All Forum Posts by: Andrew Postell

@Tom Server some investment companies will allow you to borrower against your holdings.  This is a very advanced technique and if your financial company allows this make sure you speak to them about the risk of your holdings/loan being called if you go this route.

Also, keep in mind that if that 2nd loan is paid by your savings account, your checking account, a HELOC, another loan...it still means you are net negative on that property. So, if you make $200 in cashflow with the first mortgage, and then have to payback $300 for your 2nd loan, that means you are negative.

It would be very difficult to forecast the net gain on your accounts here.  What will be the interest rate of that savings account when rates decrease?  We try to achieve 7% returns on any stock/mutual fund investments because if we hit 7%, then we double our money every 10 years.  I would also ask to factor in any matching your company provides as well.  Maybe your company doesn't match...but if they do, then that match should be factored into the projection.  Again, this will be pretty challenging at any level.  If any of use knew what the market would do...we wouldn't be talking about real estate.  We'd be on Wall Street and manage some hedge fund making billions.

I'm a 20+ year investor...and a lender...and I don't want you to borrow in this fashion.  At least think about it some more please.

@Greg Wilkowski interesting! Maybe I should bring this up with the company...I don't want this to be all about GR but we have always had DSCR options that go below that 1.25% ratio. I guess it's good that you found the article but it might be helpful to have it updated. If you are going through Guaranteed Rate for your prequalification feel free to reach out directly if something doesn't sound right. You would think that every loan officer knows these loans but some specialize in other loans, etc. Here to help if you need.

@Tomas Valladares thanks for the post.  Always great to hear from a fellow Texan especially ones that are here locally.  

I love house hacking.  It's how I got started as well.  Super low out of pocket, the best interest rate you can get, lowest closing costs, highest seller contributions, etc, etc.

Keep in mind that house hacking REDUCES my cost of home ownership. You will NOT cash flow on any property that you purchase. I'm not sure if anybody has said anything different to you but I need this to be your expectation. Remember, you are occupying one of the units...it would be impossible to cashflow in that scenario. Ok, maybe if you rented out each room and maybe did everything Short Term or something like that. But if it's long term renting, then you won't cashflow. But it will still allow you to afford a SIGNIFICANTLY higher price point than if you did not house hack.  Even after you move out you won't cashflow either...because you put a low downpayment. That's the benefit of buying a primary home.  So, when you put very little down...you borrow more.  That higher loan amount means your payment is higher.  This is why cashflow doesn't really work in these scenarios.  That doesn't mean you shouldn't do it - but this is the expectation you should have.  House hacking allows me to buy a higher valued home.

So, if real estate appreciates 5% per year, then a $500,000 property will have $138,000 in additional value after 5 years. A $1million home will have $276,000 in value increase after 5 years (using that same 5% appreciation per year). The higher our value, the higher the equity gain is - even if the % of gain is equal between the properties...the dollar amount is higher on the higher valued home because the property is worth more. That's how house hacking helps us gain wealth. We certainly aren't gaining $276,000 with $200 of cashflow. So, don't sweat the "no cashflow" thing. Just focus on purchasing a good home that you feel comfortable with living in. Your commitment is to live in it for 12 months...and then you can do it again and again!

I hope all of that makes sense but feel free to ask anything additional.  Thanks!

@Josh Hall are you sure you can get a HELOC on your property? There are loan to value limits on those things. I would suggest speaking with a HELOC provider first. That way, you know the numbers BEFORE you go out an execute on something.  Maybe you can get MORE than you think...or maybe you can get nothing.  Whatever the numbers turn out to be...now we can base our decision a little better.  I hope that makes sense.

@Greg Wilkowski there are a few "lending forums" here on Bigger Pockets but who is telling you that you need 1.25 on a DSCR loan? You can work with whomever you want to of course...but lots of other lenders just need $1 of income - meaning a 1.00 ratio. Some will even go below that 1.00 ratio...meaning, you could lose money and still buy a property. Now, I would encourage you to buy properties that net SOMETHING...but there are other options for you out there.  Just something to think about.

@Robert Mendenhallwhen I buy my primary home it has to fit my PERSONAL needs. Maybe I personally need a good commute time. Maybe I personally need a certain school zone. Maybe I want this home because of how safe I feel in the neighborhood. So, I'm addressing a primary home with a different perspective.  Sometimes people are willing to pay a little more for a primary home because it fits those personal needs.  It doesn't always come down to "math" on these types of homes.  What's your children's education worth?  There's no number for that.  You might not have children...but there might be something else in there that is needed for you personally.  Primary homes have a little different decision to them that a straight investment property.

The other thing I would keep in mind here is that house hacking REDUCES my cost of home ownership. You will NOT cash flow on any property that you purchase. I'm not sure if anybody has said anything different to you but I need this to be your expectation. Remember, you are occupying one of the units...it would be impossible to cashflow in that scenario. Ok, maybe if you rented out each room and maybe did everything Short Term or something like that. But if it's long term renting, then you won't cashflow. But it will still allow you to afford a SIGNIFICANTLY higher price point than if you did not house hack.

