New investor financing

[Justin Hanson]

I currently have a house under a mortgage and am having a very difficult time finding a way to finance an investment property. There is no chance we can qualify for conventional in our area as anything over 200k will put us over a .5 debt to income ratio. And here in Oregon most locations start out at 250k for a rehab project and 300k for a low end turn key. 

We have found one private lender who maybe would work for a rehab flip project but charging 1% interst only per month and only financing the house means we have to get creative for financing the rehab. I currently have some equity in our home I could tap into but was planning on using that to cover the required 20% down payment for this lender and that would leave only about half of our equity to work with on financing the rehab. 

Hoping to get some insight on other options I can look into other than waiting another year or 2 to save some money for a bigger down payment for conventional lending. 

[Erik Estrada]

Quote from @Justin Hanson:

I currently have a house under a mortgage and am having a very difficult time finding a way to finance an investment property. There is no chance we can qualify for conventional in our area as anything over 200k will put us over a .5 debt to income ratio. And here in Oregon most locations start out at 250k for a rehab project and 300k for a low end turn key. 

We have found one private lender who maybe would work for a rehab flip project but charging 1% interst only per month and only financing the house means we have to get creative for financing the rehab. I currently have some equity in our home I could tap into but was planning on using that to cover the required 20% down payment for this lender and that would leave only about half of our equity to work with on financing the rehab. 

Hoping to get some insight on other options I can look into other than waiting another year or 2 to save some money for a bigger down payment for conventional lending. 

 Hey Justin,

Sounds like you would benefit from DSCR and hard money financing.

DSCR loans qualify you based on rental income (either market or lease), fico, and downpayment.

Most DSCR lenders do not source or require funds seasoning. You may also use gift funds. The minimum downpayment is 20% for the time being.

If the property needs rehab, you may finance 100% of the rehab and up to 90% of the purchase price on a hard money loan, as long as the total loan amount does not exceed 75% of the ARV.

[Justin Hanson]

thank you very much! I will be looking into the DSCR loan, that sounds like a good option for finding a rental.

[Devin Peterson]

Justin you need a DSCR loan and all of your problems and worries will be eliminated!

[Scott Bowles]

Quote from @Justin Hanson:

thank you very much! I will be looking into the DSCR loan, that sounds like a good option for finding a rental.

Have you thought about moving out of your current home and using an FHA?

[Justin Hanson]

Quote from @Scott Bowles:

Quote from @Justin Hanson:

thank you very much! I will be looking into the DSCR loan, that sounds like a good option for finding a rental.

Have you thought about moving out of your current home and using an FHA?

Not a chance, my wife and I bought our "forever" home as our first home. And there isnt a chance I could convice her to move nor do I really want too. Fortunately we locked in with sub 3%  interest and have had the luck of appreciation so we have some home equity we can tap into for alternative lending that doesnt look at debt/income 

[Jay Hurst]

Quote from @Justin Hanson:

I currently have a house under a mortgage and am having a very difficult time finding a way to finance an investment property. There is no chance we can qualify for conventional in our area as anything over 200k will put us over a .5 debt to income ratio. And here in Oregon most locations start out at 250k for a rehab project and 300k for a low end turn key. 

We have found one private lender who maybe would work for a rehab flip project but charging 1% interst only per month and only financing the house means we have to get creative for financing the rehab. I currently have some equity in our home I could tap into but was planning on using that to cover the required 20% down payment for this lender and that would leave only about half of our equity to work with on financing the rehab. 

Hoping to get some insight on other options I can look into other than waiting another year or 2 to save some money for a bigger down payment for conventional lending. 

Keep in mind DSCR financing is turn key properties, not rehab properties. and you still do need 20% down for DSCR. It would solve your debt to income issues, but also understand when you buy a property with a conventional loan you CAN you used the rental income of the property to offset the mortgage.

[Stephanie P.]

Quote from @Justin Hanson:

I currently have a house under a mortgage and am having a very difficult time finding a way to finance an investment property. There is no chance we can qualify for conventional in our area as anything over 200k will put us over a .5 debt to income ratio. And here in Oregon most locations start out at 250k for a rehab project and 300k for a low end turn key. 

We have found one private lender who maybe would work for a rehab flip project but charging 1% interst only per month and only financing the house means we have to get creative for financing the rehab. I currently have some equity in our home I could tap into but was planning on using that to cover the required 20% down payment for this lender and that would leave only about half of our equity to work with on financing the rehab. 

