Plenty of liquid assets...low income. How to find financing?

Question

Hi everyone,

I'm just starting out in REI and have run into a snag. I recently sold my business and want to start investing to generate cashflow. I have excellent credit, plenty of liquid assets but currently very low income. The banks I've spoken with all seem to have a problem with my income situation even though I have enough assets to buy the building outright. One mortgage broker had a lender that didn't need income verification and would loan based on the property's cashflow. The deal was 6-8%, 30 yr, 2 points. Seems high to me, but what do I know? What type of lenders should I be looking for? I live in the Philadelphia area.

I would love some advice or direction.

Thanks,

Paul

Jeff Dulla · Answer

Richard C. if you are buying the property as an investment, when the appraisal is done, a lender can get a rent schedule included. Most conforming lenders will use the rents included on the rent schedule, depreciate them by 25% and use them to qualify you.

If you tried to refinance after the purchase and did not yet have renters in there, at that point most conforming lenders would not give you rent credit until you have a lease in place.

Richard C. · Answer

Does a tenant already have to be in place for lenders to count rent as income for financing? What if its vacant or being rehabbed and "its going to be rented out", can they base it on the projected future rent even if theres no current tenant?

Jay Milgrom · Answer

Account Closed Paul, I sold my business five years ago and have been involved in REI  (primarily single family flips and rentals) for about six years. Like  you, I found myself in a strong cash position and with very good credit  but with little income. Banks were basically unwilling to lend to me.  Other lenders were willing to lend but at rates I found to be to high. I  decided to start smaller and fund all my own deals. Unless you're able  to borrow at favorable rates or you find larger undervalued deals (in  which case you'll be able to find partners or private money), start  investing by funding your own deals and growing your income. If you find  a viable alternative, I'd love to know about it. In any case, best of  luck!

Andrew Postell · Answer

Account Closed the rate quote you received for that type of a loan product is realistic.  A "conventional" loan, a loan governed by Fannie Mae or Freddie Mac, will have a rate of 4.75%-5.25% on a 30 year right now (give or take).  But conventional loans will absolutely examine taxable income and if you sold your business it will be a significant road block.  So the other route you will take is seeking a "portfolio" loan.  Portfolio loans are loans governed by a bank - and not Fannie/Freddie.  Portfolio loans are more forgiving, will be more flexible, and aren't a bad option...mainly because without them we wouldn't have an option!  But the flip side is that the rate might be higher, or it might be an adjustable rate, or it might be only offered in a 20 year term.  Since each portfolio loan is unique to each individual bank, there could be 15,000 different portfolio loans out there.  If you are working with a broker their job is to call all these different banks to find the best bank for your scenario out there.  You could find another bank that could have a better loan though...you just have to be willing to call each and every bank there is to try to find it.  Hope this helps!

Joe White · Answer

Account Closed So you can't use a an equity refinance on any of your assets and buy it that way?

Jeff Dulla · Answer

Account Closed You are spot on. There are a bunch of lenders who basically take 90% of gross rent and approve you based on whether or not that will cover PITI. I wouldn't say there are a ton of those. Like private/hard money stuff, there are only going to be a small percentage of lenders willing to do so. With that being said, rates will be higher.

I have seen the same rate structures - 5/1 and 7/1 ARMs that start in low 6's. 30 Year Fixed options in the 8's. All of that assumes paying around a 1.50% to 2.00% point structure.

I would say that is pretty much par for the course in terms of what I have seen.

Account Closed · Answer

Wow, such great feedback! Sounds like my options are either going commercial, self fund or find a bank portfolio loan that works. Do I just start making random calls to banks or is there a database that I could search (if not, there should be. lol)?

Thanks.

Mickey Powell · Answer

Am I wrong or does commercial or portfolio lending seem to be a good avenue for Paul?

Bruce Petersen · Answer

Have you thought about a small apartment complex, something like a 6-12 unit.  It's easier to qualify for TRUE multi-family than it is 1-4 unit SF. The latest quote I got yesterday for 200+ unit was 30 year AM, 4.15%, 75 LTV.

On my first deal, a 48 unit complex, I had retired and had no W2 income but was still able to get financing from regional bank in the Chicago area (property was in Texas).  Terms on that one were 30 year AM, 4.89% and 70 LTV.

Just something to think about if you have that kind of capital.

Plenty of liquid assets...low income. How to find financing?

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