When to refinance a portfolio into a commercial loan?

Question

Greetings BP Mates,I'm closing on my 5th SFH and intend to buy a 6th soon, but this pesky thing called the debt-to-income (DtI) ratio is starting to get a little high for conventional loans. I started investing early last year so I hope to improve my DtI after my taxes are done for 2020 and I can claim the rents as income.I could use some advice, or better yet, real experiences from my fellow investors. If I can't find private financing to keep future investments off my credit report, I will be forced to refinance my existing conventional loans into a commercial portfolio loan. I want to make sure my timing is good on this though. I feel guilty refinancing out of loans I just took out less than a year ago and I haven't gained a ton of appreciation or principal paydown since it hasn't been long. While my properties easily meet or exceed a 1.2 DSCR, they are in a few different states and I'm finding that only local community banks typically offer a portfolio loan and they only service the surrounding city, let alone take on properties out of state.My questions are:1. Should I keep my current conventional loans for another 4-5 years so it makes sense to refinance them into a portfolio loan and then purchase new properties using commercial loans or2. Refinance now into a commercial loan to clear my DtI and purchase new homes with conventional loans3. If my next purchase all but seals my fate for conventional loans, should I look to purchase this new property AND refinance my existing properties all into a single commercial loan so I save the $5K on closing costs of a conventional loan only to then have to pay closing costs again to refinance soon after.

4. Is there such thing as a bank that will provide a commercial loan to a portfolio that spans multiple markets\states?

Matthew Terry · Answer

@Michael Glist

Yes, I'm leaning towards DSCR. From a few lenders I've spoken to 1.2 DSCR is the minimum and if it is a portfolio loan, they will take the average DSCR, so if one property is only 1.1 and the other is 1.3, it averages out.

Jason Shackleton · Answer

@Matthew Terry

1. I don't really see the positive of refinancing and likely paying a higher rate while doing so unless you are pulling out a large amount of equity for more deals. I would simply let these deals sit seeing as they also have good cash flow. This is very situational however.

2. You already have 5 good rate conventional loans in place. Turning them into higher rate non conventional financing seems unnecessary. To me this is kind of reverse logic. This process would be giving up what you already have in order to avoid that which you don't want. By refinancing what you want/already have into what you don't want to once again be able to buy what you do want. This will also lead to more transactional fees

3. I would simply buy as many as I can conventionally and then use private money. That's what most investors do when they hit this financing wall.

4. I only know of private money lenders that will do portfolio/blanket loans for properties that are located within the same state. I wonder if others have connections that can pull this off?

Hope this help,

Jason

Caroline Gerardo · Answer

Refinancing into commercial loans is never going to fix your debt to income ratio at all. When you apply for a conventional mortgage you must provide the mortgage bills. The payment will be higher and you still get a 25% haircut on the rents.

If your rates on the loans you have are 4.25% or less leave them alone.

You may need to do bank statement loans in the future OR increase your income with a w-2

Michael Glist · Answer

I think at this point if the issue is DTI look into either a a lender that offers NON-QM loans or lenders that offer DSCR loans. The NON-QM lender may have the ability to get you a loan with a little more flexibility on your DTI. A DSCR lender will be looking at the property you are purchasing and its ability to cover the the mortgage, taxes and insurance with the projected rental income and not necessarily looking at your income and DTI.

Matthew Terry · Answer

@Jason Shackleton

I completely agree with what you are saying, but opportunity costs are what is nagging at me. If it takes me 5 years for it to makes sense to refinance into a commercial loan, that's 5 years of lost opportunity and cash just sitting around losing value.

I guess I need to find some private money then!

Caroline Gerardo · Answer

Your DTI is from IRS taxes. Income or loss flows from S Corp or Schedule C or K-1. The K-1 or S Corp shows on personal return back pages. Conventional lenders require ALL the filed returns. If you lie and say on the application that you only have one property, when you have six, that's fraud and you can get a nice orange jumpsuit, an ugly cell buddy, and fines. Commercial loans have higher rates so once you show the real taxes, you have more LOSS, thus your DTI is higher. Lenders also have three tools to find real estate that was in your name and view the transfer to the LLC. It's merely a click to find the properties and the recorded mortgages - doesn't matter if commercial or conventional loan it still counts in the DTI.  My guess is you are working with a rookie lender who doesn't have a full set of tools. Conventional, commercial, bank statements, DCR, asset depletion, and soft or hard money.

Matthew Terry · Answer

@Caroline GerardoThanks for your insight. I'm curious, why would it not help my DtI? My conventional loans would be wiped from my credit score. Even if the lender asks for a personal guarantee, it doesn't show up on my credit, or do I have this wrong? I would still report all my W2 income, but none of the mortgage debt the next time I go for a conventional loan.