Hoping to get some insight on other options I can look into other than waiting another year or 2 to save some money for a bigger down payment for conventional lending. 

 Probably not what you want to hear, but I wouldn't buy where you're looking or I would do a lot more research to find lower priced properties.  The main reason is you're going to be way over leveraged on your primary residence (since you're debt ratio will be 50% of your gross earnings) and that doesn't make for a happy marriage considering it's your "forever" home and stress from debt is a killer.

Try this: Go to some REIA's and Meet ups in your area. Get a better feel for what's really out there. Find a hard money lender and meet investors that use him/her and then find a property that needs a little rehab that you can flip. Do it. Don't hold it, but cash it in. Then do it again. Once you do that a couple of times and you made money, your wife will be fully vested and you can use the equity line with confidence for multi family properties or more flips where you're the bank.

[Justin Hanson]

Quote from @Stephanie P.:

 Probably not what you want to hear, but I wouldn't buy where you're looking or I would do a lot more research to find lower priced properties.  The main reason is you're going to be way over leveraged on your primary residence (since you're debt ratio will be 50% of your gross earnings) and that doesn't make for a happy marriage considering it's your "forever" home and stress from debt is a killer.

Try this: Go to some REIA's and Meet ups in your area. Get a better feel for what's really out there. Find a hard money lender and meet investors that use him/her and then find a property that needs a little rehab that you can flip. Do it. Don't hold it, but cash it in. Then do it again. Once you do that a couple of times and you made money, your wife will be fully vested and you can use the equity line with confidence for multi family properties or more flips where you're the bank.

 Fortunately I have my wifes full support to leverage our house as long as the numbers all make sense. I hear what you are saying and I am totally open to all options. I just want my foot in the door and to start this journey. I am also not afraid of risk, I see it as opportunity as long as it is taken carefully and calculated. We currently have about 100k in equity and I would like to use about half of that as funding for our first investment. 

One option we are looking at after some advice from above is the DSCR loan. I have found a couple properties that may be good candidates for this option and even with current rates that I was quoted from my lender, would cash flow. Im not banking on rates coming down soon but if and when they do that will only help. However, when I factor in my monthly HELOC payments of about 500$ a month of IO it puts us in a negative cash flow of around 200$ With my current job I can support that amount and have the HELOC paid off in 3 years which brings us to a positive cash flow. Maybe by then, rates will have come down enough we can refi and be sitting in a good place with solid monthly cashflow.

The other option I am looking at, is as you suggested finding a good rehab deal and get Hard money to finance the purchase. I will have to shop around for other lenders because the one I spoke with wanted 20% down AND only covered the purchase leaving us on the hook for rehab funding. That brings me back to leveraging my equity to pay for the rehab. The risk I see with this is if we see a further decline in new listing prices and rates have still not come down, we will be holding a big bag that is burning a hole in our pockets quickly and no cash flow to cover any expenses. I know this is all a big IF but I like to look at tail risk and be prepared for a worst-case scenario l especially in our current environment.

[Stephanie P.]

Quote from @Justin Hanson:

Quote from @Stephanie P.:

 Probably not what you want to hear, but I wouldn't buy where you're looking or I would do a lot more research to find lower priced properties.  The main reason is you're going to be way over leveraged on your primary residence (since you're debt ratio will be 50% of your gross earnings) and that doesn't make for a happy marriage considering it's your "forever" home and stress from debt is a killer.

Try this: Go to some REIA's and Meet ups in your area. Get a better feel for what's really out there. Find a hard money lender and meet investors that use him/her and then find a property that needs a little rehab that you can flip. Do it. Don't hold it, but cash it in. Then do it again. Once you do that a couple of times and you made money, your wife will be fully vested and you can use the equity line with confidence for multi family properties or more flips where you're the bank.

 Fortunately I have my wifes full support to leverage our house as long as the numbers all make sense. I hear what you are saying and I am totally open to all options. I just want my foot in the door and to start this journey. I am also not afraid of risk, I see it as opportunity as long as it is taken carefully and calculated. We currently have about 100k in equity and I would like to use about half of that as funding for our first investment. 

One option we are looking at after some advice from above is the DSCR loan. I have found a couple properties that may be good candidates for this option and even with current rates that I was quoted from my lender, would cash flow. Im not banking on rates coming down soon but if and when they do that will only help. However, when I factor in my monthly HELOC payments of about 500$ a month of IO it puts us in a negative cash flow of around 200$ With my current job I can support that amount and have the HELOC paid off in 3 years which brings us to a positive cash flow. Maybe by then, rates will have come down enough we can refi and be sitting in a good place with solid monthly cashflow.

