Is it hard to get a bank to refinance mainly on rental income?

Question

Say a typical 2 br house goes for $250,000 and rents for about $1500 in a low priced area. You look at the layout and convert the living room, dining room and laundry room into rental rooms as they all have opening windows. The LR and DR are much larger than the bedrooms so they go for quite a bit more. The rooms are renting for say $400 & $450 for the 2 bedrooms, $600 for the LR, $550 for the dining room and $400 for the smaller laundry room. So now its pulling in $2400. Quite a jump. Then you renovate that dingy basement and get 3 small rooms rented down there at $400 each. Now we're at $3600. My point is if we vastly increase rental revenue will the bank significantly increase the loan value it will allocate to us? (And we can show several months of consistent revenue at these high amounts of course.)

When we end up selling it, surely it would sell as a revenue property with that much revenue, right? Being this is unconventional you'd have to raise the typical cap rate. So let's say 10%. That's pretty generous. $3600 x 12 = $43200 x 10 = $432000, a huge profit from $250,000. I know I'm winging the numbers and there are many other expenses but we're just talking generally here.

What about refinancing it? Will most banks ignore the revenue and just look at a general appraisal value for similar homes in the area? I want to find a lender that looks at the money the property is pulling in, not me so much. (My credit report is excellent but right now I have little income, just a lot of savings that I have invested in other things but it is quickly accessible in the event of an emergency.)

And if nobody is willing to reward me for my ingenuity in vastly raising the rental income I guess I just enjoy that rental income (with all its dreadful taxes that accompany it).

Steven Goldman · Answer

This sounds like a boarding house. Very few lenders will lend on a boarding house with shared bathrooms. The rent is not the problem it is the type of use. Also, the valuation could be problem tic as it will be comps not the income used to determine value. We have had numerous inquiries about these types of arrangements and they are very hard to place. Good luck.

Julie Williams · Answer

@Steven Goldman I agree that this is a boarding house. In theory, after two years of collecting rents, rents will be counted as income by a bank for refinancing purposes, but the boarding house angle may throw a wrench in that. I have been looking to buy property in Vermont (because I want to move there) and the travel nurse angle. I found out the state of Vermont defines a boarding house as more than five unrelated adults renting rooms in a dwelling unit. If it is a boarding house it requires a zoning variance and/or change of use permit whether it is a single family or a multi family with a five bedroom unit. (You may have up to four unrelated adults in each unit of a multi family without a zoning variance and/or change of use.) BUT the towns may have different zoning regulations. Just today a zoning admin shot down a project because it has three BR's and in that town a boarding house is defined as three or more unrelated adults! I had a zoning admin in a small Vermont city tell me I could not rent to travel nurses unless I lived there, and it would be a boarding house no matter what and she needed to think about whether they would allow it. NEXT. I had another town admin in a different small city tell me as long as it was fewer than five adults, go right ahead. No need to even tell me about it, just run it by the fire marshall and do whatever he says for your tenants' safety. I have had some zoning admins say I had to live on premises and some say that I did not. You have to check, town by town, if you want to rent out to a bunch of different adults, and you had better be on town sewer, too. Boarding houses have stricter rules for fire safety being enforced (like proper egress: window sizes, number and placement of exits, maximum height of egress window from the ground) and even (in New Hampshire) crash bars on the doors for quick escape! Good luck to you @Roger Simons.

Roger Simons · Answer

That was very informative Jonathan. And you touched on the very things I'm concerned about. I would need the lender to focus solely on the revenue. But as you said, this may be difficult as its really in a residential area. So it would need to be marketed as shared accommodation, but taken to the max. And zoning laws would need to be respected. Not sure how far one can push it. There are some big families out there. But they are related so rules may be much more flexible for them. It is odd that on one hand they are often clamouring to lower rental costs for the public yet seem to squash entrepreneurial attempts to solve the problem. I should mention this would be done by an owner living on the property. Active management. That is crucial. Of course that means you can't scale upwards. Well I guess you can just get/build a barn type property and turn it into more of a barracks than a residence! THAT would sure raise the rental unit availability in whatever area it was implemented if done on a large scale!

Roger Simons · Answer

Yes it would be based on DSCR of course. Its all about revenue. Are you asking a question? If so, most definitely in this hypothetical scenario. Quite a bit more.

Jonathan Soto · Answer

need to do a commercial loan based on DSCR. debt service coverage ratio. would rents cover expenses on property.

Jake Wiley · Answer

The concept sounds good on paper. Assuming this is a property you own the banks are going to look at past tax returns and bank statements to prove out the rent numbers, however the home still has to appraise and it sounds like it is a residential home thus it's not really a Cap rate thing but a market value based on comps. I'd think you are going to have a hard time getting the jump from the two bed house to 7 with the same square footage and could attract code enforcement. It would be a very specific tenant that is okay being crammed in like that. Not to mention it wouldn't be a very appealing property with every possible room occupied as a bedroom on a resale. Long story short, unlike true multi-family (5+ units), you would still be in the Resi world from an appraisal perspective and are subject to comps from surrounding properties. I'd say, if you can make the cash work for you that's likely the play.