Loan Terms:SF/MF 1-4 Rentals,LLC vs Individual w/ Only Property Cash Flow Considered?

Question

Before diving into long term cash flow properties, I would like to clarify the finances needed in this economy of high rates.

For the first property, I will use my primary home HELOC to purchase it by cash and then refinance the property to pull the cash out, and continue the scaling process. For long term rentals to cash flow, 15 to 30 year amortization would be required per my calculations. Hence, I would like to understand answers to below lingering questions:

1. If an LLC owns the rental property, are there loans w/ 15 or 30 year amortization where only rental property cash flow is considered by the lender instead of LLC's income/debt finances ?

2. If an individual owns the rental property, are there loans w/ 15 or 30 year amortization where only rental property cash flow is considered by the lender instead of that individual's income/debt finances ?

Thanks in advance

Joe Dillamore · Answer

@Michael Bayrakeri You can do it either way, but in my experience, an LLC is the easier way to source financing (especially as a few lenders demand it, but not the other way round). Regardless of whether the property is in an LLC or not, the lender is going to underwrite your credit, not the LLC's financial position -- that is, unless there are serious issues with the LLC's financial health

Erik Estrada · Answer

Hey Michael,

You may close in a personal name or LLC with a DSCR loan and qualify with rental income, fico, and reserves only.

Stacy Raskin · Answer

@Michael Bayrakeri, you can do a DSCR loan and close in an individual or an LLC. There are 30 year fixed options for these types of loans.

Using a HELOC to pay cash to buy the property may impact refinancing options to pull the cash back out since some lenders will either want a 6 month seasoning period before they will do the refinance or they will require you to pay back your HELOC if you do the loan before the 6 months are up. This is not widely known so it can throw a wrench in the plan if you're aren't prepared.

There are lenders that will do purchase DSCR LTVs up to 80% for a 1-4 purchase with a DSCR 1 ratio and a strong credit score. Cash out rates are at max 75% from what I've seen depending on the borrower's middle mortgage FICO score.

There are factors that really weigh into the rate including the length of the prepayment penalty and the LTV.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 lenders2. 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. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.4. Are you cash flowing the property as far what factors the lender uses to underwrite the loan? Is your DSCR ratio greater than 1-meaning are you cash flowing when comparing the actual or projected monthly rent against the monthly mortgage, property taxes, insurance (and HOA if applicable). 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.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 < 1Principal + Interest = $1,700Taxes = $350, Insurance = $100, Association Dues = $50Total PITIA = $2200Rent = $2000DSCR = Rent/PITIA = 2000/2200 = 0.91Since the DSCR is 0.91, we know the expenses are greater than the income of the property.DSCR >1Principal + Interest = $1,500Taxes = $250, Insurance = $100, Association Dues = $25Total PITIA = $1875 Rent = $2300DSCR = Rent/PITIA = 2300/1875 = 1.23It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Jason Wray · Answer

Yes to both 1 & 2 there are loans for both rental income only (DSCR) and cash flow on property.  Typically the 30 year is going to offer a better ROI and cash flow due to the longer term.  You can always pay more to help pay it off sooner.  Great thing about a 30 year versus a 15 year term is you can always make the 15 year payment but you are not obligated to pay it on a 30 year.

Be careful with a HELOC because there are some hidden road blocks that most investors or lenders do not discuss up front.  Make sure you price out a cash out refinance regardless of the rate on your first mortgage.  There are some pro's and con's that can make or break an REI portfolio.

Michael Bayrakeri · Answer

Thank you all for detail responses and providing information on DSCR loans. Much appreciated. My credit should be 840 plus with no debt. It is imperative then that I should not use HELOC to purchase an investment property to refinance next to a DSCR loan. I was going to use HELOC to make it easier/quicker to purchase, rent out, then apply for DSCR to pull the funds out to move to the next property.My primary purpose is to build set of positive cash flow properties to generate income during retirement as time is coming. Therefore, I will be very diligent to make sure each property provide positive cash flow, including all possible expenses, vacancy rates.

Michael Bayrakeri · Answer

Thanks @Jason Wray. I would like to touch base with you on DSCR loans If you have access to these loans. I can give you a call to provide specifics about my case. Is (727) 637-4289 right phone number to reach you ?

Loan Terms:SF/MF 1-4 Rentals,LLC vs Individual w/ Only Property Cash Flow Considered?

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