The other option I am looking at, is as you suggested finding a good rehab deal and get Hard money to finance the purchase. I will have to shop around for other lenders because the one I spoke with wanted 20% down AND only covered the purchase leaving us on the hook for rehab funding. That brings me back to leveraging my equity to pay for the rehab. The risk I see with this is if we see a further decline in new listing prices and rates have still not come down, we will be holding a big bag that is burning a hole in our pockets quickly and no cash flow to cover any expenses. I know this is all a big IF but I like to look at tail risk and be prepared for a worst-case scenario l especially in our current environment.

Most HML's will go provide a loan that covers 80% of the acquisition and 100% of the rehab as long as those numbers don't exceed 70% of the total ARV (after repair value). Definitely shop around.

You are under capitalized for a DSCR loan. If you only have 50K to work with (half of the 100K in equity) Option 2 is much better. Considering you are looking at 250K properties (if you can find one that is turn key in an area that's suitable), the down payment is all you have. You'll need 6 months of reserves plus closing costs.

[Chris Watkins]

Quote from @Justin Hanson:

Quote from @Stephanie P.:

 Probably not what you want to hear, but I wouldn't buy where you're looking or I would do a lot more research to find lower priced properties.  The main reason is you're going to be way over leveraged on your primary residence (since you're debt ratio will be 50% of your gross earnings) and that doesn't make for a happy marriage considering it's your "forever" home and stress from debt is a killer.

Try this: Go to some REIA's and Meet ups in your area. Get a better feel for what's really out there. Find a hard money lender and meet investors that use him/her and then find a property that needs a little rehab that you can flip. Do it. Don't hold it, but cash it in. Then do it again. Once you do that a couple of times and you made money, your wife will be fully vested and you can use the equity line with confidence for multi family properties or more flips where you're the bank.

 Fortunately I have my wifes full support to leverage our house as long as the numbers all make sense. I hear what you are saying and I am totally open to all options. I just want my foot in the door and to start this journey. I am also not afraid of risk, I see it as opportunity as long as it is taken carefully and calculated. We currently have about 100k in equity and I would like to use about half of that as funding for our first investment. 

One option we are looking at after some advice from above is the DSCR loan. I have found a couple properties that may be good candidates for this option and even with current rates that I was quoted from my lender, would cash flow. Im not banking on rates coming down soon but if and when they do that will only help. However, when I factor in my monthly HELOC payments of about 500$ a month of IO it puts us in a negative cash flow of around 200$ With my current job I can support that amount and have the HELOC paid off in 3 years which brings us to a positive cash flow. Maybe by then, rates will have come down enough we can refi and be sitting in a good place with solid monthly cashflow.

The other option I am looking at, is as you suggested finding a good rehab deal and get Hard money to finance the purchase. I will have to shop around for other lenders because the one I spoke with wanted 20% down AND only covered the purchase leaving us on the hook for rehab funding. That brings me back to leveraging my equity to pay for the rehab. The risk I see with this is if we see a further decline in new listing prices and rates have still not come down, we will be holding a big bag that is burning a hole in our pockets quickly and no cash flow to cover any expenses. I know this is all a big IF but I like to look at tail risk and be prepared for a worst-case scenario l especially in our current environment.

Glad to know that your wife is on board. This business is stressful and cash-intensive and that can stress your marriage (from personal experience), so do keep that in mind. 

You say you have $100k in equity. Is that your total equity? Any HELOC on your primary is only going to allow you to access up to 80% LTV. Do you have $100k total equity, or $100k accessible equity?

A property that is cash flow positive is only so when you include all debt costs, including a HELOC. If you can find a property in Oregon that cash flows at these rates with HELOC debt, you are lucky. Remember that you can include 75% of the future income of a rental property as income for your DTI calculations.

I agree with @Stephanie P. that you are undercapitalized for a DSCR loan based on what you've stated so far, and advise that your HELOC should only be used for short-term (aka rehab) costs that can be recouped in a refinance. Our HM lender will fund 90% of the purchase + rehab costs (up to 70% of ARV), but charges ~3.5 points origination and 13% IO, so it is not cheap money but very useful for the right deal.

I'm happy to look at numbers if you have deals in mind.