First property-BRRRR method- What type of financing should I be looking at?

[Stephanie Andenora]

My husband and I plan to put a down payment on a rental property we want to buy by getting taking out a HELOC on our personal home residence. The property are currently wanting to pursue is a triplex. Plan is to BRRRR. Each unit will need work (waiting on contractor quote). ARV is about 190-200K. Asking price 84K. I want to be able to have this property under a business so what are my options for obtaining the rest of the asking price plus money to rehab the property. I am new to real estate investing and obviously financing them. This property will cash flow well.

Thank you in advance. 

[Stacy Raskin]

@Stephanie Andenora, there are lenders that have fix and flip programs that will work with first time investors. They will do an initial review of the property and take a look at your numbers for purchase and rehab and also review the borrower's financial information.

Decisions and term sheets are issued quickly and then there's a longer underwriting process to close. They will also generally want a scope of work from a contractor (if the borrower isn't a contractor). For a first timer, they will generally do around 80% LTV and rehab but it will depend on the property and the strength of the borrower's financials. Some may go higher buy you also want to look at the lender's reputation for closing and funding the deal as these loans are not regulated like owner occupied long term financing so something to consider. Sometimes too good to be true is just that.

They are generally shorter terms loans such as 12-month loan term with Interest Only (I/O) payments. At the end of the 12 months, you can either sell or refinance into a longer term fixed DSCR rental property loan. This can be done earlier as well if the property is ready before the 12 month term is up.

DSCR loans won't use your income to underwrite the loan.

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.

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. 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? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and 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. This criteria is for 1-4 and 5-8 unit programs.

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 = $2200

Rent = $2000

DSCR = 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 lenders generally let you vest either individually or as an LLC. It'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.