Big nest egg, excellent credit, low income - creative options?

Question

Need some new digs. Rentals in my area are WAY overpriced, but SFH available for purchase aren't that bad.

I'm in a weird position: lots of liquid assets (not quite enough to purchase outright but enough to make a significant downpayment and fund a major reno), excellent credit, but a very low income. Too low to qualify for any conventional mortgage (I used to work in finance, hence the nest egg, but now I'm a teacher, hence the very low income).

I'm single and with COVID that won't change anytime soon :-). My family is not willing to cosign (they think I should make it on my own, which I understand).

I've seen a lot of flips in the area resell for huge profits above the original prices.

Obviously I'd need the right deal to make it work, but is this doable?

1. Use private or hard money to acquire an underpriced property in a desirable area

2. Force appreciation through renovations

3. Cash-out refi, pay off the PM, and put 1-5 years' worth of mortgage payments in escrow to pay off the conventional mortgage while I wait for the property value and my income to increase?

In my head, this is an elegant situation: as long as the numbers work out, my income is irrelevant to a bank since they are guaranteed to be default-free via the escrow account long enough to sell the loan if they wanted to, and over time the value of the house and my income should each be substantially higher.

It's not without risk, and it's unorthodox, so it will probably be a struggle to find a lender comfortable with this scenario.

Anybody tried this? How'd it work out? Other options? I welcome your advice.

Chris Levarek · Answer

@Dante Ward This sounds alot like a BRRRR. Although, coined that here, it's been used by quite a few people. You buy with cash, renovate, rent it and refi it. Your step 3, I guess I'm not seeing the purpose of the escrow account. Banks look at your income. If you can convince a bank to look at a big pile of cash instead, that's just liquid capital that could disappear at any minute. I've never met a bank that qualified me on a big pile of cash. Most banks want to see income. 2 years of income for a W-2, 2 years of tax returns for a business, 6-12 months of rental income, etc.Hence the Rent part of the the BRRRR, getting that 6-12 months of rental income behind you qualifies the refi and allows you to pull out the equity. It also allows you to build your income for the next loan.Let me know if I am missing something though. Personally, I've done this strategy, BRRRR, on multiple duplexes with other partners, so it does work. The concept can even apply on bigger properties, if the value-add play is high enough.

Alexander Szikla · Answer

Well, rentals do allow you to count a portion of their income (typically 75%) into the debt to income ratio. Something to consider. You can also use asset based loans to acquire and create forced appreciation as suggested, transfer to LLC and then have the property "stand on its own" during refi. Will be harder to find lenders who will play ball and financing will be 50 to 150 bps more expensive, but seems like your best move!

Stephanie P. · Answer

@Dante WardJust live where you are and pay cash for some of the flips. Then refinance them using a DSCR loan. Once you have enough passive income from the rentals you'll qualify for a mortgage.RESPA requires income of some sort; whether it's bank statements or W2's or tax returns, but you have to show that you can afford the monthly payments. Even an asset depletion loan is a form of income. There are loads of those type loans out there. Find a good mortgage broker, they can help you for either scenarioStephanie

Dante Ward · Answer

Hi Chris,I guess the main difference is that I'd be looking to live in the property rather than rent it out, so the property (unhelpfully) wouldn't produce additional income.The point of the escrow account (at least how I envisioned it) would mean the loan is effectively over-capitalized, with at least some of the initial payments funded from the proceeds of the loan itself. In other words, because of my nest egg, I don't really need the cash-out refi to fund another purchase or something. If the renovation produced enough equity above my acquisition costs, my goal would be to refi into a relatively high LTV loan, and use the proceeds to pay off the hard money lender, and use the rest to cover my mortgage payments while I wait for my income to improve. I would, at least in theory, have several years for my income and/or assets to increase, while the bank would carry zero default risk for at least several years.It's sort of financial engineering, but lots of companies use the exact same strategy with unsecured high interest borrowings. I don't see a reason why an individual couldn't do likewise borrowing against a secured asset, but not everything about REI is strictly rational, and for all I know there could be regulatory restrictions against even trying this sort of thing.