Is 5.70%, 5/1 arm a good deal to cash out from Rental property?

Question

Your answer might be, it depends on so many factors.Before you give me your opinion, here are some details of the deal, I have few debt free rental houses that i want to cash out to purchase another rental house.in my lender search I found an investment lender (hard money),which doesn't require either W2,or income debt ratio. What their requirement is just bank statement, good credit,rental income,not less than a year purchase property.I also want to you know that my income debt ratio wouldn't qualify me any traditional lending. and also what other product they have is 6.75% for 30 years fixed rate.

so I have good rental flow of money to pay off with in 5 years and also want continue to cash out from other houses. I feel its a good deal but if you have a recent hard money lending experience,please share me your opinion out there?

Alex Get · Answer

@Tchaka Owen@Ryan Deasy,you got my gut feeling.That is why I brought this loan to BP forum.I would ask the lender different questions to figure out either its real or  funny business, your opinion will safe my appraisal money ($550)  and educate me a lesson for the future.

Nghi Le · Answer

Account Closed

Yes, it's been a while.  And I apologize for the delayed response as well; I normally only check BP once every week or two.  Hope you've been doing well too!

Who you interface with at US Bank (or any other lender) is pretty important.  I've gotten them to do an $20k loan for me on a $30k property in a state where they don't typically lend in (since they don't have presence there) at < 4% interest rates, but it was very much a favor they did for me due to the business I bring them.  I haven't gotten them to underwrite at a lower interest rate though, and that has been one of my biggest pain points with them.  But knowing that you've done that makes me want to go back and renegotiate =)But a natural result of not meeting the DSCR is having to put in more down payment.  I'm getting close to getting them to accept 1-yr "bridge" loans at 1.1 DSCR though.  Unfortunately with any bank, it ultimately depends on which underwriter you get, which can totally derail the setup and strategy you have with your client manager sometimes.

My focus in the past couple of years has been on the financing side, finding the gaps in the industry, both on short-term and long-term options, and creating products that fill those gaps.  I know the conventional limitations well, and I also know how expensive rental loans from hard money lenders can be.  People always say talk to a local bank for those perfect commercial terms, but in all honesty, they are extremely hard to find and those amazing terms you hear of in the podcasts just simply don't exist in certain markets.  I haven't experienced a local appraiser being biased against out-of-state investors, although that makes sense.  What I have seen more of is the local banks not wanting to lend to out-of-state investors.

My problem with a 5-yr loan isn't just the risk of higher rates, but knowing that I'll have to re-up the loan.  Life can happen and completely change your circumstances, making you not as strong of a borrower as before.  Or something happens to the property where it itself doesn't qualify.  Or perhaps lending requirements change, which makes either you or the property no longer qualify.

Alex Get · Answer

Account Closed,Thank you for the information, i am reviewing their homepage now.I will come up with update.

Account Closed · Answer

@Alex Get I recently got put in touch with a portfolio lender that appears to be pretty flexible by a client.

"finance of america" is the name of the lender. My client spoke highly of them, their product, and their willingness to work with a variety of clients and situations. I have no firsthand experience with them yet though.. and I am in no way affiliated with them.

Ryan Deasy · Answer

@Alex Get @Tchaka Owen is completely correct. that is the lowest hard money rate of all time. are you sure you are using the terminology correctly? I did a cash out refinance with these rates with a small local lender and am very happy with it. i refinanced from hard money with a rate of 9.99%. thus, there is nothing wrong with your terms. although, i am quite shocked to hear that people are financing investment properties with rates in the 3s. i am equally shocked at that as i am that a hard money lender is offering a rate in the 5s.

John Teachout · Answer

The OP is referring to a hard money loan, not a bank. For hard money that sounds like a pretty decent rate. Is that your only option? Also, are there other costs for the loan like up front fees/points?

Nghi Le · Answer

@Alex Get I wouldn't necessarily call that a hard money loan, although I can understand since it probably came from a hard money lender (which is why their points/fees are so high).  For a 30-yr fixed rate, it's decent, but could be better.  Commercial loans are known to be a little more expensive than conventional, but it also overcomes a lot of the limitations of conventional loans.  What LTV is the lender giving you for that rate?

The best 30-yr commercial loan I've seen is 5.75% at 80% LTV.

Account Closed

I've gotten those same loans from US Bank before.  The downside is that it's a 5-yr loan with a 25-yr am at 1.25 DSCR, and the DSCR is underwritten at a 6% interest rate instead of the actual rate you're getting, so sometimes it's hard to get the loan unless you're meeting the 1.5%+ rule on rentals.  The other downside is that they won't consider doing cash-out unless you've owned the property for at least 2 years, so it's not a good option for the BRRRR strategy.  And of course, it's still very much a bank loan, and some things might not sway your way if you get a conservative underwriter.

I'd still rather pay a higher rate for a 30-yr loan; I don't like to gamble on what the market is going to look like 5 years from now.

