Purchase then refinance to DCRS to pull out down?
Member since 2018 · 8 posts · 1 vote
My understanding is you can get a DCRS loan at 1.2 - 1.25 debt service coverage.
Assuming the property is currently being used for short term rentals:
What is stopping me from acquiring a property having less than this debt service coverage (1.2-1.25), and then immediately refinancing up to 1.2-1.25 and getting principle back out?
TLDR: You're unicorn hunting.
Longer version:
DSCR or conventional, and assuming we're not talking about HML or loan sharks charging 10%+ and 3+ points, there's always multiple criteria in place.
DSCR (for the aptly named "DSCR" type loans) or DTI (Fannie type loans) is one common criteria, LTV is another. The most restrictive of all the various criteria is what applies. Not the most liberal (millionaires don't get to take out $2m mortgages on $300k homes, for example).
In the case of residential real estate, especially single unit (condo or SFR), the appraisal is still a residential appraisal. Comparable sales determine value for residential appraisals, not cashflow.
So, for these STR cashflow monsters, it winds up being LTV that is the constraint. Just like that millionaire can't take out a $2m mortgage on a $300k home, the person killing it with a STR can't finance more than the LTV restriction would allow for the loan program in question, and it's not 2007 any more so no one is doing 100% or 120% LTV cash out refis (yup, >100% LTV cash out refis was a thing towards the end of the 2004 to 2008 era, and we saw what that did to the global economy...).
I know of lenders who will do max LTV at 1.1%.
I've come across lenders who do not care about Debt Coverage on Investor 1-4 unit properties
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
My understanding is you can get a DCRS loan at 1.2 - 1.25 debt service coverage.
Assuming the property is currently being used for short term rentals:
What is stopping me from acquiring a property having less than this debt service coverage (1.2-1.25), and then immediately refinancing up to 1.2-1.25 and getting principle back out?
Not sure what you're asking.
Max ltv for a purchase?
Is it a single family or multi?
Some lenders go down as far as .75 DSCR at 70% ltv.
Most of the DSCR lenders require 6 months seasoning. The ones that do not have terms that aren't as favorable.
Short term rentals is your issue because the income doesn't have a track record or
The property already has a track record of short-term rental income. Ideally, I would find a bank that would let me put 0 down because the Debt Service Coverage was so good - but I'm unaware of any bank that would do that.
This is why I'm asking the question of, can I purchase the home with 20%, then REFI based off the rental income (which the property can show for the past 2-3 years) and cash out?
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
Most lenders will not go any better than 80-20% on LTV. You may find a community bank or credit union willing to do 85% but buying with 20% down only to refinance and pay all of the same fees again for 5% value isn't worth it in my mind. (assuming that it appraises out again) Why wouldn't you just start with 15% down assuming you can find it?
I would recommend asking the sellers to carry 20% and you finance 80%, essentially putting you at 0 down as that is what it sounds like you are trying to achieve.
@Shane Zilinskas I think what you mean is better than 80% LTV (20% down payment). The reason banks require 20-25% down payments is to mitigate loan risk. They are concerned about your ability to pay, but equally concerned that they can get their money back if you stop paying.
Short term rentals are an actively managed business. What happens if you get in a car crash tomorrow and can't manage your guests? Income could drop to nothing quickly and the bank wants to be able to foreclose, resell the asset and walk away without loosing money.
You may find a lender willing to take more risk, but usually that comes with higher interest rate or loan costs. If you do improvements to the property or hold it longer, it will be easier to get cash back out.
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
Most lenders will not go any better than 80-20% on LTV. You may find a community bank or credit union willing to do 85% but buying with 20% down only to refinance and pay all of the same fees again for 5% value isn't worth it in my mind. (assuming that it appraises out again) Why wouldn't you just start with 15% down assuming you can find it?
I would recommend asking the sellers to carry 20% and you finance 80%, essentially putting you at 0 down as that is what it sounds like you are trying to achieve.
Yes, this is what I'm trying to achieve (0% down), but I was curious if I could do it without seller financing.
@Shane Zilinskas I think what you mean is better than 80% LTV (20% down payment). The reason banks require 20-25% down payments is to mitigate loan risk. They are concerned about your ability to pay, but equally concerned that they can get their money back if you stop paying.
