Trying to Scale- Lending Help Needed

[Rod Merriweather]

Hi everyone, Need some advice. I currently have 3 rentals and my offer on a 4th was excepted yesterday 11-19-2024. My dilemma is that one of my properties is worth about $400K and I owe ($40k on a HELOC & $50K on the mortgage) and I'm on tract to pay them both off in 16 months- paying ($2000 from the renter and me paying $4000 a month on the HELOC= $6000 per month total) I plan on doing this until both loans are paid. My ultimate goal is to keep scaling buy 2-3 LTR and hopefully a 4+ plex hopefully within the next 12 months. I have really good income & have good credit -middle score is 768.

I've reached out to lenders here on Bigger Pockets- but their rates & terms seem high (DSCR or just not good terms)- I qualify for a conventional loan, but my DTI is almost maxed so why pay an extra 2-3% DSCR when I don't have too. I also reached out to a small local bank that is offering me a $200K cash out refi- at 6.7/8 60% LTV- 30 year fixed. This would pay off the HELOC and the mortgage and give me some cash to keep scaling. It's not great either but they are stating if given this deal once I have 5 properties; they will allow me to convert my 5 properties (I have an LLC but the properties are all in my name not in the LLC yet) over to a commercial loan (5 properties min) and give me a line of credit to continue buying additional properties. At that point if would free up my Debt-to-income ratio (Nothing would be in my name & I could start growing again). Right now I'm maxed out on the DTI and I don't have the additional cash to keep putting down 20-25%. My question is should I keep working with this small local bank, is this a good deal, can I get a better deal, what are my other options for scaling as a small real estate investor. Any advice would be greatly appreciated. PS: I'm sure I can great a nicer LTV but my business taxes don't show large gains on paper. If I left something out please just ask. I'm headed to work now. Thanks

[AJ Exner]

Hey Rod,

Congrats on where you are at! As the great philosopher once said, "mo' money, mo' problems".

I think the reduced leverage plan is a good choice to free up some DTI but obviously the extra fees on DSCR could start to add up a little. I guess my question would be, if each deal would cost an extra 2% going DSCR would it be worth it to be able to scale and accomplish what you are hoping to accomplish? Feels like the most straightforward plan to get from point A to point B and sometimes it pays to KISS

Acknowledging that I don't know all the numbers you are working with, but if each deal costs an extra $3k-$5k, but because of the efficiency of DSCR loans and the ability to ignore your DTI, you could maybe squeeze an extra deal or two a year in? I guess that is where hopefully the LOC could help you there.

Could you pair the LOC up with a DSCR lender? Use the LOC from the CU for the purchase of new properties?

I don't know, certainly takes money to make it, but I would worry about when the CU would start saying 'no'. Rate seems about right, so I wouldn't get too hung up on that (DSCR would be about there too, maybe even a little less based on that leverage).

Sorry, a bit rambling there, but would be happy to connect and talk through things if that would help? Happy to assist where I could.

Good luck!

[Caleb Brown]

I think that small bank is a great plan. As you do business with them the terms will be better and you can have a relationship with them. Small banks are the dream so you found a good opportunity. You have a strong financial foundation so you will be OK.

[Jaycee Greene]

Hey @Rod Merriweather! I know many developers like yourself with the same issue ("trapped" equity they can't access unless they sell the property). From a pure liability standpoint, is there anything stopping you from QC'ing the rentals to your LLC? Out of curiosity, would any of your rentals be located in LMI communities in Memphis such as Orange Mound or New Chicago?

[Sarah Brown]

DSCR are expensive, but that is because they generally take the greatest risk. The DSCR I have also has a prepayment penalty. If you can work with the local bank, I would do that. They will take a risk at the beginning and charge a little more. Once they learn how you do business, they will see you as less risky, offer better teams, and maybe even grant you access to cash you wouldn't get otherwise.

[Rod Merriweather]

Thanks everyone, Ideally I'd just like a LOC & to use my property for collateral. Does anyone offer that other than a HELOC ?

[Rod Merriweather]

???

[Jaycee Greene]

@Rod Merriweather Getting a LOC (line of credit) secured by real estate from a bank is going to be tough as the line of credit is viewed as a short-term liability while the property is a long-term asset. Banks like to match short term assets with short term liabilities, and vice versa.

I don't believe that DSCR loans are "expensive", but they do require a more thorough underwriting and higher amount of financial documentation other private and hard money loans.

It generally helps to have a Fractional CFO or Loan Consultant (not a broker) that will work on your behalf to negotiate better DSCR terms and rates.

[Riley Poppell]

I have a good referral for a lender that could get you the next loan at not a rate that is too high. He bases the loan off of owned properties and the properties you bought in the last couple of years. He mentioned to me something that was a tad over 7%. Let me know if you want me to refer you the lender.

[Stevan Stojakovic]

Hi Rod, The local bank's $200K cash-out refi at 6.875% isn't perfect but clears your HELOC/mortgage, provides scaling capital, and leads to a commercial loan for 5+ properties, solving your DTI issue and unlocking a line of credit for future growth. Accepting this deal aligns with your goals of scaling sustainably. Consider DSCR loans, portfolio loans, or seller financing as complementary options for acquisitions. If structured well, this strategy will position you for rapid expansion. Let me know if you need help optimizing financing.

Best regards,
Stevan

[Keena Santos]

Quote from @Rod Merriweather:

Thanks everyone, Ideally I'd just like a LOC & to use my property for collateral. Does anyone offer that other than a HELOC ?

