end up with 2x 6-12 unit complexes. Since that's my planned destination, I think forming a LLC to own the residential rentals and then once I'm ready to move to CRE that LLC has the needed history. Would you agree with that approach? Or would my personal experience be enough to carry over (I'm hoping this is the case)?

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@John Larson

To be fair, you can go directly to just about any lender.  You don't necessarily need a broker.  However, a broker is nice since we save you time and ... more time... Lol.  We know our lenders and who can do what.  I can ask you a series of questions and dial your scenario in to which lenders you may be a good fit for.  We also deal with a lot of nuances of getting the loans done without having to bother the borrower with minor details.  Some borrowers like to get more involved with what's going on in the background, but, honestly, it causes issues because they don't really know the how and why some things work and slow the processes down trying to figure it out.  There is a level of trust required when working with a broker.  We are fiduciaries and are bound by law to do what's right, legal, and in the best interests of the borrower. The vast majority of us take this very seriously, but there are some whom don't and they give a bad wrap to the 90% out there who do a fantastic job.

You don't need to have residential experience to jump right into commercial. I've met folks who's first investment purchase was a 20-unit apartment building. They never did a residential deal. It all comes down to you and what you are comfortable with. I think it would be fair to state that most investors do start with residential and scale up to commercial. Up until about a decade ago, once you filled up the Fannie/Freddie slots, there wasn't much of a choice if you wanted to continue to expand; you had to go commercial. Now programs, like DSCR, are making it possible and feasible to avoid commercial lending altogether and free up slots.

I've been able to get reasonable financing for first time investors with commercial loans. Terms are not as good as experienced ones, but it can be done. Some start a brand new LLC for the purpose of purchase investments and can get loans with no trade lines... again, not prime terms, but it can be done.

In terms of you personal experience, it all depends on what you are doing.  If you are buying to be a landlord and you've never been a landlord before, some lenders won't lend to you... others will but with less desirable terms... some don't care as long as the numbers work... If you want to borrower funding for a property, the rehab costs, and closing costs at 90LTV with no experience... that's going to be tough.  Rehab and new construction commercial lending does rely more heavily on experience than others.  Again, there are programs and lenders out there who will do it.  Just got to find them.

Honestly, find a broker to talk to and have them feel you out.  If you don't want to use one, find a lender, even if you don't intend on using them, to talk to about the ins and outs and what their guidelines look like.  If any loan officer won't talk to you to help educate you, move on and don't borrow from that institution!  That is a very bad omen.

Cheers!

A commercial loan will typically be in an LLC. Your lender will explain this. If you purchase multi-family prior to your home purchase, the income from the rents adds to your DTI. Typically they will use 75% of the rental income, so your income should be more than now. This also should increase your net worth, so your financial statement will be stronger if you can actually find an income property to buy.

My goal is to buy and hold for the passive income.  With the goal of favorable terms in mind as well as have good positive cash flow, sounds like building experience would be beneficial in the residential world first before progressing.  However, I think talking to a few lenders now would be good just to see where I stand and compare that with what I might get had I had more experience, all other things being equal.

Thanks again for the feedback and advice.