Overcoming the money hurdle

[Bryan Sinkel]

Hello!

I became an official Real Estate Investor in March 2023 when I decided to keep my primary (at the time) and turn it into a rental. Real Estate Investing was always where I saw myself ending up - it was always a matter of when not if. 

My primary was the perfect opportunity to get a rental under my belt and learn the ropes. I knew it would make a great rental because it was in a highly sought after area. This proved to be the case as I had no issues finding a tenant! Being 2 months in, I couldn't wait to get another deal under my belt -- I'm in the process of closing on my second rental in that same area and hope to have a 3rd under contract real soon. The property currently under contract is cash flow positive right out of the gate, however, it required a significant amount of cash down (25%)...

With only two rental properties under my belt and aspiring to scale this operation from 2 to 10 properties in year 1,10-20 in year 2, 20-40 in year 3, 40-80 in year 4 and so forth, I'm learning about the apparent growing pains as it relates to capital... I do plan to take advantage of harvesting new properties from existing properties as much as possible, but fear that will only get me so far...

Curious what other options are out there? How have you overcome money constraints and scaled your rental portfolios? Would appreciate any advice and/or you sharing your personal experiences (successes & failures)!

Thank you in advance.

Aspiring real estate investor,

Bryan!

[Stacy Raskin]

Have you thought about doing a cash out DSCR refinance on the unit with the tenant in place?

DSCR loans have 30 year fixed mortgage options and the rates are investment property rates. They typically start at about one percent higher than current owner occupied rates if you have strong credit and at least 20% down so 6.8 vs 7.8% for example. They don't use personal income and don't consider your debt to income ratio. They are ideal for investors who are looking to maximize their net worth since they use only your credit score and rents to qualify the loan.

Also, some lenders will use market rents provided by the appraiser so you can buy an unoccupied property and still get a DSCR loan. Also, DSCR loans usually have a minimum loan amount of $100-150K depending on the lenders I work with.

Here's a bit more in detail about how rates are calculated for DSCR loans:
1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing generally takes a hit. I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350

Insurance = $100

Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250Insurance = $100

Association Dues = $25

Total PITIA = $1875

Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

Lender terms and fees vary widely. I would recommend working with a mortgage broker as there's often lower rates and fees overall as they work with lenders that either don't work directly with the public or they don't advertise directly to the public. There's lower fees as they have the mortgage broker do a lot of the work who gets paid at the end of the transaction so the lender doesn't have to pay the mortgage broker a salary or benefits which helps lenders keep costs down which translates to lower rates and fees.