Best Loans to use to scale

[Thomas Bullock]

My friend and I are both veterans. We invested in a 3 family property about a year ago now. 100% of my friends VA loan was used, however, I am still on the loan because it was the only way we could get approved for the loan. I still have 100% of my VA loan.

It’s my understanding that since we’re both listed in the loan, we both carry that debt on our debt to income ratio. Do we both show for 100% of the loan debt? Can we each only claim 50% of the rental income to offset that loan debt? Did we screw ourselves in a sense in terms of investing towards the next property. Tax season is coming up and we want to start investing in our next property. What is the best way to claim our taxes in order for both of us to get approved for another property in 2023. Ideally we both want to get a multi family in 2023 so we can start expanding faster.

Like I said, I have my VA loan still and my friend can use FHA.

We both make average yearly salary. We have a joint bank account with a good amount saved in there that we use for all expenses and income.

Would opening an LLC and transferring the property into it help avoid this complications? Or, would the debts still show individually for my partner and I?

Very loaded questions. As you can tell I'm very new to this game. I've tried researching on my own but haven't found clear answers. Any tips will help!

Thanks!

[Eliott Elias]

Hard money and DSCR

[Kerry Baird]

Transferring title to an LLC won't change the situation that you are personally guaranteeing the mortgage. Title conveys ownership, so the owner would be the LLC. Lenders may exercise their right to call the loan due if title changes without their permission. The debt would still show up.

Fastest way forward? There are a lot of options.  To expand on the comment above mine, hard money can be between 10 and 12% interest and can get you into houses quickly.  From there, they still need to make sense in order to fix and flip, and rarely make sense as rentals.  You’d still need to season the loan for at least 6 months and then do a rate & term refinance, or possibly a cash out refinance.  

The DSCR mortgage that Eliott mentioned above is for properties held in LLCs. Rates for mine have been about one interest rate point higher than conventional loans. My husband and still personally guarantee the mortgages, but the title is held in an LLC. We don't have to show W-2 income or tax returned, but we need to show proof of funds and they require a larger down payment.

I also like to use owner financing, which is when a seller carries back a mortgage for me.  I have paid 6% interest only on my last two deals, and these loans do not show up anywhere, I don’t have origination costs, no credit pull.  I have had tired landlords carry the mortgage back.  They want a lump sum to get some of their equity back, and then they continue to get monthly payments from me.  

[Thomas Bullock]

thank you

[Thomas Bullock]

Quote from @Eliott Elias:

Hard money and DSCR

Hello Elliot, thanks for the reply. Would you mind explaining hard money and DSCR in more depth? do you believe one of these options is the best route in my current situation? Or would the alternative work where we both claim 50% of our current rental income and try to get approved for another multi family even with the mortgage debt showing. I'm assuming we both wont be able to get approved for a multi on our own, and we'll have to both be on the next loan and just go for one property again. That works for now, but we are looking to expand much more rapidly than 1 property a year.

[Thomas Bullock]

Quote from @Kerry Baird:

Transferring title to an LLC won't change the situation that you are personally guaranteeing the mortgage. Title conveys ownership, so the owner would be the LLC. Lenders may exercise their right to call the loan due if title changes without their permission. The debt would still show up.

Fastest way forward? There are a lot of options.  To expand on the comment above mine, hard money can be between 10 and 12% interest and can get you into houses quickly.  From there, they still need to make sense in order to fix and flip, and rarely make sense as rentals.  You’d still need to season the loan for at least 6 months and then do a rate & term refinance, or possibly a cash out refinance.  

The DSCR mortgage that Eliott mentioned above is for properties held in LLCs. Rates for mine have been about one interest rate point higher than conventional loans. My husband and still personally guarantee the mortgages, but the title is held in an LLC. We don't have to show W-2 income or tax returned, but we need to show proof of funds and they require a larger down payment.

I also like to use owner financing, which is when a seller carries back a mortgage for me.  I have paid 6% interest only on my last two deals, and these loans do not show up anywhere, I don’t have origination costs, no credit pull.  I have had tired landlords carry the mortgage back.  They want a lump sum to get some of their equity back, and then they continue to get monthly payments from me.  

