Author Topic: Question regarding financing on RE  (Read 1780 times)

MrSal

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Question regarding financing on RE
« on: October 01, 2016, 05:27:18 PM »
I have a question where I don't see it mentioned in numerous real estate "tutorials".

I read one about trading up your real estate portfolio for a multi unit for example. In simple terms the numbers made sense and everytime the author mentions the mortgage as if it is something easy.

Trading up a 10 unit portfolio to a 25 unit one...

My question is regarding financing. How would one be able to finance such a trade up, since I assume the bank or any other lender would want to see a maximum DTI of 40% ... Unless you have a really high paying job in order to make those numbers work no lender would allow you to trade up when the gap is so big. Most likely the income generated by the 10 unit, and hence showing on your last 2 year tax returns, would not be sufficient to allow for a 24 unit mortgage. No lender makes calculations based on the asset you are about to purchase, at least thats what I think, not sure if with such commercial RE those type of deals are made.

Another question is, assuming this same situation but when you are starting up. If I am close to get to 40% DTI with my main house mortgage and adding a rental unit how would I come to finance the 2nd property?

My thought process is, the gross income generated by the first property, would allocate 40% of it to a potential coverage of the mortgage of my 2nd property.

Example:

I make 60,000/year, which allows 2000 dollars per month in debt obligations.

I have a mortgage of lets say 1800 on my primary house.

I decide to buy a rental for about 60,000 dollars and let's assume the mortgage is 200 dollars for it. So, I am maxed out in terms of lending.

Could I buy more properties in year 1 or would I have to wait at least a year in order for the income generated by property 1 would show up in my tax returns? Lets say the income is 750/month of rent. This will make my full income to 69,000 dollars vamping up my monthly DTI to 2300.

I could then mortgage a second rental up to 300 USD in mortgage correct?

Would lenders count gross rents in the accumulated income or net cashflow?

Thanks




SwordGuy

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Re: Question regarding financing on RE
« Reply #1 on: October 01, 2016, 06:20:06 PM »
I cannot speak from personal experience, I'm a new real estate investor and still doing single family dwellings.

From what I've learned from others in the field, multi-family rental properties stand more on their own profit generating numbers and your experience running multi-family units.   Since you've go the multi-year experience, if the numbers ont he property pan out, it should be doable by the bank.

They are still likely to want some money down.

Best I can do for you.

Have you checked out your local real estate investment association?  You can probably meet someone who knows from personal experience.


arebelspy

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Re: Question regarding financing on RE
« Reply #2 on: October 02, 2016, 03:57:15 AM »
Here's the short answer: Typically when you "trade up" it's to commercial (e.g. > 4 units--4 and lower is residential), so the financing is calculated differently, and is based on the property, not the borrower. Your personal DTI won't come into play, most likely, and they may have you guarantee it personally as a formality, but this isn't even necessarily the case.  Bottom line: the financing is totally different.
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MrSal

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Re: Question regarding financing on RE
« Reply #3 on: October 02, 2016, 11:24:37 AM »
Thats interesting...

So are you guys saying that a multi-unit property (>4 units) the bank looks only at the potential cash flow production of the property instead of your own personal income? This seems odd, at least for me, in my country banks don't do this! It's always your own personal income. Even if you can demonstrate that a property will yield X you need to demeonstrate RIGHT NOW (before the property) that you can afford it's mortgage.

So, what's to say that someone that makes 50k annually why dont they buy a 1 M commercial property right away? Just put 200k down or whatever and finance the rest?


Question 2:

Regarding residential, my question remains, if I am maxed up on my DTI, would a lender consider the income production of the property i am trying to finance?

Again assuming my example:

Wage 60,000
Current mortgage on primary house 2000 dollars

Want to buy a property for 60k, downpayment 20%. Finance of 48k which is a mortgage of 230 USD per month.

This puts me above the threshold, however the income on the property is 800 USD. Would the lender consider this extra 9600 income per year even though I havent earned it yet (would only show up in future tax returns of course after purchase).

Because if they do (and this would be awesome in my country they do not) then my new income for loan requirements would be 69600 raising my monthly DTI to 2320 USD which would put me below the DTI needed.

Soirry for these questions but I am baffled if this is allowed by lenders here in the US (i hav eonly been here 18 months now)

arebelspy

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Re: Question regarding financing on RE
« Reply #4 on: October 02, 2016, 08:19:58 PM »
Thats interesting...

So are you guys saying that a multi-unit property (>4 units) the bank looks only at the potential cash flow production of the property instead of your own personal income? This seems odd, at least for me, in my country banks don't do this! It's always your own personal income. Even if you can demonstrate that a property will yield X you need to demeonstrate RIGHT NOW (before the property) that you can afford it's mortgage.

So, what's to say that someone that makes 50k annually why dont they buy a 1 M commercial property right away? Just put 200k down or whatever and finance the rest?

Yes, that's right.  It doesn't work that way on SFRs, duplexes, triplexes, or four-plexes (you need to show you can support the property without the income from the property itself), but on commercial properties, they vet the property.  If you have the downpayment, so they have recourse it goes wrong, and the property is self supporting (within their projections/guidelines, i.e. with vacancy, etc.), they'll lend at commercial rates.


Quote
Question 2:

Regarding residential, my question remains, if I am maxed up on my DTI, would a lender consider the income production of the property i am trying to finance?

Usually not.  At best they may consider 75%, if it's already occupied.

If your DTI is that bad, work on improving it.  Each property you have should LOWER your DTI, and make it better, because it should be cash flow positive, so it should increase your debt, but increase your income by even more.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

MrSal

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Re: Question regarding financing on RE
« Reply #5 on: October 02, 2016, 09:38:29 PM »
Thats interesting...

