4 PLEX investing - Big down payment limits you ?

[Sashika De Silva]

Hello Everyone..

I am new to bigger pockets! Very excited to be here! I am starting my real estate journey with my husband. We are thinking of a 4 plex to buy. Where are the best affordable cities? And more than anything my concern is, if we buy one in the range of 500 k, now a down payment comes down to about 120 k.. because you have to put 25% down, then how do you buy a few more, without having to put down such big down payments? This limits you from investing more at once?

Would really appreciate your help here !

Thanks

Sashika

[Stacy Raskin]

There are DSCR investment property loans that are 20% down with a 720 middle FICO credit score for a 2-4 unit. These are 30 year fixed options and a minimum of a $100K loan amount.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth. They don't consider borrower income.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. Market rents from the appraisal and/or the actual rents need to cover the mortgage payment, property insurance, taxes and HOA (if applicable).

4. Prepayment penalties range from 1-5 years and you get to decide the length of the term. The longer the term, the less of an impact on the rate.I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350 Insurance = $100 Association Dues = $50

Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100 Association Dues = $25

Total PITIA = $1875

Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

DSCR loans can be used for purchases and for cash out refinances. Most lenders allow you to vest individually or as an LLC.