 Hi Kerry, thanks for the response.

So you're saying that transferring a title with the lender permission, into an LLC will only change ownership. My partner and I will still show the debts personally?

Hard money generally isn't used for long term investment properties? Why is that the case? Is it still worth looking into or should that route be avoided altogether for my current situation?

DSCR mortgage can only be used with LLCs?

The last option you mentioned sounds very interesting but also difficult to pull off.

Thank you for your response!

[Doug Spence]

@Thomas Bullock The LLC route is definitely not going to solve your problem. I recommend reaching out to an expert VA lender (there are many on these forums) and reaching out to your CPA. If you don't yet have a CPA and you plan to do more real estate investing, it's time to hire one! Don't wait until you're in over your head with tax questions to hire a CPA - do it now.

Keep us all updated on your journey and good luck!

[Erik Estrada]

Quote from @Thomas Bullock:

Quote from @Eliott Elias:

Hard money and DSCR

Hello Elliot, thanks for the reply. Would you mind explaining hard money and DSCR in more depth? do you believe one of these options is the best route in my current situation? Or would the alternative work where we both claim 50% of our current rental income and try to get approved for another multi family even with the mortgage debt showing. I'm assuming we both wont be able to get approved for a multi on our own, and we'll have to both be on the next loan and just go for one property again. That works for now, but we are looking to expand much more rapidly than 1 property a year.

Debt Coverage Ratio Loans, qualify you based on the cashflow generated from the property, investing experience, and cash to close (typically 20-25% down payment). Rates on these are higher than conventional loans and they often carry 3-5 year pre-payment penalties. Terms are 30 year fixed or some lenders offer a 5/1 ARM option

Hard Money loans are short term loans, interest-only, and have a balloon after 1-2 years. They are great if you are planning to flip, need financing for rehab, or want to leverage out. You can do a cross-collateralized loan on these if you own multiple properties with equity. Sometimes you can get away with no money down. 

Using both can be a good way to scale your portfolio. Just be aware of the risk and higher costs associated with both of these loans. 

[Stephanie P.]

@Thomas Bullock

There's a lot to unpack here. Just saying, "hard money and DSCR" really misses the crux of the questions.

My friend and I are both veterans. We invested in a 3 family property about a year ago now. 100% of my friends VA loan was used, however, I am still on the loan because it was the only way we could get approved for the loan. I still have 100% of my VA loan.

Point 1:  So you and your friend have an owner occupied property where you are joint owners and he used his VA loan and your income to qualify.

It’s my understanding that since we’re both listed in the loan, we both carry that debt on our debt to income ratio. Do we both show for 100% of the loan debt? Can we each only claim 50% of the rental income to offset that loan debt? Did we screw ourselves in a sense in terms of investing towards the next property. Tax season is coming up and we want to start investing in our next property. What is the best way to claim our taxes in order for both of us to get approved for another property in 2023. Ideally we both want to get a multi family in 2023 so we can start expanding faster.

Point 2:  Part of the answer to the question of claiming the rental income and the debt is how and who pays the monthly payment.  I've linked to the Fannie Mae seller's guide for the long drawn out answer but in reality, you both wouldn't be hit for the full payment just like you don't both get the full benefit of the income.  https://selling-guide.fanniema...

We both make average yearly salary. We have a joint bank account with a good amount saved in there that we use for all expenses and income.  Would opening an LLC and transferring the property into it help avoid this complications? Or, would the debts still show individually for my partner and I?

Point 3:  No, transferring the property to an LLC would open a can of worms unless you refinanced out of the VA loan and into a DSCR loan.  Even then the mortgage debt for a "financed property" would count against your total maximum of financed properties through Fannie Mae.

You need to sit down with good mortgage broker that understands VA loans and how VA, FHA, conventional and then finally DSCR loans can help you structure your portfolio. You're on your way. The next purchase should be another property using VA (remember it has to be owner occupied).

Stephanie