Stalled on buying my 3rd Property - How to push past?

Question

Hi BP crew! So excited to reach out today. Hopeful that I can get some advise to help me keep pushing forward in my REI journey! I purchased my first 3 unit FHA in APR 2018, and then my second property, a 5% down duplex in JAN 2020 (currently occupying 1 unit). I have $41K in savings and quite a bit of equity in the props already, due to market appreciation! My agent who is really more of a mentor, told me early on in this journey that "Savings don't buy houses, houses buy houses."

I have this decent savings built, but would like to hold onto it as E-Fund, CapEx savings and coming up here pretty soon, a new vehicle (will buy used). I reached out to my lender (used on both deals) and tried to get preapproved for a 5% down owner occ loan on a single family with an in-law apartment (duplex). I was wasn't approved because my DTI: is too high now. I'm looking at my savings and saying it isn't quite enough for a 3-4 unit in the area at 20% dp, and I'd be leaving myself vulnerable. I see the equity I have, despite buying with low downpayments, and keep thinking; am I going about this wrong? Am I attempting to save more, when I should be looking at doing what my mentor said years ago - use the equity I have to buy more houses.

Prop 1 (3.5%dp FHA 2018) - Purch. Price $373K - Current Market Value: $525K

Prop 2 (5%dp Conv. 2020) - Purch. Price $280K - Current Market Value: $460K

I need some ideas to think on, terms to research and advise on how to get this ship moving again. I don't want to stall out with 2 properties at 31 y/o! Have to keep pushing! Thanks BP! Love you all, and have a great day!

Kevin Sobilo · Answer

Sell property #1, use a 1031 exchange to avoid paying income tax on your proceeds from the sale and then use that money as a down payment to buy 2-3 more properties.

By selling property #1, your DTI should improve, and for the new properties you may want to focus on things that cashflow better. I suspect that your DTI was too low because those properties were too expensive relative to the rent. Fortunately you bought at the right time and were able to get some nice appreciation.

Also, consider starting an LLC and using portfolio loans in the LLCs name with you as guarantor. These won't show up on your credit report and the financing will be based on the property being able to cashflow on its own not on your personal finances so much.

Shawn L. · Answer

I really think its more a matter of finding a lender that will calculate your DTI correctly. If your rentals are increasing your DTI, you're doing something wrong that you should figure out before you buy any more. If they're cash flowing, they should be offsetting their mortgage and then some.

Chris Tarpey · Answer

Awesome start!!

Have you reached out to any other lenders? Every lender is different.

Most lenders that I have dealt with, will accept current lease agreements that show income to offset your DTI.

If all else fails, can you find someone to co-sign the loan? Perhaps partner up? Or switch to off market, where you can use your cash as "skin in the game" and connect with a PML/HML to get a deal below market value?

Theres definitely more than one way to get over this hurdle! Keep at it:)

Shawn L. · Answer

As previously mentioned, different lenders have different ways of calculating DTI with respect to rental income. Some will require minimum of 2 years experience (which you seem to have, but worth mentioning) as a LL before accounting for any offset to mortgages. Some will simply use the 75% of rent roll. Some will base it on your tax returns. I have seen one that based it on tax returns but refused to back out depreciation deduction. Bottom line, check in with some other lenders. Not that I have any idea as to the specifics of your situation, but if you're cash flowing you should be offsetting your two mortgages and then some. Assuming you don't have a ton of other debt and your income supports your new mortgage, I'd be surprised if you don't get approved.

Nick Burkhardt · Answer

Thanks so much gentlemen! I like the idea of HELOC property 1 and using that to put down on another 3-4 unit at 20%+ dp. Then focus my cash flow on paying back that HELOC asap.  I'm worried that if I were to take out that 2nd mortgage and then approach lenders even with 20%+ down I would be denied so maybe that's the point that I create an LLC and use a Portfolio Loan (?)

Keep the ideas coming! I'm loving the chat!

Cody Neumann · Answer

@Nick Burkhardt

If it were me I would try to get a HELOC if possible or cash other refi to pull that equity out to buy more properties.

Stalled on buying my 3rd Property - How to push past?

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