@Ryan Deasy

10% hard money seems expensive for TX (for an experienced investor), although it depends on the price points you're buying, the area, how fast they can close, and what the rest of your terms are.  If it's 100% financing, then that's cheap.

Alex Get · Answer

Account Closed, even though i live in east coast,fortunately,  my primary house mortgage is US Bank,but I am afraid that I can qualify for conventional or commercial loan, here is my situation a year ago I purchased 3 houses with two conventional loan ,1 equity loan, and already 1 primary house mortgage.So at this point even though my rental income is more than enough to cover the new loan, unless I get loan with no income verification documents like personal loan  my income debt ratio wouldn't allow me for other loan option.Thank you for your opinion.

Account Closed · Answer

@Nghi Le

The "who" at US Bank is so important. Some lenders are much better at selling a file to an underwriter than another. I would say if you work with a good CM, they're not paid a commission based on spread and can give you those lower rates. We see sub 4 almost every time now. We're also allowed out of footprint product universally now. Out of footprint property AND out of footprint buyers. It only took  2 years & like... 50 closed loans from us? Maybe closer to 100?

The way I see it is I'm doing them a favor by offering them my business at the rate I do... so we have high expectations of them and we constantly test their rules + have found that the rules have become more and more flexible over time for us. Debt coverage is the biggest challenge with them. You've basically got to bring an 8 cap to them for it to check out. Maybe a little lower if actuals are very favorable.

Local appraisers kill me lol. They include 2 comps at value, then a 3rd at 40% of value that's clearly a gutjob. Complete arbiters, and many of the one man appraisal company owners are investors too.

I see what you're saying with the 5 year balloon. The what if's are always a little scary.. but I know what kind of assets you're investing in. They're nonvolatile, they cash flowed well in the last crash, and they service debt very well. US Bank doesn't want inventory at balloon time, and they want you to keep making payments to them. If they see 5 years of debt service and strong performance they're not turning you down. Plus, if the property really can't perform at the level that qualifies it for another loan... it probably isn't performing well enough for you to be making monthly debt service either.

That^^^ is all very hypothetical, and you know the financing business better than I. But common sense does prevail in a lot of these situations. Even in the last crash, a very small % of multifamily defaulted nationwide. That very small % probably weren't 10+ caps either lol.

Account Closed · Answer

@Nghi Le Long time no talk! Thanks for the replies to this post and the other one over the weekend. I hope you're doing well man.

US bank is as fickle as it is conservative, & as you know they're very conservative. One thing we've learned over almost 100 deals with them is that they are more flexible than they appear. Who you work with (a business banking officer vs a client manager) has a major impact. We've been able to get them to run DSCR at 5.25 interest which makes a difference. We've also been able to use actual data on county & city vacancy rates to reduce the expense ratio in their DSCR calc. They're also willing to use a sub 20% operating reserve if property actuals substantiate it. If you're just shy of meeting debt coverage, we have still been able to get approval without a larger downpayment based on the buyer's experience, global cash flow across their portfolio, and liquidity.

We've found the competence of the banker running the deal to be extremely important as well. A good client manager (we've finally found one after 3 years) can sway underwriting one way or the other, and we've seen this happen many times. In fact, we've only seen one customer fail to receive approval and this happened well before the underwriting stage due to a recent foreclosure.

They're nitpicky, but have an excellent product. 3.75 interest and 0 points @ 80%LTV is what we're seeing most often now.

Conventional lenders @ 30 year fixed rates are great. Many have a slightly higher cost today than what we're seeing above, but the locked in rate is nice. They do eventually run their course with a buyer though due to DTI or number of loans, whichever is met first. Limitations to 1-4 unit properties can slow things down a bit too if an investor is ready to up the ante.

Of course, there are a rare portfolio/commercial lenders that run 30 year fixed rates, don't cap you on # of loans or DTI, run recklessly loose debt coverage calculations (i'm not complaining lol), and will be more likely to appraise at ARV even though they've seen your recent purchase at a much lower price. I've hunted these down and have a huge registry. I find that with these options, appraisal risk is still really high b/c even though the bank doesn't mind you having no skin in the game, the local appraiser doesn't want to give the CA investor who bought the property for pennies on the dollar months before a high ARV. If you do roll the dice and win on the appraisal, which isn't unrealistic, we've found that these type of portfolio lenders charge about 5% and 2 points plus administrative fees. This is hardly worth the price of entry to us.

As for rates, I'm no economist by trade and I don't remember if you are since we haven't spoken in a while... but the US treasury is in no position to raise rates to 6% or 7% until government debt is substantially reduced. With the introduction of the 30 year bond, and talks of introducing a 50 year bond, it doesn't look like we're even trending in the direction of higher rates. This kind of rate hike would cause our governments debt service cost to increase dramatically, and put them at high default risk. We've dug the QE hole pretty deep, and very gradually since 2008 I don't foresee us hopping right out of it in time for a 5 year balloon.

Is 5.70%, 5/1 arm a good deal to cash out from Rental property?

Most Popular Reply