Next Purchase: Refinance or Conventional?

Question

Hello BP,

Thank you all in advance for taking the time to consider my question.

I just rented my third rental, and am preparing to file my second year's tax return of being self-employed. Finally, I will have some options available to me in the realm of traditional financing (without W2, you are required to show 2 years). I know that I would like to start refinancing my units (they are all free-and-clear), and would also like to take advantage of low rates with a conventional mortgage this year.

I am torn between whether I should refinance one of my units first so I can make a strong cash offer on another REO, or go the traditional route first. I am worried that if I do the conventional first I may disqualify myself for refinancing or vice-versa, as on paper I don't show a lot of income (the majority of my income has taken the form of equity). If I refi to purchase another rental, and can show positive cash flow after debt service, am I correct in assuming that this would actually increase what I would qualify for in terms of DTI?

I purchase distressed properties (mostly condos in South Florida; Broward County), rehab them entirely myself, and rent them. I am a broker and find my deals on the MLS where competition is pretty fierce and will probably have to purchase at a premium if offering financing on an REO with a conventional as opposed to cash if I refi out. A conventional would also likely limit the extent of distress the bank would approve to build equity. I am not considering 203k or other distressed-friendly loans, as to my understanding, they dictate that the lender should approve the contractors/subs, and I prefer to do my own rehab.

I have been looking forward to finally being able to qualify for financing since starting down this path 2 years ago, and really want to make this work. I will be interviewing some local banks next week. Should it prove helpful to anyone else in a similar situation, I will update this thread with what I learn. Many, many thanks!

Justin Jocewicz · Answer

Hey @Elan A..  All three of my properties are condos.  If it is the banks own money (portfolio loan), then they do not care if it is government backed.  I am saving to buy more properties via a bulk package or multi-family.  Numbers are interesting around here though :-(

Alan A. · Answer

Thank you @Justin Jocewicz I plan on doing just that this week. Will post the results here. My only concern is that all of my units are condos, and I understand there are additional hurdles involved in terms of qualifying the HOA.

How did you refi go? Did you use it to pick up another unit?

Justin Jocewicz · Answer

@Elan A..  I would check out a local bank that offers a portfolio loan.  This loan will refi you out and will be mostly based on the asset and associated cash flow.  They will hedge their investment by giving you 70-75% of the appraisal, but that is a good thing for you in the long run.

Just my .02.  Just did this with a local bank and it worked out well.

Jerry Padilla · Answer

@Elan A.

Delayed financing would be paying cash for future purchases and then obtains financing with in the first 6 months from closing; Here is some more info on the subject. I am always glad to answer any more questions.

A cash-out refinance within six (6) months of a purchase transaction when no financing was obtained for the purchase transaction are allowed under the following parameters:

• The new loan amount is not more than the actual documented amount of the borrower’s initial investment in purchasing the property, plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV).

FOR AN INVESTMENT FIXED RATE CONVENTIONAL MORTGAGE;

• 1. SFR, mortgage #1-4 - 75% LTV
• 2. 2-4 unit MFR mortgage #1-4 70% LTV
• 1. SFR mortgage #5-10 -70% LTV
• 2. 2-4 unit MFR, mortgage #5-10 - 65% LTV

Alan A. · Answer

Thank you @Jerry Padilla

Would you mind elaborating on delayed financing? I was under the impression I would need to start paying immediately upon refi, which would not be ideal if it took some time to find and close on the next purchase.

Jerry Padilla · Answer

@Elan A.

Yes, If you are cash flowing the greater the better for your DTI's. Whatever rental income you show on tax returns is what will be counted as your income. 75% of lease agreements will count on any real estate not yet able to show on your tax returns.

Once you reach 5 mortgaged properties, it is more "complicated" to cash out, so I would cash out now on the three properties and new purchases bought cash could be finance with delayed financing after you purchase within 6 months from closing.

To see if you could qualify for all three, you could apply for the total amount and see if they approve and then have it selerated into three transactions, for each individual property.

Make sure you use a knowledgeable investor with financing, you don't necessarily need a local lender as it looks like you will qualify for conventional.