All Forum Posts by: Michael Rutkowski

Hi Justin, To answer this question, it will mostly be based on what your current rate is at, and what your other income is. Your "useable" rental income, according to the bank will be around $825 (see below). So then while you may have some equity, it doesn't mean your debt to income will suffice to pay for another rental property.

I've done 2 different things in this market: 

First option is to get a second lienholder on your rental. It sounds like a marketable title, and so that could be a good option. Some caveats here would be that the bank may want you to be incorporated in an LLC, or something like that, if you are specifically investing. You can try Shann Scott at First Interstate for a loan like this, he is easy to work with. This will be an investment or commercial loan. The thing with this option, is that it will create its own separate payment on a new loan, and the lienholder will be in the second position. This is not a place most lenders want to be in, but if the numbers work, then most banks will try to get that loan going for you. These rates will be higher, around 5%, but there is no set in stone rule about these types of rates. But the upside is, you can qualify as an LLC, and sometimes even bad credit doesn't matter that much if the numbers work and the property looks good to the bank.

The second option is to cash out refi. Now you asked about whether your rates will go up... So I had a loan on a property in Bozeman from around 2015, and rates were at 3.8 on a multi-family back then. I just cashed out some equity for another property, dropped my rate to 3.12, and my payments are the same amount, still no PMI, and now I've got more cashflow. It is totally idiosyncratic with each property. If your property is not a multi-family, you may get as low as 2.5 right now, which I would really recommend trying for if you can swing it. Rates will never be this low again in the foreseeable future. Multi's always have a higher rate on them.

So there will be some immediate questions which will pop up at the bank: What is your new debt to income ratio with your new loan that you are wanting to acquire? What is the appraisal going to come in at (you may be seeing comps at $460K, but that doesn't mean the appraiser will agree with you)? 

Then the bank will only work with 75% of your rental income towards your new mortgage or loan payments. Also, STR rental income can only be used if you've been incorporated, and paying taxes on that income for a few years in my experience. Any income on your property which is not LTR, will be valued at LTR, which sucks, but that's how it is. So that means you will have about $825 going towards your mortgage, not the $1100.

The bank will sit you down and tell you that you aren't even breaking even, and won't qualify, like this: $185k @ 2.8% (was my guess close for 4 year old rates?) over 30 years, with taxes, insurance = ~$950/mth in liability. So when you want to cash out something, the bank will say, hey, your current property isn't cash-flowing (even if it is). This is mostly because you are only allowed to use the 75% of rental income to qualify on investment property. So you're right at the cusp of paying PMI, at 24.4% equity, and if you take some equity out, you will have to add another $150-$300 of PMI to your debt to income, thereby unqualifying you, unless of course, you have some other source of income.

If you need any help with working with the bank, or finding a multi-family let me know through DM's. No one can answer your question sufficiently enough unless you divulge income and loan rates, which is not something you should be doing with anyone besides your CPA and the bank. But honestly a SFH right now is going to drag you into some big debt in this town!

Well, I will agree to disagree. First, there are two basic ways to invest in real estate. One is for rental income, which it seems as if what your strategy is, and the second, which is my strategy, is equity investing. Bozeman is not for most rental income investors, especially fix and flip investors, and it is indeed hard to find properties which cashflow here. 

But compared to the rest of the country's markets in 2008-2010, Bozeman's market was very healthy. When you say the word "condo" I do think that is more volatile, and I have never owned a condo before, but I do watch those markets and they traditionally have bigger dips and gains than single family and multi-family housing. That's associated with the cost of ownership of condos, ie condo fees. Also, your one data point is not representative of the market as a whole. I have been in this market as a property manager and investor since 2007, so I'm aware of what has happened in this town since then.

Here is a graph of real estate prices for SFH in Bozeman since 1996. You can see a small healthy dip around the 2008 Mortgage Crisis, from around $310k in 2008, to $280k in 2011, which is a 9.7% drop, as compared to a Nationwide average price drop of 18% (https://money.cnn.com/2008/12/...) and then a rebound, and it seems as if home prices are skyrocketing. Source: walletinvestor.com

I'm generally not a fan of these types of graphs, but I would even argue that the rebound was faster, and more intense than this graph portrays. I'm glad you found other places in Montana to invest in, and if you had held onto that condo, it would probably be selling at around $400k right now, depending on where it is... So that's why I prefer to hold onto real estate for the long term, and if it gets good rental income, that's great too. 

As a STR investor, I'm not worried at all. I just need to make sure my rentals are for less than 30 days as per state regs. And also not worried about vacancies for my own loan payments, as business has exploded since Covid hit.

