Conventional, Heloc or Commercial???

Question

My wife and I have just bought our 8th door and we use the Brrrr strategy. We have always went for the 30 year fixed because our goal is CF and we plan to hold for a long time. I am only a nurse and my wife is a stay at home mother basically so we arent high income earners . We recently started to run into DTI issues and a commercial lender said I shouldn't be assuming mortgages in my name anymore to avoid this issue. The last 2 loans I took out were commercial loans with 5 yr. ARMS that aren't fixed and I just dont like not having a fixed rate.  My question is what would be my best loan option to get the longest amortization, fixed and decent rates without assuming loans in my own name or should I just keep trying for conventional loans and max out the 10 conventional loans rule. I have always struggled with the Refi aspect and what the best options are. It seems like everyone has a different opinion of it.

Jacob St. Martin · Answer

Hello John, what kind of assets are you investing in? Based on your post it sounds like it is single family homes. I am honestly surprised that you were able to get a commercial loan for them as single family homes and multifamily are evaluated very differently. Assuming they are single family though, the DSCR loan is exactly what you need. The lender will choose to lend to you based on the cash flow of the deal not your DTI. If you have some properties that are >15=20% equity you should look into refinancing a couple into DSCR loans which will lower your DTI or just use DSCR loans going forward.

Stephanie P. · Answer

Hey John,

First, you're not "only a nurse".  You and your colleagues are the backbone of health care, so thank you.

I'm a DSCR broker (full disclosure).

I always recommend borrowers exhaust their conventional financing before venturing into commercial or DSCR, especially if they're in it for the long haul.  The rates, over time, will pay you back handsomely.  Once you get to a point where either you don't qualify or don't want the hassle, then DSCR is a great way to go because of either the interest only option that gets you better cash flow or the 30 year fixed option.  Commercial with a shorter amortization is last in my opinion.

John Matthew Johnston · Answer

Thanks for the kind words, when I said "Only a nurse" I meant more of the financial aspect of the it but the kind words are appreciated so thank you. Also thanks for the great information and the reply!

John Morgan · Answer

@John Matthew Johnston

I did my first 10 with conventional loans. Interest rates were much lower. But if your DTI is too high, then go with DSCR or commercial loans. I’ve done a few 30 year fixed DSCR loans and they’re great. And I’ve done 4 commercial loans which aren’t bad. But they are 5 year ARMs with a 25 year amortization.

Jay Hurst · Answer

@John Matthew Johnston  The advantage to a commercial loan/DSCR is that the property itself qualifies for the loan by the rental income it brings in.  In other words you do not qualify with tax returns, pay stubs etc. However, assuming you give your personal guarantee which you almost assuredly will, it does not lesson your debt to income ratio on the next full doc loan you go to get.

As you have seen commercial/DSCR loans have drawbacks either in adjustable rates, shorter amortization,  higher rates/costs and possibly pre-payment penalties. So, IF you can qualify with your W-2 income along with your rental income the 10 conventional loans will give you by far the best terms. if you cannot qualify  (but make sure you have a very competent loan officer go over your file before you decide that) then the DSCR/Commercial approach can be valuable.

As for the refi portion of your post the key to that is have a plan with your LO before you ever purchase a property. You tell your LO what you are looking to do with a particular property and they should be able to lay out a step by step program for how it will work. If they can not do that, find a new LO.

Kerry Baird · Answer

A few years ago, I couldn't keep the reserves for the conventional loans.   I was buying houses which would take from the reserves, and reserve requirements went up for more houses.  Submitting all the banks statements and tax returns was onerous, too.  Lastly, I wanted to close with LLCs.  All that said, I have had good experience will DSCR loans.  I have used a variety of lenders, some better than others.

Nathan Harden · Answer

DSCR loans sound like your best option at this point. I would shop around because I know some DSCR lenders allow you to put up to 4 doors into a portfolio loan, but be careful, a lot of portfolio loans are not fixed with DSCR. They will usually have an ARM of some sort. Try and save as much money in points and closing costs so weigh the pros in cons for your situation when lender hunting.

Good luck!

Dominic Pizzi · Answer

Hey John, I think using a commercial lender that allows you to use an LLC to close in would be beneficial in this regard. Depending on your FICO score and the types of properties you are looking at, you could qualify for a decent loan structure with the right lender. If you can message me with more detail that would be awesome!

Conventional, Heloc or Commercial???

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