All Forum Posts by: Alex Breshears

Hi Mike! 

Your question is great because real estate is all about leverage and knowing the different tools in your tool belt can really help you build a real estate business plan. There is a wide variety of financing options, each with their own pros and cons. One is not necessarily better than the other. Think of loan products as tool you have to complete a job. While a hammer is great, it make not be super handy if you have to change out a light switch.

Since you mentioned DSCR, I'll address that one. This means debt service cover ratio. That's a fancy way of saying they want to make sure there is enough income coming in from the property to cover the debt on the loan (monthly mortgage payment for example). It is often expressed as a number that is the ratio of monthly projected income to monthly expenses. For example, a DSCR loan commonly requires 1.25 as the coverage ratio. Technically this looks at the net operating income as the numerator and then the monthly obligation on the bottom. For example, the monthly revenue projected for the property might be $3000, and the debt service might be $2000. If you divide $3000 by $2000 you get 1.5. This would be the debt coverage ratio a lender is looking at to determine eligibility for the loan product. Generally most lenders are around 1.25, I've seen a few in rare cases go as low at 0.75, but the rates and fees are much higher, along with capital requirements from the borrower.

What is the benefit to using a DSCR loan? Usually there is some aspect to the borrower lending profile that a borrower may not want to address with a new loan. For example, low credit score or low documented income might be a reason a borrower would want a DSCR loan. Some lenders do not check credit score at all, and I would think most aren't looking at personal income in general. Other borrowers may want the loan to be in the LLC name versus their personal name, so they will seek out a DSCR loan and close in the LLC name, and possibly have to personally guarantee the loan. This means that if the worst happens and loan defaults, if the property does not sell for the amount owed to the lender at auction, you are personally liable for the remaining balance. This is known as a recourse loan. Some DSCR lenders will do non-recourse debt, and others will do only recourse debt. Again, just depends on the lender, borrower, property and situation. Similar to a traditional hard money loan, they are going to require some level of a downpayment, depending again on the lender and situation, it could be anywhere from about 15% to 25% of the purchase price of the property. They likely are also not going to offer any additional funds for renovations. That is definitely one of the downsides. Another downside is that right now these are some pretty expensive loans. Most lenders are working around 8% to 9% as an annual interest rate. The length of the loan is also all over the map depending on the product, could be a short bridge loan type situation so it would be a shorter loan time, or it could be 15,20,25 or 30 years amortized. These have their place in the market place, but you just need to understand what you are looking to do and what your strengths and weaknesses may be.

Generally these loans are more of a buy and hold play, but if you need to close quickly without a thorough underwriting analysis on you as the borrower, these may be a good option since you are not holding the property for a long period of time. These also may be a benefit in that IF you cannot get it renovated in time or you decide to hold it versus sell it, the DSCR financing could potentially stay in place. And since you have a loan out on it already, if it does turn into a situation where you want to refinance into better terms, it is easier to do a rate and term refinance and they will go to higher LTV's than a straight cash out option. For example, a rate and term refinance may go to 75% LTV, versus a cash out that may be limited to 70% LTV.

I hope that helps!

Hi Michael!

I can totally appreciate where you are as Seattle is definitely a booming market, with a lot of people needing or wanting to travel through the area.  I'm somewhat biased towards private lending, and we also lend in the WA market. 

Private lending is going to allow you the greatest flexibility for terms such as interest rate, length of the loan, extension possibilities, etc. Private capital means one person is then funding your one deal. Depending on the dollar amount, this could be a really good way to build a track record using private money. The next private money deal will be easier to get when you can show a track record of acquiring a property, performing on the proposed business plan at roughly your budget and timeline, and then paying the private lender back from either a refinance or sale. Having that established business relationship would be huge to get your investing career kicked off! So thinking of the longer term bonuses, this may be the way to go on this deal.

