All Forum Posts by: Sanat Bhandari

@Michael Lightwood It won't help you in getting financed. The biggest benefit to inheriting tenants is that the property is generating income from day 1 right after you close on it

If you're looking at a commercial/DSCR loan, the 1007 by the appraiser helps in maximizing the leverage and therefore, financing on the property

P.S The only place where I can see it help is if you get a portfolio loan from a local bank. They have the flexibility to use the leased rents (vs 1007 rents) and a desktop appraisal (vs an in-person one)

I've seen a ton of interest in the DSCR loans from investors and just wanted to clarify some of the minor details of an actual DSCR loan:

- The rental income used to calculate DSCR is based on the lower of market rent value on the 1007 or the rents at which the subject property is rented out. 

So if you rented your property for $1,500/mo and 1007 says the market rent value if $1,300/month, we'll be limiting your leverage based on the $1,300/month number and not the former. 

- DSCR = NOI/DS (NOI = Net Operating Income and DS = Debt Service) is correct and used for MFH and commercial property DSCR evaluations

However, on 1-4 unit properties from a lending perspective, DSCR = (Lower of gross Income determined by 1007 or lease agreement)/PITI (add flood insurance to the denominator if the property is in a flood zone, HOA if there is one)

- Your credit score matters a lot in determining the terms of the loan . The difference in terms between a 680 and a 740 is fairly substantial (a higher differential in pricing than if the loan was conventional/FHA/VA/USDA type)

- There's customizable options for everything, including rate locks, prepays, front-end/back-end broker compensation, I/O options (and a range of I/O options) etc

- Generally speaking, we're looking at seeing immediate access to 6 month liquid reserves (not necessarily escrowed) so that the buyer can cover the property's debt after closing were it not to be leased 

A real life example: a client of mine thought the DSCR for his property is 1.2 for a cash-out refinance based on

DSCR = $1000 (current leased value)/$750 (PITI) = 1.2 ------- (1) 

Upon closer inspection, found out that the property is in a flood zone which adds $100/month to the expenses. To add to the mix, there was an HOA of $50/month and the appraisal came in at $950/month for market rent value. By the time the loan got to closing, the DSCR evaluated was

DSCR = $950 (lower of the 1007 value/leased value)/($750+$100+$50) = 1.055 --------- (2) 

The difference in rate pricing between (1) and (2) was a cool 75 bps or 0.75% interest rate which in the current climate can completely kill cash flows. 

When I started out as an investor, I made this mistake. I see plenty of investors making this mistake and failing to realize that these nuances and wanted to make sure others learn from my experience

@Pradhuman Joshi I can help with that, I've got contacts up in ND. Feel free to PM me. 

@Marcus Cordova Welcome to BP and good luck on your first investment!

I'm an investor + mortgage broker licensed in TX. Feel free to reach out if I can help you in any way

@Braheem Tolbert I second @Chris Seveney's statement

Plus you might get better terms on a situation like this at a local bank vis-a-vis a broker. I know a few banks in my area that will lend up to 70 LTV on land

According to this article by CNBC, rental prices have witnessed the slowest growth in the last 19 months. Some excerpts from the article:

- Rental rates have witnessed the slowest pace at 3.4% in November '22

- Sun belt rents rose by just 0.9%, waning off the insane growth seen over the last couple years. However, rents and demand for single families in sun belt are growing considerably faster than apartments due to a 'the supply of former being smaller than the latter'

- Midwest, on the other hand, had rising rental rates of 10% and 9% in Indianapolis and Kansas City respectively

- Multifamily construction has slowed down considerably with an 18% decrease in permits for the same in November vis-a-vis October

Unsurprising that midwest is still going strong despite slowdowns across the country. Most midwestern markets are a fairly solid choice for investing due to being insulated from the ebbs and flows of the coastal markets. 

It all depends on what you're bringing to the table. If you're not bringing the financial piece of it, you can always promote other skills/services you have that can be beneficial to the partnership. The beauty of partnerships is that it all boils down to negotiation and what you guys agree upon

P.S (Nugget) Never Split The Difference by Chris Voss is a good one to read on negotiation tactics

Offer to do a 75/25 or even a 90/10 split initially, prove yourself as an experienced operator who can execute projects successfully, and then move on to do a 50/50 split eventually once you have the capital and track record to command a larger share for smaller input. Alternatively, if you are dead set on a 50/50 split, you could offer to personally guarantee the debt while their name would be on title but not the loan

I've seen partnerships where one of the parties isn't bringing in any money go sideways more often than not. Make sure you hone in on your value proposition to not just the deal but the team as a whole and try to chip in something, even if it is fairly minimal

If I was the money partner in your scenario, I wouldn't partner up with someone who is bringing just the sweat equity without some sort of substantial skin in the game since it is far too easy in a situation like this for them to leave the other partners holding the bag if the project goes sideways

@Francis Nasser A CPA can chime in on this one but as far as I know, an interest-free loan isn't illegal per se but it is highly likely to trigger an IRS audit

However, you could include a certain $ amount as a part of the purchase price and record it on paper as prepaid interest which could potentially circumvent this issue 

E.g, a seller is carrying $100,000 for a property with a 2% interest on 30 year am and a 5 year balloon (=10%). You could either do this or bump up the purchase price to $110,000 with the same am at a 0% interest for 5 years (=0%) so that all your payments are "technically" going to the principal since it's a 0% loan

Any CPAs who can add on to my answer here? 

@Basit Siddiqi

Welcome to BP @Jenny Officer

Feel free to reach out to me or any of the members if you need any help. It's a good group of people and a fairly collaborative community in here