Investment and Lending Options

[Eric Herrera]

Hey All.

Got an interesting scenario. My brother and father in law are moving to Greenville, SC and looking to rent a property together, as I do not believe they are in a position to purchase a property. I live in California where prices are extremely high. I wanted to explore that idea of finding a 3 bedroom or Multi-Family property and rent out to them. I also have thought about using my brother in law as a way to secure a a better rate/loan since it would be his primary. I assume we would need to have him on the loan or do a partnership?

I am also looking to connect with investor friendly agents in the area to see on and off market opportunities that meet the criteria above. Not opposed to finding something that needs a little work to force equity. I have about $50k to leverage so thought this opportunity could be a good one given the situation.

[Erik Browning]

Quote from @Eric Herrera:

Quote from @Erik Browning:

Quote from @Eric Herrera:

Hey All.

Got an interesting scenario. My brother and father in law are moving to Greenville, SC and looking to rent a property together, as I do not believe they are in a position to purchase a property. I live in California where prices are extremely high. I wanted to explore that idea of finding a 3 bedroom or Multi-Family property and rent out to them. I also have thought about using my brother in law as a way to secure a a better rate/loan since it would be his primary. I assume we would need to have him on the loan or do a partnership?

I am also looking to connect with investor friendly agents in the area to see on and off market opportunities that meet the criteria above. Not opposed to finding something that needs a little work to force equity. I have about $50k to leverage so thought this opportunity could be a good one given the situation.

 Hi Eric, Erik here. 

Are you familiar with the different types of financing available to you?

 Hey Erik,

In terms of my scenario and trying to leverage my brother in law on the loan to secure better rates and terms, I am not. I am familiar with the various options if I bought the property just myself under my own name or LLC. I guess I want to see how I can leverage my brother in law on the loan or if that is even possible, If I am providing all the capital and want the property still in part of my name.

TLDR: The oldest discussion in real estate. What are income-based loans? What are DSCR loans? Weighing both options. Stop worrying and save your money.

 Ah ok. 

Buying under your LLC conventional, FHA, USDA, or VA is not necessarily an easy task. Most lenders do not close into an LLC at the start, but you can transfer it over eventually. The biggest thing to consider is probably the oldest discussion in real estate: "will the bank call the note due once I transfer to an LLC?"

Best way to understand is to do an example: 

You and your family buy a house using your combined income to qualify.

You close the house in all of your names.

6 months later, you transfer the deed over to the LLC for legal protection

The servicer (lender that collects the note) notices and says, "hey, we were under the impression that Eric and his family have the ability to repay the loan. Now this new owner, Eric's Homes LLC., we have no idea if they can repay the loan and we didn't agree to it."

As a result, they can say that all of the principal of the note is immediately due because the Eric's Homes LLC. hasn't been vetted and they don't know if the loan is good anymore.

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Ok, chances of that happening are 50/50. Some servicers will wait and see, some might not notice that it changed, and some might have an eye on all of their mortgages and immediately ring the bell.

Now - what you can do is not use one of those regular conventional, FHA, USDA, or VA type loans. You can use instead something called a DSCR loan where the loan is given based on the "Debt Service Coverage Ratio" (DSCR). And a DSCR will allow for you to close in an LLC.

Simplest way to understand how the DSCR ratio works for a DSCR loan is another example, though this is very simplified for illustration purposes: 

Monthly Revenue/Rental Income: $1000/mo

Monthly Debt Service/Mortgage Payment : $1000/mo

$1000 / $1000 = 1.00

Most lenders like to see a 1.20 and above DSCR ratios, but some will go to 0.75 or even lower - knowing that the investor will improve the property's rental income performance over time.

Now, nothing is free Eric. 

With the Conventional/FHA/USDA/VA loans, they are all income-based and you are getting preapproved based on your income vs debts. You are limited to primary residences, 2nd homes, and investment properties that are all BASED ON YOUR INCOME and the income the property produces. Rates are lower, but you have to follow a lot of rules. You also have the opportunity to put 0% down, though.

With DSCR loans, rates are higher, but you have more freedom on property types and can close in an LLC. You also have to put typically 20% - 25% down. This is for real investors that don't mind the higher rate because they are saving so much in taxes anyway.

My recommendation: Skip the LLC and worry about getting a good deal. You already have your family moving in there and it's a good idea to not use your entire $50k on one property. Use the least amount of cash for the purchase and save your money. If you want to be safe from liabilities and getting sued - get an extra insurance policy (umbrella) that is more comprehensive.