I will caution that you really should at least investigate financing for your permanent debt. Some lenders are pulling back on lending on STR's in many markets due to saturation and the uncertainty of demand moving forward. Having at least a few lenders that you know you would qualify on the back end to refinance out with would also be a huge step for a private lender to feel comfortable funding the acquisition loan as well. Chances are in todays lending environment you are going to need to put some capital down, even if you are buying a place with a lot of equity. They may say "100% financing" but it generally means up to 100% of the loan to value for rehab costs, but they are going to make you put down 10% to 25% of the purchase price. Make sure you understand the loan terms and don't get sucked in with the marketing angle of "100% financing". While possible, yes, but really make sure you understand the capital they are expecting you to close with, are they doing renovation hold backs, what does the draw process look like for you, and what level of reserves would an end lender look for so you don't overspend on a rehab, furniture and decor for a STR, and not be able to qualify for the conventional debt. I'm happy to chat about what private lending could help you do if you are interested. Just shoot me a message and I'm happy to help you work through some options.

Hi Ryan! Depending on what your goal would be, there are a few options. For example, if you decide you want to keep this as a rental of some sort, it may actually be better to put debt on it at acquisition because you can get a higher LTV doing a rate and term refinance right now than you could with a cash out refinance. Also - that would potentially put your loan up over 100k, which seems to be a pretty common benchmark for a lot of lenders right now.

If you did not want to use funding for the acquisition, you could talk to a lender about putting a lien on it but it would just be for renovations since you already own the property. If the lender is giving you 70k on a property without any current liens, that's a really low LTV loan and should be easy for any private lender to do. Be prepared or ask a lot of questions about the process to actually receive that cash. Some lenders will do an escrow holdback, so while you are paying for $70k of a loan, you are not given $70k at closing to just do with what you will. They may do an initial draw, say $15k to get you started, and then have you provide receipts and mechanic lien waivers in order to get subsequent draws, so I would advocate having at least some capital of your own to start off with in the beginning if your lender of choice does the renovation holdbacks.

Hi Amy!

This is often mentioned because active investors are looking for this sort of product, and the reason there are not companies offering it is because of the amount of risk involved in doing this type of loan, especially in the current economic climate.

I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative. First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged. As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property. If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.

Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be. If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that upper 20% of equity.

Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.

If you are borrowing from friends/family and plan to pool their money together in an LLC that is not secured, you will need to research state and federal law related to this type of activity as that could be considered a security in your state and/or potentially subjected to SEC regulations associated with a pooled mortgage/debt fund or private equity fund (syndication). Additionally, you should consider how long your friends/family are willing to have their money out to you. If you use DSCR loans as permanent financing, you could be locking yourself into loans with stiff prepayment penalties that usually have a 5-year prepayment step-down penalty.

While borrowing from friends and family is typically the starting point for most people when finding private money loans, it's also the quickest way to sink relationships, if not done correctly or as a true business transaction. I find a lot of people just assume that since they inherently trust their friend/family member, a lot of the "what ifs" and worst-case scenarios are not hammered out in fine detail which can lead to confusion and personal interpretation after the deal is closed, which it should have been addressed pre-emptively before the money was lent out.

So my recommendations are 1) get an attorney involved so you know what your able to do legally and s/he can draft up the proper legal documentation to support the path forward, 2) consult with DSCR lenders to understand your prepayment penalties and bake that into your exit strategy with your private lenders, and 3) consider the cost of capital in relationship terms rather than monetary since that matters more than getting the money. You don't want to burn any bridges by miscommunications or not properly addressing resolution paths, buy-outs, exits, etc. in a legal manner on paper and signed by parties. If you and your family wants to become more educated in how to transact this loan safely, you could check out BP's newest book - Lend to Live: Earn Hassle-Free Passive Income in Real Estate with Private Money Lending. I happen to be one of the co-authors and an experienced private lender.

I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative. First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged. As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property. If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.

Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be. If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that upper 20% of equity.

Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.

And the article about doing gap funding can be found here: https://www.biggerpockets.com/member-blogs/14589/98410-help-my-cousin-s-best-friend-needs-20k-as-gap-funding

Hi Parker!

