All Forum Posts by: Chris Mason

It may "complicate" things, but not so much that I'd suggest leaving money on the IRS' table. 

If an underwriter is looking at Schedule E on joint tax returns that list six properties but you're saying you only own two, they will ask you to prove that you do not own the other 4. Fortunately, that's easy, since you're married to the person who owns the other 4, so that paperwork will not be hard to come by. 

In no way should filing jointly v separately ever disqualify you, however. 

 Expanding the search criteria is one thing you could do. Draw a bigger circle around the property in question. But now you're out of "that" neighborhood, that could also introduce inaccuracies. 

Something else you could do is a comparable NEIGHBORHOOD approach. Go back to 2019 and find another neighborhood nearby wherein homes used to sell for $300k for similar reasons (similar schools, bla bla bla). Maybe that 'hood does have some comps. We intentionally picked a "competing" neighborhood, because presumably a buyer today wouldn't pay $700k for a home in your neighborhood when they could pay $500k for one in that competing neighborhood, right? So if your research tells you that you could buy a home there for $500k, why would you buy here for $700k? You wouldn't! And you shouldn't, you should put in your $500k offer, knowing that if (when...) they don't accept it, you can just take your business to that very same neighborhood we just identified, and get better bang for your buck! 

The number of sales matters to loan officers, realtors, and appraisers, but it doesn't really matter to homeowners, homebuyers, homesellers, or real estate investors. It's possible for the number of sales to go down concurrent to values going up, it's also possible for them to go up while values go down (see: the years right after 2008), and everything in between. 

Mortgage rates are the lubricant of the number of sales. Low rates is a well-lubricated environment, and high rates makes it hard for those gears to churn (you can easily tell stories about why sellers, and buyers, will be less likely to transact, if the rates are higher). It's broadly expected that consumer-facing mortgage rates will go down this year, even if the Fed continues to increase the Fed rate. So the number of transactions this year will likely be higher than in 2022 (excluding Q1 2022 when rates were still low). Which, again, that in itself means absolutely nothing for home values, rents, cap rates, or any of that, either way. (But if trying to evaluate if one should invest in certain stocks that tend to go up when the number of transactions goes up, that have recently become steeply discounted, that's a different story...)

If what you are asking for, for a 12 month lease, is beyond what we ask for on a 30 year mortgage, something is probably amiss. :) You can probably think back to what was requested the last time you got a mortgage as a good starting point (where do you think all the "standard" criteria used by landlords ultimately came from? :P ).

A paystub, and last year's W2 to validate a history of income at that level, is reasonable. Verifying income with the current employer, at a publicly listed phone number (to ensure it's not their buddy's cell phone number) is also reasonable... anything larger than a lemonade stand with 1 employee is going to have a "verification of employment" process that you can use, the authorization form to use it you just include in your tenant application package. I know a lot of landlords don't do this last part, but it's easy, and you're plugging into an existing framework (the same framework already used when those employees apply for mortgages).

Asking for 2-3 employment references as a standard thing is not reasonable, especially not if they've been at their current job for some time.

Asking for bank statements to validate income as a standard thing isn't accurate (since a buddy could just dump cash in there), but as a one-off for a specific reason it could be reasonable. Back when I was in college and a renter, with the GI Bill as my income, I showed him a few months of bank statements showing once-a-month deposits of exactly $2345.67 from "Dept of Veterans Affairs," along with a) a print-out showing E-5 BAH in the zip code of my school was exactly $2345.67 and b) a print-out from a credible public source showing that veterans in college on the GI Bill do not get paystubs. So that reasonable landlord lined all that up, it made sense, and they rented to me on that basis. 

But what IS true is that DSCR loan are a lot less work, and require less knowledge, for the loan officer. The uptick of "just use a DSCR loan!" by loan officers, this last year, on these forums, certainly is interesting. :P

 Redfin and zillow both have the option to only view sold properties. You want to focus on CCCR - close, closed, comparable, and recent. Make a spreadsheet, don't over-rely on a single comp, and only use price per square foot as a sanity check ("if the other comps are $300 per square foot, and this one is $450, I may have done something wrong"), not as a primary way to value real estate.

 Hey Nicole,

Hate to be wet blanket, but I'd be remiss not to point this out. Looks like it's about 2 years too late, but better late than never.