So, if real estate appreciates 5% per year, then a $500,000 property will have $138,000 in additional value after 5 years. A $1million home will have $276,000 in value increase after 5 years (using that same 5% appreciation per year). The higher our value, the higher the equity gain is - even if the % of gain is equal between the properties...the dollar amount is higher on the higher valued home because the property is worth more. That's how house hacking helps us gain wealth. We certainly aren't gaining $276,000 with $200 of cashflow. So, don't sweat the "no cashflow" thing. Just focus on purchasing a good home that you feel comfortable with living in. Your commitment is to live in it for 12 months...and then you can do it again and again!

Hope all of that makes sense but feel free to ask anything additional if you need.  Thanks!

@Jake Faris keep in mind that if you change the structure of this property, then the lending options change too.  This would significantly affect the resale value of the property if you ever went to sell or ever wanted to refinance.

@John Campbell thanks for the post here.  I would always suggest to trust your instincts on these types of things.  The fact that you went to the internet about this should say something. Now, some basic comments.

Lenders LOVE interest only loans.  Lenders also LOVE variable interest loans.  Both products give lenders BIG profits.  Interest only means you are paying them straight profit without reducing your loan amount.  So, when you do go to refinance (which also makes that lender money) you will then be borrowing the maximum amount again.  They earn money in 4 ways doing this - the initial writing of the loan, all the interest that you pay on the loan, then again when you refinance the loan, and then finally when you are paying on that loan that you just refinanced into.  Maximum profits!  If only all loans could be written this way then every bank's balance sheet would look great!

Now, what about the ARM product? ARMs are the perfect way for a bank to hedge itself against inflation. As rates go up, so does the ARM. As rates go down, so does the arm...but this is also good for the lender too. You see, when you are in an ARM, by default, once it starts adjusting the rate will be slightly below the prevailing market rate. Meaning, when you go to refinance...you will refinance into a HIGHER rate.  This means you are likely to stay in that ARM.  Ok, I know there are instances where the ARM would be higher...but about 85% of the time the ARM is slightly lower.  Remember, this is a product that makes the lender money because they are hedging against inflation.

Now, some things to share about your pay and taxes.  If you pay less taxes through the year...you still have to pay those taxes at the end of the year.  If you pay more in taxes through the year, then sometimes we get a refund (and sometimes you just owe less at the end of the year).  To me, that strategy is highly questionable to justify a loan.  Keep in mind that ALL mortgage interest is tax deductible.  A 30 year, fixed rate loan will also give you tax deductible interest. And to justify paying more in interest so you can write it off...that's flawed logic at every level.

I love it when anyone can use their own primary home to house hack.  That's how I got started.  And I don't really mind when people use some of these alternative products out there...but some lenders are very desperate for business right now.  I hope I'm not coming down too hard on these things but continue to trust that instinct!  

Hope all of that makes sense but do reach out with any additional questions.  Thanks!

@Noah Bussanich I'm glad you are at least seeing what the challenges are to a BRRRR transaction. I want to say what we "normally" do on successful BRRRR properties and maybe some of these things will help.

Acquisition - Usually, we execute a BRRRR Method property with some type of temporary, acquisition loan. In these scenarios we are wanting to receive 75% of the ARV on that loan product. Why 75%? Because then it makes our out of pocket lower. Now, we still have to buy right...but more on that in a moment.

Math - When we purchase with 75% of ARV that means when we go to refinance at 80% of ARV...we aren't getting any cash back. So, even in your example above, 80% of $700k = $560,000. That means you would be coming out of pocket $55,000 in that property. Now, that's not bad...except, who the heck has $55,000 just laying around? I mean, you would also need reserves when you went to refinance so you would need even MORE money to execute on that deal. Who's got that much money? None of us do.

We make money when we BUY - In theory, we should only be offering $425,000 on that property. Why $425k? Because our acquisition money will lend us 75% of the ARV, which = $525,000. Then we subtract out the rehab of $100,000 = $425,000. Even in that scenario, you are still coming out of pocket $30,000. Why $30k? Because of closing costs and holding costs.

Now, you might be saying "Andrew, this sounds crazy.  With these numbers I wouldn't be able to buy very many properties!"...and you would be correct. I usually make about 100 offers per year to do two...maybe three if I'm lucky. It's not your fault someone is asking too much. You can only offer what you can offer. We still have to be profitable when we do this. This is why we also don't buy properties on the MLS either. MLS properties, by default, are at the highest price possible. I can't make that work.

*WHEW*  I hope that wasn't too much information.  It may have even been too little information...but hopefully it gets you thinking about more things. Feel free to ask anything additional. Certainly here to help.  Thanks!

@Tom Server you would be losing money because the rents wouldn't be enough to counter the two loan payments you have on the property. Currently, we aren't cashflowing with 25% down...so if you are borrowing 100% of the value...you would be way in the hole each month.

Hope that makes more sense.