This is a great question, and to give you some more specific answers, I'm going to come at this from a lender's perspective, so someone would be acting as a bank and providing the capital for the acquisition of the property and potentially the renovation of the property. This is going to be different form an equity partner, which would potentially bring capital, but also experience or connections to the deal as partners (meaning you are both on title or you both own an LLC together and that LLC is on title).

Looking at this from the lender's perspective here is what I would recommend. In general, get an attorney familiar with lending in the state you are located in (if this is the same as the property and lender), and this may not be the attorney you closed your conventional loans with. Those real estate attorneys often have lending documents emailed to them, they are not routinely generating them. You will also want to make sure that the lender understands the deal, the process, and the numbers. This is to avoid the two parties have wildly different expectations of the actions each is responsible for, on what timeline certain events will happen, and when they are likely to be paid back. If this is all clearly written out, there isn't going to be any ambiguity about who said what. You will add them as the lender of record to your hazard insurance policy, often called mortgagee clause. I would also advocate you get lenders title insurance for them, because title problems could potentially wipe out their entire investment, and unless you are willing to repay every single dime you borrowed out of your own pocket, this is cheap insurance to make sure you have clear title and their loan will be the 1st lien if they are expecting to have that lien position. Now this above scenario keeps them squarely on the debt side of the equation. It would be very similar to getting a hard money loan. They will wire funds to closing, and then funds will be distributed to all the parties and vendors involved in the transaction according to the HUD-1. The lien instrument (deed of trust or mortgage depending on state) will be recorded, and the original promissory note and any other disclosures will be sent to the lender, and once the lien instrument is recorded the lender will also be sent the original. They need to keep these originals! You can set up the loan with a servicing company which will act an intermediary to accept payment from you as the borrower and disperse it to the lender. Depending on the services included, they can also arrange to make the required tax documents at the end of the year, a 1098 for the borrower and a 1099-int for the lender. Then everything is documented through a third party entity, and it makes is easier for a borrower to pay, as it can be as easy as logging into a portal to make a payment, similar to what you do for the conventional loans you have in place.

The book on BiggerPockets about private lending will walk through all the steps for this situation as if you were the lender, but it is also a very powerful tool for active investors because you now can become the subject matter expert in your network and talk about all the ways you are going to protect them as the lender! https://store.biggerpockets.co...

And the article about doing gap funding can be found here: https://www.biggerpockets.com/member-blogs/14589/98410-help-my-cousin-s-best-friend-needs-20k-as-gap-funding

Hi Season!

This is often mentioned because active investors are looking for this sort of product, and the reason there are not companies offering it is because of the amount of risk involved in doing this type of loan, especially in the current economic climate.

I just want to explain from a lender's standpoint why this might be above a lender's risk tolerance, so you can possibly find another alternative.  First, when borrowing funds for the downpayment, that means the property is 100% completely leveraged.  As the person providing that 2nd lien against the property, if that property loses value for ANY reason (and not all of them you control) that means my loan is automatically underwater being in the 2nd lien behind your financing to acquire the property.  If the property values in your market soften, if the tenant moves in and destroys it, fire, earthquakes, floods, hail, hurricane, another lock down requires you to keep a non-paying tenant - honestly anything - and my position in the property is at jeopardy. I'm not saying no one will do this type of loan, but I'm explain why looking at it from a lender's risk perspective could help you look for another alternative.

Another reason, other than being over leveraged, is that a borrower that is not well positioned with capital is also at a much higher risk of default. If a borrower stops paying on that first mortgage, and then the lender goes to foreclose, any equity that might have been had in the property is now gone because default interest, late payment penalties, legal fees, etc will eat up anything left after the principal balance of that first lien is paid. As the 2nd lien holder, again, I'm wiped out entirely. So again not a good place to be.  If you close on the property and then discover the roof is leaking, the main sewer line is nothing but tree roots, really any major expense, that can easily put a borrower in a position where they do not have enough actual cash to solve the problem, so the property loses value due to deferred maintenance, or the borrower digs themselves into more debt, making it even harder to get another loan to cash me out of the equation at that  upper 20% of equity. 