Short term rentals are an actively managed business. What happens if you get in a car crash tomorrow and can't manage your guests? Income could drop to nothing quickly and the bank wants to be able to foreclose, resell the asset and walk away without loosing money.
You may find a lender willing to take more risk, but usually that comes with higher interest rate or loan costs. If you do improvements to the property or hold it longer, it will be easier to get cash back out.
There is already a management company in place and they have operated it for the last 3 years like this. It's almost entirely passive other than approval for major repairs.
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
Most lenders will not go any better than 80-20% on LTV. You may find a community bank or credit union willing to do 85% but buying with 20% down only to refinance and pay all of the same fees again for 5% value isn't worth it in my mind. (assuming that it appraises out again) Why wouldn't you just start with 15% down assuming you can find it?
I would recommend asking the sellers to carry 20% and you finance 80%, essentially putting you at 0 down as that is what it sounds like you are trying to achieve.
Yes, this is what I'm trying to achieve (0% down), but I was curious if I could do it without seller financing.
Friends, family, relatives, credit cards, hard money, there are a lot of options for you do use for zero down strategies. It sounds like you have the 20% down and it is possible if you use the right strategies.
For example I bought a deal off market for $200k, I put 20% down, got a loan $160k. I filled it with tenants, showed leases of up to $3,600/month and got it reappraised at $270k and then refinanced a month later. I got 2nd position line of credit on it for 55k and advanced on it to get my cash out (20% down or $40k) and then some (an extra $15k).
@Shane Zilinskas I think what you mean is better than 80% LTV (20% down payment). The reason banks require 20-25% down payments is to mitigate loan risk. They are concerned about your ability to pay, but equally concerned that they can get their money back if you stop paying.
Short term rentals are an actively managed business. What happens if you get in a car crash tomorrow and can't manage your guests? Income could drop to nothing quickly and the bank wants to be able to foreclose, resell the asset and walk away without loosing money.
You may find a lender willing to take more risk, but usually that comes with higher interest rate or loan costs. If you do improvements to the property or hold it longer, it will be easier to get cash back out.
There is already a management company in place and they have operated it for the last 3 years like this. It's almost entirely passive other than approval for major repairs.
Correct me if I am wrong, but you have not owned it 3 years? You said acquire it and immediately refinance for 100% of purchase price. They are giving you a loan at 100% of value. If you had to sell the property tomorrow, after sales expenses you are looking at 92% cash back out. That is very risky for a bank to know an asset will net less on sale than is owed.
I am not trying to argue with you, just explaining how risk assessment works for banks. Banks are not entrepreneurs. You see puppies and rainbows, they see risk of default. If they take risk, they expect higher payout.
@Shane Zilinskas I think what you mean is better than 80% LTV (20% down payment). The reason banks require 20-25% down payments is to mitigate loan risk. They are concerned about your ability to pay, but equally concerned that they can get their money back if you stop paying.
Short term rentals are an actively managed business. What happens if you get in a car crash tomorrow and can't manage your guests? Income could drop to nothing quickly and the bank wants to be able to foreclose, resell the asset and walk away without loosing money.
You may find a lender willing to take more risk, but usually that comes with higher interest rate or loan costs. If you do improvements to the property or hold it longer, it will be easier to get cash back out.
There is already a management company in place and they have operated it for the last 3 years like this. It's almost entirely passive other than approval for major repairs.
Correct me if I am wrong, but you have not owned it 3 years? You said acquire it and immediately refinance for 100% of purchase price. They are giving you a loan at 100% of value. If you had to sell the property tomorrow, after sales expenses you are looking at 92% cash back out. That is very risky for a bank to know an asset will net less on sale than is owed.
I am not trying to argue with you, just explaining how risk assessment works for banks. Banks are not entrepreneurs. You see puppies and rainbows, they see risk of default. If they take risk, they expect higher payout.
I really appreciate you trying to poke holes. I understand what you're saying from the risk management side of the banks.
To answer your question - I have not owned it for the last 3 years, but we would be continuing to run it through the same property management company. I guess that's the first question I should get clear on - if we could use that history to qualify.
