Small Multifamily BRRRR Financing and Credit Scores

Small Multifamily BRRRR Financing and Credit Scores

Rental Property Investor · Piedmont, SC · Member since 2016 · 37 posts · 17 votes

Long time since I've been on here due to a recent move and job change or sorts. 

To start off, we bought a house in 2010, lived in it for 3 years and moved. We have been renting it out successfully ever since. Most recently, we refinanced out of the VA loan that it was initially under in order to purchase our current residence. I'm covering expenses at this point and letting the tenants increase my equity. My initial plan was to just hold it and sell it in approximately 10 years to help pay for kid's college expenses. However, in the last couple of years I have replaced all the major systems and renovated the master bath and feel like now would be a good time to sell while all those pieces of the puzzle are new.

I would like to roll the profits into a small multifamily BRRRR strategy. I have a few questions as to the nuances of the financing:

How do you get around the debt/income ratios when your portfolio gets past the first few properties and you need to finance the next or if you need to go out and purchase something else on credit?

I would most likely put these properties under an LLC, but since it's a pass-through entity, it won't save me from the above. Is a commercial non-recourse loan an option? How hard is that to find?

I would imagine all the debt doesn't do your credit score wonders... 

Any insight into this would be greatly appreciated.

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Lee RipmaPro Member
Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
7y

You can only get a commercial loan if you're holding title in an LLC. Commercial lenders to look at you but they don't care about DTI ratio like residential lenders do. Loans under 1M are rarely non-recourse, so you're looking at recourse with a personal guarantee if you get a commercial loan under 1M. You could always max out your residential mortgages before moving on to commercial. I hate residential lending and I get commercial loans on my properties, even if they are under 5 units. Commercial loans are held in LLCs so I haven't seen any effect on my credit score from having them. I don't think the lenders even run your credit when you take out the loan. They are mostly looking at the asset and you but not in the same way that a residential lender is looking at you. They want to make sure you don't foreclose, they hold the note on their books.

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    You can only get a commercial loan if you're holding title in an LLC. Commercial lenders to look at you but they don't care about DTI ratio like residential lenders do. Loans under 1M are rarely non-recourse, so you're looking at recourse with a personal guarantee if you get a commercial loan under 1M. You could always max out your residential mortgages before moving on to commercial. I hate residential lending and I get commercial loans on my properties, even if they are under 5 units. Commercial loans are held in LLCs so I haven't seen any effect on my credit score from having them. I don't think the lenders even run your credit when you take out the loan. They are mostly looking at the asset and you but not in the same way that a residential lender is looking at you. They want to make sure you don't foreclose, they hold the note on their books.

  • Rental Property Investor · Piedmont, SC · Member since 2016 · 37 posts · 17 votes
    7y

    @Lee Ripma Thanks for the reply. So, I need to refresh myself on the LLC stuff as far as pass through goes. I didn't know if you had a loan in the LLC, that they don't look at you personally. That's great to know.

    Is a residential mortgage under an LLC handled the same way?

    Other than for tax purposes, are there any other pass-through issues? 

    ** I know, I know... seek a lawyer. This isn't legal advice, etc. I'm just trying to figure out how you guys handle this. **

  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y
    @Rivers Plowden So you can claim your losses or gains on a schedule E or you can do it through an LLC, same tax treatment. But I’m not an attoney or a tax advisor so check that ;) So technically if you get a RES mortgage you can’t hold title in an LLC. You’ll have to hold title in your name to close. Then you can transfer the title to you LLC. This triggers the due on sale clause and is not allowed. However, people do it all the time. I’ve never done it bc I hold title in the LLC all along BUT that’s w a commercial loan. Commercial lenders look at you, it’s just as horrible as residential lending! Where they want to see everything, including your last physical results ;) tax returns and a personal financial statement is all I have to give!
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    @Rivers Plowden

    I believe commercial loans are the way to go through small local banks. Process is pretty basic and they typically look at the profitability of the investment.  They will still run your credit because you will need to personally guarantee the loan.  @Lee Ripma is correct most loans under 1 million are recourse not nonrecourse.  There is a multi family program for a minimum of 750K through Fannie.  

    The debt on commercial loans does not show up as debt to you. It is an entity debt in this case a LLC. Mortgages are not reflected against you.

    Good Luck.

  • Rental Property Investor · Piedmont, SC · Member since 2016 · 37 posts · 17 votes
    7y
    @Kenneth Garrett that explains a lot. I appreciate it!
  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    7y

    @Kenneth Garrett

    How do you get the 750k loans through Fannie? Are there brokers that work with these products? 

  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    7y

    Yes, only certain brokers.  Contact old capital.  James Eng is on BP.  They also have a podcast called Old Capital Podcast.  They are very helpful.

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