Now what can possibly be done, with the properties you already own. If you have equity in the properties that are getting ready to sell, you could find a private lender that will do a 2nd lien on those, again as long as the equity is there. So for example if you are pretty far along in one rehab, and you have about 50% LTV with your current financing, you could potentially find a lender that will do a 25% LTV second, so your total LTV isn't above 75%. The 2nd lien holder position has a few considerations that need to be in place, such as it can't be a hard money lender, there can't be a large pre-payment penalty, it has to be current, etc. These types of loans I have seen done, and I've personally done a few in my chosen market.

I hope this information helps!

Hi Antonio! I'm going to agree with a few other posters here, Private Lending has been a game changer for me. You would easily be able to have $5000 a month cash flow from that amount of capital being put into a private loan between you and a borrower. Now, this option will likely be the most "work intensive" as there are some matters to private lending you will need to be aware of, in addition to the expertise to underwrite a property relatively well in your market. BiggerPockets newest book is about private lending, and in that supplemental materials area, there are copies of forms and worksheets to help you along the way. If you purchase the book through BiggerPockets you also get a risk mitigation video from the lender's perspective as well! Pro's to this method: You get to do this from anywhere in the world, usually on your own time table. No tenants, toilets, trash or roofs to worry about. Downside: This is a debt position only, so if you are looking for depreciation to write off a high income or wanting to bank on appreciation of that property, obviously those would not apply here. Many private lenders usually do a few different things in real estate to help balance this out. I own STR's and invest in MF syndications as my equity play, because there is no way you could get me to be a long term landlord ever again. lol

The book can be found here: https://store.biggerpockets.com/products/lend-to-live

Hi Brenton! While I am not based in the Tampa market, I thought I could offer some insight into the DSCR loan versus all cash option part of your question. First, I'm always going to ask what is your goal? Do you want a property you can visit periodically because you have kids in college there
? Then maybe you need an STR, so you can use the property when you want to do that. Are STR's allowed in the area you want to own? Are you looking for steady cashflow and hopefully get some appreciation out of the game and sell in a few years for a lump sum to roll into something else? Are you looking for a place for yourself to retire to? etc etc. The list just goes on and on. Sometimes when having your guidelines too broad, you actually end up being unable to compare anything because all the options are so different. I think narrowing down your focus that supports the reason WHY you are investing in this market will help give you options.

Something else to think about would be how long do you want that capital tied up? If you pay all cash, you are likely going to only get about 70% back out with a cash out refi, so you will have 30% stuck in there as equity. If you are using something like a HELOC on your primary to cover this $250, would the cash flow cover the mortgage and the payment on the HELOC? You can see how this starts to become hard to answer because it's more like a choose your own adventure book, but we aren't sure which adventure you are trying to have, what your risk tolerances are, or what your goal for a property might be.

If you acquired a property with a loan of any sort, at that point it becomes a rate and term refinance, so the lenders are likely going to be more able to get 75% of the LTV, so possibly having a mortgage on the property to have this rate and term option be a possibility is worth it for you. I will say DSCR has sort of fallen out of favor with lenders, as capital markets are not really in a rush to purchase these loans, and the rates are just sky rocketing compared to what they were even 7-8 months ago. If the property still cash flows with a rate that high, then chances are you can refinance out when the rates for a 30 year fixed come down a bit, or you can refinance into conventional money, which likely will have a much lower interest rate.

Good luck!

Hi Sean! As an STR owner, and someone who has lent on these projects as a private lender, I want to just caution you on a few things and possibly have you consider a few others. First, STR's are probably the most active form of owning real estate, and you need to think of these are running a business rather than owning a rental property. They have a million details that must be tracked and accounted for in order to have a successful rental, especially in a market like you are referring to because of the competition in the market. Homes NEED to be done really well, like professional level decorating, amenities that guests want (think hot tubs, fire pits, outdoor kitchens, access to grills etc). While looking at numbers on a website like AirDNA, please remember there are a lot of factors that are not considered in those AirDNA numbers, and also the nightly rate they show you includes ALL of the money paid by a guest, not what you as an owner net. Also, the numbers do not take into account seasonality, so some markets could be earning income 3-4 months out of the year, while the other ones are shoulder season or just plain off season. Buying in the range you mentioned means you are going to have a BIG mortgage payment each month, so really knowing the seasonality is going to be crucial. Think if you closed on a place right at the beginning of the off season? You may likely be carrying the mortgage to this place for months until guests return to the area.