I would love to be put in touch with anyone you know who can underwrite a loan based off of 100% of rental income. That would dramatically expand my options. I have been in business with Sched C and D incomes since 2016, and have been expanding, non-stop since that time. Before that I have a clear track record of 100% occupancy for going on 20 years now.

Another caveat, is that I do STR's and just ran into a situation, where I had an appraiser ask me for lease agreements for one my multi-family STR's. Obviously I did not have those, and it was a totally foreign concept for them. This is a commercial investment loan refi, so I had to pay $1200 for it, as opposed to the normal $500-$800 SFH refi appraisal. I was disappointed when he told me he would need to use market rents in my area (which are still very high though), on a fully furnished property that makes 2.5x market rents, with almost a total of 1000 reviews. Long story short, it took 6 MONTHS to refi this loan (which I think is a go). It got passed around to 3 different underwriters, as my taxes and rental situation was just not cookie cutter. Again, this was a commercial loan, with perfect credit, and low LTV ratio.

So any contacts you may have, that I could put in my back pocket for the next round would be great. I got locked into a 3.375% rate this time, which I thought was high, but it is indeed pretty low for a commercial rate in my area. I expect this loan to be sold immediately on the secondary market, so I'm a bit nervous about it. 

I feel like it is time for the loan market to evolve around STR investors. We are not all straight commercial, which I would agree is riskier and could necessitate a higher rate. But we are a hybrid of the two, utilizing, in many cases residential property to generate a commercial gain. I need those underwriters whoever they may be.

Lots of caveats with those properties, there's a decent one for sale near Butte. Do you need an agent? This property has huge potential to expand, or just develop it a little differently.

Medium sized town, far from anywhere, but with good connecting and direct flights. Major research University in town, beautiful scenery all around, easy to self-isolate and still get out, no crime, and I could go on and on, but I'll stop... Real estate is crazy here right now. Pushing over $600k for a SFH, with median wages around $23,500, and a family $46,500. I was a PM on a property which sold sight unseen, for $50k over asking ($650k), to people from California.

Anyway, when we got shut down, I lost all my STR bookings in two days. But then, the strangest thing happened. They all got filled right back up with longer stays (2+ weeks). So we thought, what would happen if we raised the price 20%? Well, we staggered bookings, and we are at like 95% with some odd days in there for maintenance. I'm pretty well booked like this until January, and taking reservations for summer and next fall. I have the opportunity to meet these people, as they stay longer now, and they are all people who "work from home", who either sold a house, or have a white collar job which has shut their office down. Many are also buyers.

It has been the craziest time I have ever seen in real estate, and this is my third rodeo. I thought 2008-210 was rough, but this started out worse, and ended up being a boom time. I have my theories on what is happening, but could not possibly sum it up in this thread.

Why, in this day and age, with almost zero vacancy across the board, will an underwriter only use 75% or rental income to qualify? What about like 90%? Is that just so crazy?

I am wondering about your thoughts on the use of commercial land, adjacent to a freeway exit, but the caveat is that there is transmission power line easements through much of the property. From my experience, any structure which is temporary is fine, such as greenhouses, storage buildings on skids, and lean to's for equipment. 

I have to make this decision pretty quick and I have a number of ideas going in my head. It is fairly large in size, enough to where I know I can put at least one permanent building on the lot. This spot gets an incredible amount of traffic. I would be looking to run my own business out there, whatever that may be. 

What would you do? Let's say it is 90% easement. It has been on the market for years, and I can almost get this lot for free.

Sounds messy. My best advice is to document everything, including the Facebook posts. Do not use the phone, and send every letter certified. If it needs to be brought into litigation, the Montana Landlord Association lawyers are very good. 9 times out of 10 a tenant will win in Montana courts. The appeals process can become brutal and expensive, and an injunction is easy to file. Best to go cash for keys and to get the tenant out.

This is all assuming your lease is strong and legal. I've been PMing in Montana for almost 15 years, and have run into a tenant like this only once. We settled out of court, and she ended up leaving anyway. In my case, she was harassing a tenant of mine next door, and forced me into eviction procedures. Of course they will blame you for that... 

It would do you good to just have a consult with the lawyer I mentioned. Last time I used them, they didn't charge me for travel time, as they are based in Missoula, which is a rarity. When delivering any notices, include this wording in the body of the letter. https://leg.mt.gov/bills/mca/t...

edit: to add to this, do not delay your procedures, and follow everything to the word of the law. It may take much longer than you think to get them out if the tenant wants to drag them out. Without knowing the details, here is a section of the code you can read up on. If I were you, I'd almost be relieved if the tenant did not pay rent. Do not "diminish services" or you will become familiar with the term "treble damages".

Read up on the Landlord Tenant Act here: https://leg.mt.gov/bills/mca/t...