All Forum Posts by: Nick Coons

Quote from @Grant Schroeder:

@Nick Coons why not do 85% LTV cash out to recoup more of your capital for your next deal?

I would love to! Can you tell me where I might find such a unicorn loan?

I might be looking for a unicorn.

The standard max with DSCR loans on investments seems to be 75% LTV on a cash-out refi, from the brokers I've spoken with. I have a property that I may be looking to cash-out from in 2-3 months once the rehab is completed (a LTR), and I want as much cash as possible for my next project. Here's what I'm looking for:

- Something in the 85% LTV range on a cash-out refi.

- Doesn't really take into account personal DTI.

So.. that's basically it. Here are factors that don't really concern me:

- Interest rate. I believe standard DSCR loans today are probably in the 7-8% range. If a program with a higher LTV exists and is in the 9-10% range, that would be an acceptable trade off.

- Negative cash flow. I'd be fine with this as I have other sources to make up the difference. I'm not interested in positive cash flow in the short term. I can cash flow a bit negative in the first couple of years (and make it up as I hold the property for 5+ years in eventual increasing rents and appreciation) if it means I can get more cash out now for another project. The only concern about negative cash-flow would be in regards to qualifying (i.e. if a ratio of >= 1.0 is needed, obviously this wouldn't work). I've seen some loans advertising 0.75 ratios, but I haven't explored them yet.

- ARMs. A 5/1 or similar would be fine as that gives me plenty of time to adjust my strategy as necessary. I'm not looking to minimize my payment from a cash-flow perspective, but if an ARM provides for a lower payment and I'd need that to qualify for a particular ratio, this would be acceptable.

Quote from @Ryan Swan:

I think your analysis about keeping it as a LTR is the best option. 3 months is a rather long time in this current climate of continued interest rate hikes, coupled with downward pressure on sale prices. Your $10-$15k estimated profit could be $0 or even negative in 3-6 months. 

I would try do to a cash out refi (ASAP after completion, before rates go up again), and then set it up for success as a LTR. Maybe the market goes up in 12-24 months, maybe not...I think probably not, so plan for a longer term rental hold. 

The only other strategy you didn't mention is to live in the home yourself, thereby cutting your other current housing expenses. Then you would rent it by the room for higher cash flow than a typical non-owner occupied LTR.

One of the reasons the LTR option is appealing to me is because, 1) That's my long-term goal anyway (once I raise more cash so that I can comfortably leave it in a property), and 2) If I were in the market to buy a rental on purpose, I would love this particular property. So I'm not concerned about the short-term value (12-24 months) if I go this route, because it'll cash-flow anyway, and I can take the appreciation on the back-end in 5-10 years.

You're right that values could be depressed even further by the time this property is completed at the end of the year. Phoenix is a pretty strong market, so they could flatten, or even recover somewhat in that time frame (who knows?). The nice thing is that I don't have to make that decision now, I can see what the market looks like in three months and decide then.

I hadn't considered a "house hack", that's an interesting idea. I have a couple of challenges with that idea:

- I would love that, as I had considered it as a strategy going forward as well (once I can improve my DTI, see below). I own my current house, and would like to rent it out. But I'm currently DIYing some renovations here, and if I accelerate that with my construction crew, I'm about a 6-12 months from having those completed and making my property rentable. So it's not an immediately-available option.

- The investment property is in the west valley.. I live in Tempe, and my life (including my son's school) is here, so that'd be a long daily trek for me.

- The benefit of living in it vs. renting it out would be the primary residence loan, which means personally qualifying. With my DTI (obviously, a common issue with investors) probably doesn't allow that. If I get to live in one house and rent the other, and the investment property has a DSCR loan regardless, I'd rather stay where I'm at. My current residence is bigger, and better located for my life. In other words, it probably doesn't benefit me to swap houses.

But I like and appreciate that you introduced a strategy I hadn't considered!

I purchased a property about three months ago as a flx-and-flip, and I have about three months remaining on the project. It's a full gut and rehab. My long-term goal is to buy and hold rentals. However, I know the infinite BRRRR is uncommon (especially in markets like Phoenix, where my property is), so I know I'll probably have to leave cash in each deal. That's the reason for the fix-and-flip(s), buying those in between rentals to raise additional cash so that I can leave cash in a rental without running out (preventing me from continuing on to the next, or depleting my cushion).

My plan with this property was to net about $40k after absolutely everything. With the softening of the market, I'm anticipating a lower ARV was when I originally analyzed this property, and now I'm thinking it's realistic that I'll net $10k-$15k. That's much lower than what I'm really wanting from this deal, so now I'm considering alternate strategies. Namely, keeping it as a rental for a couple of years for the market go rebound, then selling for what I wanted (or, just keeping it as if I had intended to hold it as a rental).

In doing so, I'm looking at the pros of each. If I keep with my original plan and sell it once completed:

- I get all of my original cash back out, plus about $10k in profit. In this scenario, I have the most cash available for the next deal.

If I hold onto it:

- Best case, I can cash-out refinance it at 75% LTV and get back a little less than half my cash. That would still allow me to move forward with another deal, but with far more restrictions on what I can do because I have less cash.

- When I do sell it, the profits are LTCG instead of ordinary income.

- There are some exterior repairs that need to be done on the property before selling, but if I'm keeping it as a rental, some of these could be deferred (these items could be worked on and completed while I have a tenant in the property). However, not completing these things might affect my refinance appraisal.

