All Forum Posts by: Doug Smith

Good Post, @Alan Asriants. From a lender's perspective, we're also seeing a lot of greed with some wholesalers raising their spread to the point that the math doesn't work for the end buyer. For instance, we had an application today where the wholesaler got a home under contract for $200k and then put a $50K mark-up on it to sell it to the "C" buyer for $250K. The math didn't work at $250K, but it works at $222K. They are sticking to their full $50K. We as a lender are passing on the deal. If you're a wholesaler, one much understand that a rising tide raises all ships. If you're end buyer can't get the numbers to work, you'll likely have no deal anyway. We used to do a ton of wholesale deals, but the spreads are getting out of hand. 

Most institutional lenders are going to require 25% or more down on such a property, so that might be a struggle for you based on your post. Also, institutional lenders are going to want to "source" the down payment funds and they typically won't allow borrowed funds. It's been really, really hard to get multi-family to cash-flow lately with higher insurance rates. Outside of getting a partner to help, I really don't have any creative solutions for you that won't leave you in the poor house at the end of the day. 

I'll address your second paragraph with where you are talking about a 10+ unit building. 20% has historically been a minimum down payment (I'm saying minimum...it might be more down from lender to lender) on commercial property. Multi-Family is currently getting a ton of scrutiny from lenders over expenses...particularly insurance. Most commercial lenders are underwriting to $2000 - $2500 per door for insurance. Althought rents are high, there is a concern that rent increases are not going to keep pace with the increasing expenses that landlords are facing. Commercial lenders have really been backing off of their aggressiveness with multi-family as of late. I think it will be unlikely to find a commercial-style loan for a multi-family property at anything less than 20% down...they will likely be 25% or more at this point. I wouldn't be stunned to see that trickle down to SFR rentals as well.

As far as the first paragraph is concerned, I can't do Convential Loans in TN...only commercial-style rentals, so I will leave that first paragraph to someone local to you. I very much wish you well in your investment journey. 

Great question. On Tuesday I attended a CCIM luncheon where a couple of my friends/fellow commercial lenders served on the panel. One of the takeaways was that lenders are freaking out about multi-family right now. The biggest concern they are having is over dramatically increasing costs...not so much with rate, but with items like taxes and insurance. They are worried about underwriting the deal to today's costs with the concern that rents might not rise to cover the additional costs (keep in mind, I'm in FL with huge insurance rate jumps...but other areas are feeling similar pain). That being said, they appraise it a bit differently by using "Capitalization Rates" or "CAP Rates" to determine value instead us using comparable properties to establish value. The CAP Rate is interchangable with the return on a property overall. CAP Rate = Net Operating Income / Property Value (Purchase Price). So if you have a 5.5% CAP Rate for similar properties and your NOI is $100,000/year. then your property value would be NOI of $100K / Cap Rate of 5.5%, or $1.181M. Does that make sense? It's just a different vay of valuing a property. You won't typically use DTI for a 41 unit building. You'll use the CAP rate and DSCR (calculated differently than how most lenders on here do it...more expenses are added). DSCR is still Income/Expenses, but they add in more expenses like vacancy factors, management costs, replacement reserves, etc into the expense side. From an amount down standpoint, they'll like want a minimum of 25% down. That will vary depending upon your experience level, the quality of the property, the cash flow of the property, and the lender's appetite for that type of loan. I wish you well in your investment journey.

We specialize in "Builder/Investor Spec Construction" like you're doing here, so I can answer this for you. We lend at "the lesser of" cost vs As Completed Value, so we have you get your plans and specs together and then we give it to an appraiser that will appraise it "as completed". The consider the materials used, etc, but they do use area comps of newly constructed homes as the value. When we do the construction loan, we'll take the cost you paid for your lot, your soft costs (plans, permits, property prep, etc) and add it to the build costs (keep in mind, we'll make sure those amounts are fluffed and that they make sense). We will then usually go with the lesser of 80%-85% of the total cost of the project or 70% of the As Completed Value from the appraiser. When you go to sell it, the appraisal will buyer's appraisal will be a traditional As Is appraisal on a FNMA form 1004 using area comparables. If those comparables show that your property should be appraised at $220K, that's what you're going to have to contend with. They won't really look at the cost with that appraisal, but will look at the materials and workmanship for any upgrades/downgrades of value. Did that answer your question? Did that help?

When you say "first time home buyer", I want to clarify that you currently do not own a primary residence...or any property, correct? Dodd Frank was very specific about lenders verifying homeowners' income when they purchase a home. It is true that does not apply to investment property, but what happened was that first time home buyers that did not qualify for a home loan were trying to circumvent that Dodd Frank rule by saying "oh, this is a rental property" (wink wink) and then move into it...basically creating a no-income verification loan. The CFPB doesn't believe that you would buy a rental before you would buy a residence, so they gave pushback on lending to guarantors that don't currently own a property. Most lenders won't do it. I've seen several scenarios where it made sense to rent instead of buying a primary while buying a rental home...such as the Manhattan attorney that rented but wanted to be part of an LLC buying a duplex in FL for rental purposes. That being said, most lenders don't want to tangle with the CFPB and most won't risk it by lending to a guarantor that does not currently own a home. Please clarify if you currently own a property or not...from reading your post it appears that you might not.

We pretty much all use "the lesser of" Cost or ARV (As Reparied Value) as the value we use for lending. Once 6-12 months have passed, depending upon the loan program, you should be able to refinance it to bleed some of the "instant equity" out. No one that I know of (ever in 33 years) will lend based on the ARV over Cost over that first short period of time.

A big issue you might run into is that most lenders will require you to qualify carrying two mortgages in your debt-to-income ratio. One program we've actually used for clients is a bit odd and it is somewhat expensive, but it does work. Basically, you're given a bridge-loan up to 75% of the value of your current home (the one you're selling) minus the first mortgage balance. You can use this as part of the down payment on the new home. It has been my experience, however, that the underwriters tend to low-ball that 75% figure. It also comes with an offer to buy the property in 90 days for that same 75% figure. They state that if you can't move the property in 90 days, they try to sell it for 4 months more, but I don't really have that level of trust. They then do the first mortgage and wipe out the mortgage payment on the current home from the new homes DTI for qualification purposes. They charge a percentage of the old home's sales price as a fee with a minimum of $9,000. I'm not a huge fan because of the costs and risks of the program, but I've used it for customers in certain situations where it made sense. It's a wholesale product, so reach out to a good mortgage broker in your state to help. They can access the program if that is something that might help.

I am not licensed for consumer lending in TX, so I don't have a dog in the hunt with this opinion. The rates for a purchase money loan (one where you take the loan out to directly acquire the property) vs when you do a "cash out refinance", which your loan would be if you chose to pay off the line with a loan on the primary residence, it typically done at a higher rate. A purchase money loan on a primary is likely to be significantly less than the rate you would pay on a line of credit on an investment property. Of course, if you have a great lender that you work with, they can work out side by side numbers for you to give you the info you need to make an informed decision. I wish you luck in your purchase!

They key that we're all going to ask is about your experience. Have you or someone in your ownership group done this type of project before? That will help us answer your question.