I suppose the heart of what I'm trying to wrap my head around is this hypothetical:
I acquire a property for $1M that has a NOI of $150k. If I had owned the property myself all these years and wanted to get a loan from a bank based on the debt service coverage - I would think I could qualify for a much higher loan based on the gross rental income. Understanding the interest rates would be higher etc, but would a bank not let me REFI at a larger loan amount which would let me get cash out?
It doesn't need to be "immediate", but I'm really just trying to understand the constraints. Alternatively, let's just say we bought it cash, would a bank not let me qualify for a loan based off the debt service coverage?
TLDR: You're unicorn hunting.
Longer version:
DSCR or conventional, and assuming we're not talking about HML or loan sharks charging 10%+ and 3+ points, there's always multiple criteria in place.
DSCR (for the aptly named "DSCR" type loans) or DTI (Fannie type loans) is one common criteria, LTV is another. The most restrictive of all the various criteria is what applies. Not the most liberal (millionaires don't get to take out $2m mortgages on $300k homes, for example).
In the case of residential real estate, especially single unit (condo or SFR), the appraisal is still a residential appraisal. Comparable sales determine value for residential appraisals, not cashflow.
So, for these STR cashflow monsters, it winds up being LTV that is the constraint. Just like that millionaire can't take out a $2m mortgage on a $300k home, the person killing it with a STR can't finance more than the LTV restriction would allow for the loan program in question, and it's not 2007 any more so no one is doing 100% or 120% LTV cash out refis (yup, >100% LTV cash out refis was a thing towards the end of the 2004 to 2008 era, and we saw what that did to the global economy...).
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
Most lenders will not go any better than 80-20% on LTV. You may find a community bank or credit union willing to do 85% but buying with 20% down only to refinance and pay all of the same fees again for 5% value isn't worth it in my mind. (assuming that it appraises out again) Why wouldn't you just start with 15% down assuming you can find it?
I would recommend asking the sellers to carry 20% and you finance 80%, essentially putting you at 0 down as that is what it sounds like you are trying to achieve.
Yes, this is what I'm trying to achieve (0% down), but I was curious if I could do it without seller financing.
Friends, family, relatives, credit cards, hard money, there are a lot of options for you do use for zero down strategies. It sounds like you have the 20% down and it is possible if you use the right strategies.
For example I bought a deal off market for $200k, I put 20% down, got a loan $160k. I filled it with tenants, showed leases of up to $3,600/month and got it reappraised at $270k and then refinanced a month later. I got 2nd position line of credit on it for 55k and advanced on it to get my cash out (20% down or $40k) and then some (an extra $15k).
Thanks Brandon! This is pretty much exactly what I want to do, but didn't know if there might be any issues with the timing (seems like you did in a month so that's great!), or because it's a short-term rental property (looks like some lenders are fine with this).
TLDR: You're unicorn hunting.
Longer version:
DSCR or conventional, and assuming we're not talking about HML or loan sharks charging 10%+ and 3+ points, there's always multiple criteria in place.
DSCR (for the aptly named "DSCR" type loans) or DTI (Fannie type loans) is one common criteria, LTV is another. The most restrictive of all the various criteria is what applies. Not the most liberal (millionaires don't get to take out $2m mortgages on $300k homes, for example).
In the case of residential real estate, especially single unit (condo or SFR), the appraisal is still a residential appraisal. Comparable sales determine value for residential appraisals, not cashflow.
So, for these STR cashflow monsters, it winds up being LTV that is the constraint. Just like that millionaire can't take out a $2m mortgage on a $300k home, the person killing it with a STR can't finance more than the LTV restriction would allow for the loan program in question, and it's not 2007 any more so no one is doing 100% or 120% LTV cash out refis (yup, >100% LTV cash out refis was a thing towards the end of the 2004 to 2008 era, and we saw what that did to the global economy...).
Really insightful. Thank you Chris. Seems like the LTV will be the restriction then.
I have not been able to find lenders who will do better than 20% LTV for investment purchases. The purchase point is above a jumbo so that may be why. I'd be interested in what lenders you found that provided these terms, but because I haven't that's why I wanted to understand if I could buy with 20% down, and then refi with the DSCR to get the down payment back out.
