I am wondering how investors get loans once they accumulate a number of rental houses or investments. I have been told some banks or at 4 now. I have heard 10 in the past. What if you want to own more than that?
I have a total of 4 now.
10 is the max allowed with conventional financing. Nine investment properties and your primary residence. Used to be if you wanted more than 10 you could find Alt-A lenders that would allow more than 10, but most of those people are gone now. There are a few left, but there rates are astronomical.
Can you use commercial financing on a rental property? Single family?
Yes, but the rates are not as attractive and you will not be able to find a 30 year fixed rate loan. You will be able to find a 30 year amortization but it will have a balloon after typically 3,5,7, or 10 years. And most commercial loans will have some sort of pre-pay. I am running into the same problem myself. I have several investors that have more than 10 properties and we are having trouble finding lenders that will take their loans. There are some out there that will, but the rates are in the double digits killing the cash flow. What we are exploring now is moving some properties into blanket loans in the name of their LLC thereby clearing them from their personal credit.
Agree with Chris. He just about summed it up.
of lenders that once allowed more than 10 properties has been reduced quit considerably. Still a few conventional lenders with decent rates but ltvs will need to be 70-75%.
Investors will need to explore using commercial loans either made to individual properties or blanket together. Lender will usually want minimum of 5 properties in the blanket loan.
Commercial rates higher, terms shorter, and closing cost much lower.
Is the 10 loan limit driven by the ability to sell the loans in the secondary market? Bank regulations limit ‘loans to one borrower’ to a certain percentage of capital but I’ve never seen a bank with a stated number of loan limitation.
71,
Most of the time it will be in the underwriting guidelines that the customer never sees, but it also shows up on the Automated Underwriting findings as well. It is a Fannie/Freddie guideline. You can go to efanniemae.com and read up on it if you like.
I have a similar situation. I currently own five multi-family rental properties. I had an offer accepted on my sixth property in late August, right in the midst of the melt-down, and I found myself going from lender to lender looking for one that would give me a 90%LTV for a legal three family. I had a few options at 90%, although the interest rate was ridiculous. I am now looking for alternative methods of obtaining financing for the purchase of additional rental properties, and was looking for some advice. Most hard money loans are looking for properties that need substantioal improvements to them, where I currently am looking for properties in pretty good shape, that are currently occupied. Also, when I would try to refinance the hard money loan, I would probably run itno the same issues with Debt to Income ratios and the such that banks require for financing an investment property. I have found a great product that allows individuals to put their 401K, Roth or traditional IRA’s into an account which then can be used as a self-directed IRA that can be invested in real estate. The only problem is that the IRS states that you and your direct relatives are disqualified; thereofore you can not invest with your money. I was wondering if there were any newtworks out there that linked up people with retirement funds with investors like me! Also, previously stated was taking a blanket loan out on multiple properties. What banks do this, and how should they be approached?
The blanket loans that I have referred my customers to are with small local or regional banks. To avoid the DTI issues you could go with a no ratio product, but I don’t know of any that go to 90%.
My method of investing involves getting the loan for the smallest down payment, then using the money I would have paid in the form of a down payment for improvements to the property that will in turn, increase the value of the property as well as the gross rents I am bringing in. I understand that banks are risk adverse, therefore they only take 75% of you rgross rental income, and then expect your DTI to come in under 50%, while factoring all your mortgages into the equation. I beleive they are in essence, double dipping; where as they are already extracting 25% from the rental income to cover for operating expenses; so why don’t they throw all the mortgage debt to the side and not factor that into the total DTI calc? I assume that it is in the case that all my rentals all of a sudden became vacant, or nobody paid me rent all of a sudden, then I would have to find a way to pay all the mortgages from my paycheck! That is why I need to find alternative ways to obtain financing, otherwise I’m never going to be able to quit my day job! What should I expect when I go to the local bank to ask for a blanket loan? Will they require the same ratio’s, etc…? What LTV will qualify for a no-ratio loan in this every changing market? Will they require source and seasoning?
In regards to the blanket loan the qualifications that my customer qualified under were 80% LTV and a debt service coverage ratio of 1.2%. Meaning that if the properties total combined payments were $5000.00 then the total combined rents collected must be at least $6000.00. This loan was done by a small local bank in Cumming, Georgia where my customer resides.
In regards to your debt calculation question the mortgage debt is cancelled by the rent or 75% of the combined rent. They do not throw out the rent and still hit you for the debt or no one would be able to qualify for more than one or two mortgaged properties.
In regards to the no ratio program depending on your FICO you can get up to 90% on single family residences. Multi-family is lower more like 75%. You do need to have reserves. Most of the time it is six months reserves of PITI.
Let me clarify what I was speaking about in regards to the banks double dipping. They first take your gross rental income and multiply that by 75% to factor for operating expenses. This amount is added to your other income (wage income, etc…). This amount is what is used for the income portion of your DTI calc. On the debt side, they take your PITI on all your properties, along with any and all debt that would typically show on your credit report (credit card minimum payments, student loan payments, car payments, mortgage on personal residence, etc…) and total this number for your numerator. The equation is as follows:
DTI = Debt/ Income
Therefore, when the bank has a DTI criteria of 50% or less, it is very hard to get there when you own multiple investment properties. The reason why is that the original purpose of the DTI critieria being at say, 50%; is that the bank is anticipating the other 50% of your income to cover your utility bills, groceries, car insurance, savings, etc… ( anything you spend your money on that does not show on your credit report - your personal operating expenses and savings). So the bank is not being fair by adding in your PITI into the debt part of the equation, but only including 75% of the rental income. They should take the 75% of the rental income and not factor the PITI from the investment properties into the DTI calc at all, or give you credit for 100% of your gross rental income, then factor your DTI with the PITI. It seems like the bank is safeguarding itself by factoring out "operating expenses, not once, but twice out of your investments. That is why I am now having a hard time obtaining financing on great, profitable properties!!! What ever I do, my DTI still comes in above 50%!!! It’s like they are expecting you to obtain rents that would be in excess of 267% of your PITI!!!