- If I were in the market to buy a rental property on purpose, this would be a property that I'd want. It's a growing area, and rents are strong (and likely to remain that way).

- Since this is a full gut and rebuild, I shouldn't have much in the way of cap-ex, once completed, for quite some time.

So my questions are as follows:

- Are there pros (or cons) in the above strategies that I'm not considering that might help me make my decision? If I could somehow find a magical 85%+ LTV cash-out refinance on a rental property, that would pretty much solidify the decision for me, but I don't see that being realistic (also, with the associated monthly payment, it could cash-flow negative.. fine by me, but that would make it difficult to qualify).

- Are there other strategies that I should consider? This property would not make for a good STR, so I'm intentionally not considering that.

I liked working with PenFed. Their process was fairly straight forward, they offer up to 90% LTV, and an introductory rate of 0.99%.

@Jorge Gonzalez

Since you're taxed as an S-Corp, take some of the profit as distributions (instead of W-2 income) and use it to further pay down debt. You'll be taxed exactly the same as if you just left the money in the business.

But putting that aside for the moment, let's say that your only option is taking funds as W-2 income. Is the extra amount you'd pay in taxes not worth it to you to get started in real estate? In other words, would you anticipate making so little in real estate that it's not worth a few thousand in income taxes?

Here in the Phoenix area, the properties that saw the biggest uptick, primarily the ones that were more expensive to begin with ($700k+) are the ones that are seeing the biggest drop. Properties on the lower end (<$400k) haven't taken much of a hit and are already starting to recover.

Here's my thinking that explains this. Someone looking to purchase a more expensive house probably already owns a house with a mortgage and is not a first-time home buyer. This person is comparing their current amazing interest rate to the interest rate they would get on a new loan, and are seeing that it's not worth it. Someone looking to buy a property on the lower end is probably a first-time home buyer. It doesn't matter if the current mortgage rates are 2% or 12%, they're comparing their monthly mortgage payments to their monthly rent payment. If they can save money monthly by buying a house, or come in roughly the same, then they're looking to buy.

That's obviously quite the simplification, but I think it makes sense.

@Jason V.

Maintaining a good reputation and long-term relationships is more important than any one deal. To that end, I don't ever ask anyone to cut their rates, especially if I've already agreed to it. They're either worth it, or they aren't. If they are, then you need to figure out how to make it work, or find a new buyer. If they aren't, then you need to find someone who fits your situation better.

I have an agreement with my buyer's agent to pay him 2.5%. In my last deal, the seller only agreed to pay 2%. My agent informed me of this and asked what I thought. I told him that the deal still works, we agreed to 2.5%, so I'll contribute the remaining 0.5% out of my pocket at closing. The deal was more important to me, and especially my relationship with my agent was more important to me, than whatever 0.5% worked out to be.

How long do I have to own a property before I sell it and the proceeds are subject to capital gains taxes vs. ordinary income? I believe it's one year.. but is that a calendar year (i.e. 1/1 - 12/31) or just 365 days? So if I purchased a property on 6/29/2022, I would need to sell it on or after 6/29/2023 before the tax type changes?

I also assume I can't sell a property that is subject to ordinary income (like something I've owned for four months) and then put the proceeds into a 1031 exchange, is that right?

Regarding 1031 exchanges, is it always a one-for-one? Or can I take the proceeds of the sale of one property and put it into two or more others? Or can I take the proceeds from two or more others and put it into one new property? What are the limitations in this regard?

Quote from @Christopher Winkler:

This guy just does not get it, he has been told over & over its risky and a challenge, and count on any couple dozens of reasons something goes sideways and destroying your plans. 

Instead of trying to convince us Nick, why don't you go try to do what you say and report back. 

That's right, I don't get it. Saying "it's high risk, over and over again" doesn't do anything.. I'm looking for "why", and no one has provided an explanation for that. In my example scenario, I'm saying to a lender "here's a hold on an existing credit card I have that guarantees that if I don't pay you, you can grab your funds from here." No one seems to be able to tell me why that's high risk. That sounds like a lower risk than even securing a loan against property, because it's an order of magnitude easier for the lender to get their money back (literally pushing a button and having their entire principal back in 24 hours) vs. foreclosing on a property.

I'm not trying to convince anyone. I'm trying to get a reason why it wouldn't work, and virtually all of the responses I'm receiving are demonstrating that the respondents don't understand the scenario that I'm laying out. This might be because I'm not explaining it well, or it might be because people (including in this forum) don't understand the technical details of how a credit card transaction works (which is totally understandable, because.. why would they?).

I would love to try this and report back! I don't have funds to loan (I'm using my capital for my current investments) otherwise I would.

Let me put it another way. I want to borrow $10k from you. In order to guarantee that you're going to get your funds back, I'm going to hand you $10k in cash. You can hang onto it. If I default on my loan payments, you can keep the $10k in cash of mine that you're holding. Would you consider this a risky and completely unworkable situation as the lender? Of course not, you'd jump at this opportunity, because there's close to zero risk on the lender's part. While not identical, this is very close to what I'm suggesting.

To be clear, I'm not looking for funding. I'm not asking anyone to do this for me. It's just a business idea that I had that I thought I'd throw out there. I'm looking for constructive criticism of the idea to see if it's workable (which isn't the same as building a strawman and criticizing it).