Need some advise about financing options going forward

[Zach Liu]

I am a starting buy and hold investor and I bought my first rental property last October. Got it rented out last December and it looks good now. So I am ready to move forward and acquire more. I talked with a mortgage broker today and got a little frustrated. Here is my situation:

I have two mortgages, one for my home and the other for the first rental. Because I was not planning when buying first home, I used 15-year term and now my debt to income is 39% which is pretty high from lender's perspective. I was told I can still finance a 120,000 property but my goal is to acquire at least two more this year. 

The problem I have is that I have about 100k budget for the year so 120,000 is far from enough for me to borrow. And if I buy one property by cash, my debt to income will go higher and I won't be get loans any more.

I thought getting my first property rented should count as some income but just realized it takes two years for lenders to consider it positive. 

To make it short, I have some cash ready and my credit score is 740, but because of 39% debt to income already leaves me few options.

Any advice will be welcome:)

[Azeez K.]

@Zach Liu 

The situation you described is pretty common. I have seen a lot of new investors run into the issue you described. The issue happens when individuals try to buy the homes in their personal names as you describe and then they assign the property via quit-claim-deed to an entity (your LLC). I don't know if you have assigned it to any entity. What happens is that the loan is under your personal name and it is reported by the banks on your credit agency. What does this mean? This mean any properties you buy will show up on your credit report in essence your debt-to-income will be higher..This means you don't look as favorable to the banks. You can certainly buy multiple properties under fannie mae guidelines https://www.fanniemae.com/content/guide/selling/b2... However, there are reserve requirements that you need to maintain for each properties. I believe its 6 months PITI reserve for each property you own.

So now the question is  how do you buy multiple properties without impacting your personal credit and debt-to-income. 

Here is my two cents: Not a legal advice so please do your own due diligence

Step 1: Go to a small regional bank and  speak to someone who deals with small business loan or small commercial loan depending on the $ Amount

Step 2: Tell them that you are a real estate investor and looking to build a portfolio of cash flowing properties. You currently have your entity structure. For example you can tell them you have a Real Estate holding company that will buy n number of properties under separate LLC's. You are looking for a loan to start with 1 property under an LLC and that you will provide the banks with a personal guarantee

Step 3: Most likely you will be referred to several people. Eventually you will find the right person. I see that you are in Atlanta. I can send you some names if you PM. Full Disclosure: I have no affiliation with any of these bankers etc. It will just save you the trouble

Step 4: Like any other loan application you will be requested to submit Personal Financial Statement (PFS), Paystubs, W2, Tax etc. 

Step 5: The banks will give you an early indication 5-7 days that your application is looking good/not so good 

Step 6: If its good then your file will go to underwriting etc. For these type of loans you need to put 20% down minimum

Step 7: Underwriting approves. You  set closing and you get the keys to your new house and give it to the tenant.

Now since the loan is under your LLC it is not reported to the credit agencies and it does not come under your credit report. This will allow you to give a personal guarantee and get a loan.

Pros: Loan does not get reflect on your credit report, under your entity

Cons: Higher interest rate, higher down payment, you won't be eligible for HELOC but eligible for HLOAN. I am sure other investors might have better idea and think what I am suggesting might be an overkill. However, do your own research and see what works best for you and seek input from other investors.

Anyways thought this might help your situation..Just one idea to consider. Also don't try big banks  work with smaller community banks.

Good Luck