If someone ever wants to get a normal mortgage on that property (a future buyer, for example, or perhaps if you ever want to refinance it), and the appraiser calls it a duplex with an ADU, that loan application will be denied.

As of today, and as of 2 years ago when you started this project as well, Fannie/Freddie/etc, will lend on single family homes with an ADU. But not 2-4 unit properties with an ADU, and not on a SFR with multiple ADUs (that's how I know that precisely zero MLOs were involved in the drafting of that landmark California legislation pertaining to ADUs).

That guideline could change in 2 or 5 or 15 years, but that's speculation. In the back of your head, if I were you, I'd be thinking about finishing this up in such a way that it's most cost effective to "de-ADU it" if/when needed (it can be an office or a storage shed or communal rec room, no issues there). If you want to sell for top dollar (in 2 or 5 or 15 years), that means you want the largest buyer-pool possible, which means presenting it to the market in such a condition that a buyer can get a mortgage on it. "Cash deal only" type properties tend not to sell for top dollar.

GL.

I see that you've learned enough about how it works to be dangerous. :) You google searched "how does rental income factor into my DTI," and read one answer. There are actually about a half dozen different ways that rental income is calculated, scenario dependent. What you just did (the part I underlined) is owner occupied 2-4 unit rental income math. So if the property isn't owner occupied, that isn't the math that would be applicable.

Rental property math (you DON'T live there) is as follows (I'm assuming that $1900 number is the full PITI).

- If the property is not yet on your tax returns, b/c you just purchased it. $2850 * 75% - $1900 = $237.50 in the green. Add $237.50 to income. Add nothing to debts. DTI improves.

- Once the property starts to appear on tax returns, down the line. Suppose you write off $2500 in repairs and other expenses, and $3420 in property management. $2850 - ($2500+3420)/12 - $1900 = $456.67 in the green. Add to income. Add nothing to debts. DTI improves even more.

There are 4 or 5 other formulas, but I suspect those are the ones most likely to be relevant to you today and in the near future.

Reminder that the sheer number of loan originators exploded in 2020 when refi demand increased by 500%, most got very little training, since they were only hired to do refinances of owner occupied single family homes and condos for W2 wage earners, that's all they needed to be trained on. If there's a list of "top 3 things COVID refi loan officers screw up on a regular basis," one of that top 3 would be "anything involving rental income." So work with someone that's been around a while, it doesn't matter that you know how this math works, THEY need to know how it works, or they will not submit it correctly, causing a loan denial that should have been an approval, and now you've lost an entire house!

If you go spend 2 or 7 hours in spreadsheets, you will learn that for a normal mortgage with no PMI, no matter what, the ROI is exactly, down to the 0.0001th decimal place, your interest rate (subject to rounding errors introduced by Google Sheets and Excel using "middle school rounding" rather than "bank rounding," among other things). 

So if your rate is 6%, the return is 6%. It's simply a question of if you could put that money to work somewhere else earning more than 6%. Since paying your mortgage balance down is a guaranteed return, and the other thing(s) you'd do with that money isn't, you probably want some number a few ticks above 6% to justify it. Risk premium.

From ballpark 2012 to 2019, rates were in the 3.5% to 4.5% range, maybe rental property rates were roughly in the 4.5% to 5.5% range, while the stock market ticked away at 7% or 9% growth  (also annual, just like the interest rate, making this comparison easy) with some consistency, and many people even did much better with real estate investing than that, so the prevailing advice was to "NEVER pay your mortgage early, unless it was for 'peace of mind' or other totally valid (this isn't a knock) psychological or emotional reasons." That seven years of ballpark consistency  from 2012 to 2019 meant a lot of advice got handed out as "forever and always" type advice, but I'd argue that's no longer necessarily valid (I'm not staking out a position either way).

The reality is that we're in for turmoil for the foreseeable future, at least another year or so. Maybe right now is the best time to invest ever (in Wall St type assets or real estate, maybe both?), maybe it's not, relative to that 6% guaranteed ROI.

It's not as magical as sources monetized by clicks/ads will tend to indicate: 

IRL each $500/mo block of rent will bump your buying power by about $20k.

So if the other unit generates $1500/mo, it'll bump your buying power by about $60k.

Talk to your loan officer about specific exact numbers particular to your scenario, but it's not going to jump from $20k per $500/mo to $30k per $500/mo.