For me personally, I do invest in remote mountain properties, but my personal criteria is that the property needs to pay for itself in 7 to 10 nights of stays. This means the mortgage, utilities, internet, cleaning, occupancy taxes, supplies, and a maintenance slush fund I maintain for each home to replace things like worn out linens, stained towels, or plates/bowls etc. I do this for two reasons, one - I want to be able to use the homes. I am geographically free, so I bounce around a lot. I may spend a week a month at each home with my dogs. I couldn't do that if they required a ton of nights just to break even. Second, IF the market starts to get soft, travelers decide they cannot afford a vacation, or competition in my market pushes down nightly rates, I am ok because as long as I can get weekenders in there paying a decent rate, my expenses are paid AND I still have a house to use. What you will find is most of the big properties do not operate in this manner, as they have a considerable expense to purchase (big mortgage), considerable expenses to stand up (lots of bedrooms, lots of linens, kitchen items, outdoor amenities, it all adds up quickly), and there are more bodies to break or damage stuff in the home (I'm a pessimist lol just when I think I've seen guest do it all, we get another one that invents yet another way to be dumb). Also - STR's don't have to be just for vacation guests. There are a wide variety of reasons someone would need or want to stay in an STR. For example, military families coming from overseas may not get their furniture for a month or two, so they will stay in a property for that timeframe so they have access to a kitchen and furniture. Some people travel for business, attend conventions, family events such as weddings and funerals, so don't limit your thinking to STR's are for vacations only. One of my properties is outside an area with four large colleges. We routinely get parents staying there for college events such as football games, homecoming weekend, pick them up from school, drop them off at school, and graduations. One of my properties has also been booked a few times for photo shoots for clothing and other products.

My advise to get started is pump the brakes and learn A LOT about underwriting and managing an STR. There are different business models you could employ. Those will affect your numbers greatly. For example, I have a high touch, high customer service business model, higher end amenities, and we are pet friendly. Our target demographic makes between 100k and 250k, drives an SUV or truck, has a medium sized dog, and wants to unplug from life for a bit to hike or unwind in a hot tub after a day out in the mountains. We charge a premium rate, but they check in to a bottle of wine and chocolates, get brunch at a local mom and pop place that is fabulous and makes them feel like royalty, and we have tons of recommendations for activities, sights to see, insider tips and tricks, restaurants, and other things in the units such as hiking books, history of the area books, and just a lending library full of books to read in case someone wants to do that during the stay. I shoot to have occupancy about 65 to 70% because higher than that I could probably have charged more, and had less wear and tear on the property with another turnover of guests. This is the exact opposite that many people do with large properties where the experience is all about getting heads in beds. Cram as many warm bodies into the property as allowed, making the property as available to as wide a guest set as possible. These properties often run at higher occupancy and a lower rate, but they also have higher expenses so they NEED the bookings.

The last thing to look at, which really should be first, is the regulations around STR's in any city or county you want to buy in. Regulations are only increasing, and this can also be outright bans on new rentals entirely. This is happening increasingly across the country as affordable housing debates rage and communities are looking for any sort of relief. Not only understanding what the regulations are right now, but also where they could be going is going to be crucial. It doesn't matter how well the place is decorated or how great the view is if the property isn't legally allowed to be run as a short term rental, and this is a MAJOR consideration these days. Regulations are not going to ease up, ever. And one city can have totally different regulations than the one adjoining it, so make sure you have a conversation with the government that will be ruling over any property you buy, and I do mean a conversation. Don't rely on information on the website. Call them, talk to them, ask them questions, you NEED to know this before even thinking about buying a home in any market.