I am wondering what are optimal ratios ie. LTV and cash reserves, that a bank would like to see for me to continuously expand a rental business. I just want to get an idea. I’ll be visiting some local banks soon.
JP
Not to be a smart a** but if you want to know what the banks want to see and you are visiting the banks, I’d say just ask them!
I’m finding that the last several banks I’ve talked to wanted to see my income tax forms for the past few years to verify my rentals and net income from all my buildings before they’ll even discuss what LTV they give you on a building and what cash reserves I need. To which I say, I’ll take my business somewhere else. It’s ridiculous. Anyone else seeing banks do that lately? A few years ago, that never happened. I just showed them my spreadsheets of financials, rent rolls, and proof of no taxes owing, appraisal, and it was fine.
Even hardmoney lendors won’t give you a dime until your net income (income minus business/farm losses) doesn’t raise your dti out of the “ideal” range. We are having the same problem. In fact, we are in the process of amending our tax return so we can adjust our dti. To make things worse, they won’t include income from rental properties in your income until you have them on your taxes for two years instead of one year. We are doing all we can to make our pretty picture — also making sure we have 6 months expenses per house in LIQUID cash (not 401k & stocks, etc.) in a savings account like ING. We made the mistake of burning it down because we thought our equity and our investment accounts would do the trick. I am learning that it pays to have a lendor and your tax accountant that are in communication to help me follow the rules as they are changing so rapidly. Where there is a will, there is a way. Sucks to sit and watch opportunities pass you by and I keep thinking there has to be another way other than owner finance or subject to, but we are looking for those right now.
Do you know if there is an LTV requirement on current properties? I only have one property. My equity position in that property is approximately 10%. It has a good cashflow but it hasn’t been 2 years yet. I am in a very good cash position not including IRA’s but would rather not pay down the mortgage on the property. Would this be necessary to make the balance sheet look good or is just having the cash good enough? Thanks.
JP
There are lots of moving parts here, but I will do my best to let you know what my experience is with my bank and several of our investors programs as well.
To purchase the down payments required is between 10-20%. In order to count existing rentals as income, you must show them on your tax returns for the last 2 years in most cases, but some investors at 1 year. As far as reserves for existing rentals, there is no problem using 401K’s, or any other investment that is not currently liquid, just so long as its capable of being made liquid. The genereal rule of thumb though is that you will only be able to count between 65-70% of any asset such as a 401K, or stocks, mutual funds. This is to allow for fluctuations in the value from day to day. You will need your most current statements.
And to answer JP 's last question…no there is no requirement as to your existing rentals being at a specific LTV.
Here is the other typical issue that most investors tend to run into. The number of financed properties that you own. The typical conventional lender will allow 4 financed properties plus your primary residence as a max. I know of some investors that will go to 10 though.
Hopefully I have answered most of your questions here. Good Luck Guys!!!
I agree – the hardest jump is above the 4-5 property range. We own 7 but have loans on 5. They shut us down though when we didn’t have CASH in a bank account. 401ks etc. helped, but COLD HARD CASH always wins. They like to see $3-5K per property sitting and doing nothing but earning savings account interest and NOT in your business savings account. That is hard money and conventional