Most lenders will not go any better than 80-20% on LTV. You may find a community bank or credit union willing to do 85% but buying with 20% down only to refinance and pay all of the same fees again for 5% value isn't worth it in my mind. (assuming that it appraises out again) Why wouldn't you just start with 15% down assuming you can find it?
I would recommend asking the sellers to carry 20% and you finance 80%, essentially putting you at 0 down as that is what it sounds like you are trying to achieve.
Yes, this is what I'm trying to achieve (0% down), but I was curious if I could do it without seller financing.
This does not exist.
@Shane Zilinskas I think what you mean is better than 80% LTV (20% down payment). The reason banks require 20-25% down payments is to mitigate loan risk. They are concerned about your ability to pay, but equally concerned that they can get their money back if you stop paying.
Short term rentals are an actively managed business. What happens if you get in a car crash tomorrow and can't manage your guests? Income could drop to nothing quickly and the bank wants to be able to foreclose, resell the asset and walk away without loosing money.
You may find a lender willing to take more risk, but usually that comes with higher interest rate or loan costs. If you do improvements to the property or hold it longer, it will be easier to get cash back out.
There is already a management company in place and they have operated it for the last 3 years like this. It's almost entirely passive other than approval for major repairs.
Correct me if I am wrong, but you have not owned it 3 years? You said acquire it and immediately refinance for 100% of purchase price. They are giving you a loan at 100% of value. If you had to sell the property tomorrow, after sales expenses you are looking at 92% cash back out. That is very risky for a bank to know an asset will net less on sale than is owed.
I am not trying to argue with you, just explaining how risk assessment works for banks. Banks are not entrepreneurs. You see puppies and rainbows, they see risk of default. If they take risk, they expect higher payout.
I really appreciate you trying to poke holes. I understand what you're saying from the risk management side of the banks.
To answer your question - I have not owned it for the last 3 years, but we would be continuing to run it through the same property management company. I guess that's the first question I should get clear on - if we could use that history to qualify.
I suppose the heart of what I'm trying to wrap my head around is this hypothetical:
I acquire a property for $1M that has a NOI of $150k. If I had owned the property myself all these years and wanted to get a loan from a bank based on the debt service coverage - I would think I could qualify for a much higher loan based on the gross rental income. Understanding the interest rates would be higher etc, but would a bank not let me REFI at a larger loan amount which would let me get cash out?
It doesn't need to be "immediate", but I'm really just trying to understand the constraints. Alternatively, let's just say we bought it cash, would a bank not let me qualify for a loan based off the debt service coverage?
If this million dollar property has $150K net income including management fees, that seems well worth the $200K down payment. Another option may be getting a second home loan that only requires 10% down. I am not sure how much money you have for a down payment or what type of loan you qualify for, but leaving cash in a deal isn't the end of the world if the numbers are right.
The high level numbers look good. Even if you have to wait a couple years to do a cash out refinance, this seems like a meaty deal.
@Chris Mason gave you the down low and he is an expert in the lending business.
@Shane Zilinskas
We have a no ratio program.
Can also offer 85% ltv on a purchase with a credit score over 720.
It's "principal" and not "principle". Common spelling error.
@Shane Zilinskas DSCR is not the only factor that banks look at. They generally will not go over a certain LTV as well - typically 70-80% but sometimes higher.
The value of a SFR is mostly determined on comps rather than income. The bank/appraiser is looking at the value of the home if it has to sell it off because you are not paying your loan. If you are buying a property with a good track record and management in place for STR I'm guessing you are not getting a massive discount that would allow you to then try to get it Re-appraised in a month at a significantly higher value. To achieve that you would need to make improvements to the property or add square footage so that it is better than other homes in the neighborhood.
Your best bet for no money down is finding a dump, fixing it up, renting it out and then refinancing because the appraisal will be substantially higher. Or for this particular property ask the seller to hold 20%. But also be aware that some banks don’t like that either, they want to see that you have skin in the game.
@Shane Zilinskas
I’m sure you can get seller financing.
Depending on the bank you might run into having to disclose this with the bank or it’s a federal offense.
the bank will need whatever the seller is financing to be off there hud 1 or closing statement.
That means your going to have more collateral for the seller to feel comfortable having a separate silent deal.
I’m sure it will just take some good strategy to get what you want. Hope that helps.