To prove this crazy percentage, I have entered the following equation assuming your PITI is $1000 (for simplicity).
.75i = 2d
.375(i/2) = d
i = (2d/.75)
i = ((2*1000)/.75)
i = 2,667
d = 1,000
i/d = 267%
This equation is showing that to meet the banks criteria, you have to take your rental income by 75%, then it has to be at least double the PITI on it. The equation actually even astounded me!! I thought it would be between 225-250% Sorry for the long post, thought it might be of interest to some!
Your final equation is incorrect. It should be debt/income not the other way around.
d=$1000
i=$2667
$1000/$2667=.37 or 37%.
Based on your numbers this property would cashflow by the banks standard of 75% by over $1000. How could this possibly hurt you? Banks do not double dip. They just make you responsible for 25% of the payment. If you are buying and renting correctly all of your properties should more than cashflow. Banks do not like negative cashflow. Because negative cashflow on multiple properties is a recipe for disaster. I think this is the equation banks have seen lately.
negative cashflow= :banghead
foreclosure = :help
:banghead = :help
this equation is set out to prove the required percentage of gross rents in relation to the PITI on the property is required in order to fall under the banks criteria (less than a 50% DTI ratio - assuming you had no other income or expenses). Therefore, all things aside, the bank has set up a cushion for the possibility of the property sitting empty for a prolonged period of time. To put this percentage into perspective, a 180,000 house with PITI of $1,700/mth would require gross rent of $4,539 to stand alone as an investment that meets the banks criteria.
$4,539 multiplied by 75% = $3,404.25
D/I = $1,700/$3,404.25 = 49.94%
That means that you are generating cash flow before normal operating expenses
of $2,839!!! Wow, that is a great investment!!! I got really good investments w/in the price range and PITI numbers close to above, although I am only pulling in between $500 to $900 positive cash flow before paying for water, sewer, and maintenance!!! I think these are still great investments, although they don’t meet the banks criteria; and based on the example above; how do any meet the criteria? Can you explain the requirements for blanket loans in more detail?
Keifer,
The house needs to rent for $2,275 a month to be considered as a stand alone investment that does not have a negative affect on your current DTI $2,275 X 75%= $1706.25. Things like this really only had an effect on qualifying back in the days of 100% NOO financing when banks took negative operating income as a disqualifying condition. Nowadays where you have to put down at least 10% negative operating income is not a huge deal. The higher the rent on the property the less of an affect it has on your DTI. I don’t think you totally understand how DTI is calculated. The scenario you are describing takes into account that you have no other income and no other debt. For example on the scenario you described above. If the house rented at $4539 per month… $4,539 multiplied by 75% = $3,404.25. So if your only income was that rental property and you had no other debt then you are correct that is all you could qualify for. Most people that are investing in property have jobs, and other debt. In fact you have to have be employed either for yourself or someone else to get a loan on a house so the scenario you are describing is one that could not happen. Very similar to the question “if your car was going the speed of light and you turned on your headlights would anything happen?” So in every other case other than the one you described (no other income/no other debt) your numbers are incorrect. In every other case this house would only need to be rented for $2275 a month to have zero affect on your debt to income. You could buy houses all day long if you could find investments that worked with these numbers because the income would wash out the debt. As a matter of fact even using your scenario only your first house would need to bring in your numbers after that my numbers would go into effect. I hope this helps.
On a rental property debt is what you owe after applying .75 * rent to your PITI. If you owe nothing- no debt. It is not a reoccurring debt then.
Rent is not income but a payment toward PITI and expenses , then if there is money left over it becomes taxable income.
right?
On a rental property debt is what you owe after applying .75 * rent to your PITI. If you owe nothing- no reoccurring debt then.
Rent is not income but a payment towards PITI and expenses ,then if there is money left over it becomes taxable income.
right?
100% of the PITI is added as debt and the rent X 75% is added as income. For example if the property PITI is $1000 and it is rented for $1200 then $1000 is added as debt and $900 is added as income.
So for every $1000 of debt you need $2000 of income to keep your ratio at .5? On a rental at $1000 PITI you would have to be offset by a $2000 net rent not to hurt your existing DTI ratio?
How can you ever structure a rental property deal then that doesn’t kill your DTI ratio? Especially if you own more than a few?
No this is not correct. You don’t need to have a 50% DTI per property just over all. If you have $1000 of debt and 1200 in rent you get 75% of that rent or $900.00. So for example if you make 60K per year then you make 5K per month. So lets just say all of your credit debt and current house payment total $2000 before you buy this property. You would be at a 40% DTI ratio. $2000/$5000 = .40 or 40%. Now say you wanted to purchase this property and it was going to be $1000 a month and rent for $1200. So now your debt would be $3000 and your income would be $5900 ($5000 plus the $1200 X 75% or $900). This would put you at a 50.8% DTI which would probably be okay depending on your credit score and your assets.