So are you guys saying that a multi-unit property (>4 units) the bank looks only at the potential cash flow production of the property instead of your own personal income? This seems odd, at least for me, in my country banks don't do this! It's always your own personal income. Even if you can demonstrate that a property will yield X you need to demeonstrate RIGHT NOW (before the property) that you can afford it's mortgage.

So, what's to say that someone that makes 50k annually why dont they buy a 1 M commercial property right away? Just put 200k down or whatever and finance the rest?

Yes, that's right.  It doesn't work that way on SFRs, duplexes, triplexes, or four-plexes (you need to show you can support the property without the income from the property itself), but on commercial properties, they vet the property.  If you have the downpayment, so they have recourse it goes wrong, and the property is self supporting (within their projections/guidelines, i.e. with vacancy, etc.), they'll lend at commercial rates.


Quote
Question 2:

Regarding residential, my question remains, if I am maxed up on my DTI, would a lender consider the income production of the property i am trying to finance?

Usually not.  At best they may consider 75%, if it's already occupied.

If your DTI is that bad, work on improving it.  Each property you have should LOWER your DTI, and make it better, because it should be cash flow positive, so it should increase your debt, but increase your income by even more.


Ok ... My DTI is enough for the first 2 properties... However, how long to keep getting more properties do I need them before a bank considers the income on those properties as a data point on their analysis for a 3rd property?

2 years of tax returns? 1 full year until they see the cash flow on my taxes? Sorry for the question but trying to base on my game plan...

So, if this is true, what stops a person of going directly to a 5 unit property instead of relying on DTIs and just look for a nice property where your personal income does not come into play?

arebelspy

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Re: Question regarding financing on RE
« Reply #6 on: October 02, 2016, 10:47:10 PM »
Thats interesting...

So are you guys saying that a multi-unit property (>4 units) the bank looks only at the potential cash flow production of the property instead of your own personal income? This seems odd, at least for me, in my country banks don't do this! It's always your own personal income. Even if you can demonstrate that a property will yield X you need to demeonstrate RIGHT NOW (before the property) that you can afford it's mortgage.

So, what's to say that someone that makes 50k annually why dont they buy a 1 M commercial property right away? Just put 200k down or whatever and finance the rest?

Yes, that's right.  It doesn't work that way on SFRs, duplexes, triplexes, or four-plexes (you need to show you can support the property without the income from the property itself), but on commercial properties, they vet the property.  If you have the downpayment, so they have recourse it goes wrong, and the property is self supporting (within their projections/guidelines, i.e. with vacancy, etc.), they'll lend at commercial rates.


Quote
Question 2:

Regarding residential, my question remains, if I am maxed up on my DTI, would a lender consider the income production of the property i am trying to finance?

Usually not.  At best they may consider 75%, if it's already occupied.

If your DTI is that bad, work on improving it.  Each property you have should LOWER your DTI, and make it better, because it should be cash flow positive, so it should increase your debt, but increase your income by even more.


Ok ... My DTI is enough for the first 2 properties... However, how long to keep getting more properties do I need them before a bank considers the income on those properties as a data point on their analysis for a 3rd property?

2 years of tax returns? 1 full year until they see the cash flow on my taxes? Sorry for the question but trying to base on my game plan...

Depends on the lender.  You should be working with a good mortgage broker who can help you with this.  Typically, from what I've seen, they don't count until you have two years' experience with your first one (so subsequent ones won't have this restriction), and they are on your taxes.  So one you buy in Nov, rent in Dec, show it on your taxes and a valid lease, they may count that (though, again, they typically only count part of it--75% is the number I usually see).  Sometimes they'll count it with just a lease, but usually want to see it on your taxes.

Get the second property, which will improve your DTI, then wait until the lender counts the income, then get the 3rd, then wait.. once both those incomes are counted, maybe you can get 4&5 at the same time, then maybe 6-10, then you're capped out of Fannie/Freddie and can get private money.  It'll take a few years though, and you can cross that bridge when you come to it.

They key, of course, is getting good deals, so that they improve your DTI (even after PITI and 75% of rents).

Quote
So, if this is true, what stops a person of going directly to a 5 unit property instead of relying on DTIs and just look for a nice property where your personal income does not come into play?

Nothing stops them from looking.  Finding a deal where it makes sense, saving up for the down payment, etc. are all still challenges.  Many times, with today's low cap rates due to the search for yield and ZIRP and all the money pumped into the system via QE, a property WON'T support itself on cash flow, unless there's a HUGE down payment.

The commercial lender may also want to see some experience with rentals.

If you can find something though, financing is not the problem.  If it's really a deal, money is available.  It's the deal that's hard to find, not the money.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

MrSal

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Re: Question regarding financing on RE
« Reply #7 on: October 02, 2016, 11:35:52 PM »
Interesting. So much different where i come from! Overthere money is the problem :D

Enigma

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Re: Question regarding financing on RE
« Reply #8 on: October 04, 2016, 11:45:50 AM »
Interesting and pretty much a reality for me.

Prior to this year I had 16 units.  (4plx, 4plx, 3plx, 3plx, 1-SFR, 1-commerical)
- The bank asked for a rent roll, few years of personal taxes, my 'Personal Financial Statement'
- Prior units almost all paid off (80%)

In Jan-2016, I put in a backup cash offer for 10units (6plx, 4plx) for 30k per unit (Tennessee).  They were trying to close with another buyer but that fell through and I closed quickly.
- I borrowed the money from a third party/family friend - 10% short term loan
- Took almost 2 months to finalize and secure a bank loan

Due to the bridge loan I was also able to give the bank a copy of the new property's rent roll and everyone's leases (given to me at closing)

The bank closed my loan with reconsolidating my past loan (25% that I owed and the new loan).