Have you heard of all in one loan? Try doing some research if that could be an option. 

[Tanarat Bunchom]

@Rod Merriweather 

The local bank's offer looks like a good move, especially since it helps clear your HELOC, gives you cash, and sets you up for a commercial loan to free up your DTI. While the LTV and rate aren't perfect, it supports your scaling goals. You could explore other options, but with limited income on paper, this might be your best path for now.

[Robin Simon]

Quote from @Rod Merriweather:

Hi everyone, Need some advice. I currently have 3 rentals and my offer on a 4th was excepted yesterday 11-19-2024. My dilemma is that one of my properties is worth about $400K and I owe ($40k on a HELOC & $50K on the mortgage) and I'm on tract to pay them both off in 16 months- paying ($2000 from the renter and me paying $4000 a month on the HELOC= $6000 per month total) I plan on doing this until both loans are paid. My ultimate goal is to keep scaling buy 2-3 LTR and hopefully a 4+ plex hopefully within the next 12 months. I have really good income & have good credit -middle score is 768.

I've reached out to lenders here on Bigger Pockets- but their rates & terms seem high (DSCR or just not good terms)- I qualify for a conventional loan, but my DTI is almost maxed so why pay an extra 2-3% DSCR when I don't have too. I also reached out to a small local bank that is offering me a $200K cash out refi- at 6.7/8 60% LTV- 30 year fixed. This would pay off the HELOC and the mortgage and give me some cash to keep scaling. It's not great either but they are stating if given this deal once I have 5 properties; they will allow me to convert my 5 properties (I have an LLC but the properties are all in my name not in the LLC yet) over to a commercial loan (5 properties min) and give me a line of credit to continue buying additional properties. At that point if would free up my Debt-to-income ratio (Nothing would be in my name & I could start growing again). Right now I'm maxed out on the DTI and I don't have the additional cash to keep putting down 20-25%. My question is should I keep working with this small local bank, is this a good deal, can I get a better deal, what are my other options for scaling as a small real estate investor. Any advice would be greatly appreciated. PS: I'm sure I can great a nicer LTV but my business taxes don't show large gains on paper. If I left something out please just ask. I'm headed to work now. Thanks

Are you saying your DSCR quotes are 2-3% higher in rate or are you talking points up front? If its rate, then that looks way off, DSCR rates should be in the same neighboorhood, like .5%-1% higher depending on some prepay stuff

[Jonathan Klemm]

Wow, amazing work @Rod Merriweather!   I love the systematic approach you are taking with your real estate investors.  I have a feeling the snowball of moment is increasing, and you will have that 4 plex in no time at all!

In my opinion, you should for sure team up with the local bank!!  To think short term on these interest rates and terms if the numbers work...

You are crushing it and your sole focus should be growing...often there are short-term sacrifices for long term growth

[River Sava]

Hi Rod - 

Out of curiosity, what rates and terms were you quoted for the DSCR loan?

While DSCR rates are generally higher than conventional loans, it's because they offer much more flexibility. Unlike conventional, DSCR underwriting focuses on the property's cash flow rather than your personal finances/DTI. Typically, DSCR rates are about 1% higher than conventional loans—not the 2-3% range you mentioned. TIf you're goal is to scale, they are an excellent option for while bypassing some of the stricter requirements of traditional financing.

[Steven Stanimirovic]

Rod, you're in a strong position with your credit, equity, and income, and the key now is optimizing your financing strategy to scale efficiently while maintaining liquidity and leveraging smartly.

The offer from your local bank isn't bad, particularly because it provides the opportunity to convert your portfolio into a commercial loan, which would free up your DTI and allow you to scale further. That said, the 6.875% rate could be improved. It's worth exploring other small local banks or credit unions, as they often have more flexibility for investors like you. Building relationships with these lenders can lead to better rates or terms, especially as your portfolio grows.

If the $200K cash-out refinance aligns with your immediate need for capital, it’s a reasonable option to consider, but keep in mind that reducing your equity too much now could limit flexibility later. Another path might be a short-term solution like a bridge loan to fund your next acquisitions while holding off on a full refinance until rates or terms improve.

Given your goals to scale rapidly, keep an eye on maintaining cash flow while growing. Leveraging partnerships or joint ventures could be another way to move forward without overextending your own financial resources. Also, be sure to consult a CPA about the timing of transitioning properties to an LLC to avoid potential complications with financing or taxes.

Take time to compare multiple lenders and products that fit your strategy. If you need a second opinion on any of the terms or strategies, feel free to reach out again I’m happy to help.

Steven

[Ashish Acharya]

@Rod Merriweather The small bank’s offer of a 6.875% cash-out refinance at 60% LTV is reasonable, as it consolidates your HELOC and mortgage while providing capital to reinvest. Their promise to package your properties into a commercial loan after reaching 5 properties could free up your DTI and provide a line of credit for scaling.

Consider delaying aggressive HELOC repayment to preserve cash for new purchases, and explore portfolio loans or DSCR loans as alternatives. Work with a CPA to optimize your tax returns to reflect sufficient income for future loan approvals. This approach balances immediate needs with long-term growth.

This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

[Esther Joseph]

Rod, as you add more properties and move into the commercial arena you also want to consider moving the properties out of your name and into the business LLC. This will show lenders that you are serious in running and scaling your business.

Esther - Dellanue Ventures, Inc