Will a Lender do this?

5 Replies

Currently negotiating a deal for a pair of duplexes, offer will be 300k for both.   Subtracting the costs of the mortgage, property management, repairs, vacancies, propterty taxes, etc each door will cash flow $200/month.

These properties are owner free and clear by the seller and the plan as of now is to use traditional financing for 50% of this deal (down payment) and the seller will carry a second for the remainder - I will pay all closing costs/fees.

From what I have read, it seems like some banks will do this - some will not, I have already began reaching out to some lenders that I have worked with in the past for their 'blessing' on this type of deal.

Now my question, I would like to have some additional reserves available as the closing costs will likely tap me out at the moment.  Instead of financing 150,000 is it possible to finance say 160,000 so I can have a 10k reserve in the event that I have to deal with any minor repairs/bad tenents, etc in the beginning?  An additional 10k will only cut into my cash flow by approximately 50$/month but I think it would be very important to have some additional cash available when starting out.

Or would I have to close first and then add a HELOC on the remaining equity?

You are right- it all depends on the lender. A bank will take a first position on the property and they should have some comfort in the fact that their loan is at a 50%-60% LTV. Another metric a bank relies on is the Debt Coverage Ratio. Banks have different thresholds but the higher, the better. A DCRS of 1 means you are just covering your debt service. The last deal I put together was 2.1 which is very good. In the past 1.2 was as low as you'd want to go.

DCRS = NOI / Total Debt Service

I would also suggest putting an entire lender package together. This will give the banker everything they need to make a decision, shows that you have done your homework, but also reconfirms to you that this is a good deal to move forward with. I basically put a business case together - takes time but it's a must. 

Here are some categories I include in my feasibility studies:

  • Property Overview: includes property characteristics (SF, Type, Year Built, Condition, etc.)
  • Rent Analysis: pull rents from the area to justify what you are going to collect in revenue. I use google engine pro to map these as well. Great visual.
  • Sales Comps: I pull sales comps for the area. I show what this type of product has been selling for in the area to show I'm getting a fair or good deal. Again, I map on google engine pro to create a visual. 
  • Pro Forma: develop a pro forma for the properties. Make sure to triple check your rents and its even more important to understand all your expenses. For example, call the tax assessor and understand what the taxes are currently and how they will adjust based on the purchase. You don't want to be caught off guard.

In doing this, you will confirm your decision to invest in the properties as well as covering all doubts a lender would have. If any of the above categories do not support your investment, step back and reconsider. An just one last tip- never include appreciation in your strategy. It should work and make financial sense day one. Appreciation is icing on the cake. 

Best of luck. If you want me to send you a copy of something I've put together just email me at [email protected] I don't mind sharing this stuff if it helps. 

@Andrew Wydra thank you very much for all the great information.  I have collected all of that data above during the evaluation of the deal but did not think of presenting it to the lender in that fashion, I will definitely do that.

As we are still ironing out the details with the seller and the deal is not yet under contract, I opted to just go with a general question to a guy who was my closing agent on my primary residence last month.

Just to reiterate however, will the bank let me pocket 10k of their loan if the LTV is great?

I would list exactly what it will be used for and possible put it on the closing statement as a Seller Credit for deferred maintenance. You may have to increase the purchase price $10k to make it all foot out. We did this and the bank made us keep an account open with them and present receipts when we needed the money. 

Good Luck!