SFR Cash out finance questions

[Nathan James Flesher]

Your goals and story: Hey ya'll I'm a first time investor with a recent acquisition of a SFR. I'd like to perform some BRRRR style cash purchases rinsing and repeating with a starting investment of $100k. I'm 33 so I have a long time horizon for the rentals but would also like to maximize ARVs for short term profit as well.

Type of property: Single family home

Location of property: Macon, GA

Purpose of financing: cashout to roll into the next acquisition and profit on the ARV if possible

Type of financing sought: Not sure

Current or prior ownership of real estate: First property.  Bought April from another investor already renovated.

Occupancy: investment with traditional long term leases

Value of property at present and/or your offer price: Paid $84,000

After repair value: $115k-130k

Anticipated or actual appraisal issues: yes, not many comps nearby that have been renovated. Also I bought it from a group who buys it distressed, does the rehab for me, and sells it to me at 75% of the expected ARV. So technically the reno was performed before my $84k purchase so I don't have documentation to show an appraiser of why it is worth more than what I paid.

Current rents per month: $1150

Fair market rents per month: $1000

Down payment or equity: paid cash

Source of down payment funds, if applicable: own funds

Income Source: Salaried/hourly W2

Monthly debt obligations appearing on credit report, plus (if applicable) personal rent and alimony/child support/etc: $

FICO: Excellent

Credit issues: none

Additional details: I was notified on Friday by Guaranteed Rate (BP advertiser) that FNMA just announced suspension of 2nd homes and investment homes.  They locked in for me an expensive loan $7k fees at 3.625% 30YRF to only pull out my $84k but of course this wouldn't achieve any profit from the value add.  Should I wait the 6 months typical seasoning to get an appraisal and hopefully do a better cash out?  What can we predict about the lending environment 4 months from now with some time for the lending environment to adjust to this news from FNMA?  I don't need the cash on hand right now technically but just want to make the best long term decision.  Looking forward to ya'lls insight!

[Nick Belsky]

@Bonnie Low

@Nathan James Flesher

The typical guidelines will look something like this:

Min FICO 660

Up to 85% LTV

Max Loan Amount of $3,000,000

Foreign Borrowers Permitted

No Limit Cash In Hand

Interest Only option up to 80% LTV

Qualifications based on 100% PITIA for LTV greater than 75%, 110% of PITIA for LTV less than 75%

Ok, so what does this mean? This is the basics of a DSCR (Debt Service Coverage Ratio) loan. Some lenders will have guidelines that vary a bit, but these are pretty common guidelines.

No Income to qualify

No DTI to qualify

No Employment to qualify

The lender will look at very few things:

Credit Worthiness

Reserves on hand (can be cash, stock, etc...) - Usually 6-12 months of P+I

DSCR = NOI (Net Operating Income) / PITIA (Principal+Interest+Taxes+Insurance+HOA)

The property value is determined by a "rental" appraisal. The appraiser will determine what fair market value of the property's rents are. From there, you calculate your NOI to get your DSCR. Most lenders leave this calculation up to you and rely on you to provide them with realistic numbers. Ultimately, you determine your ratio and they either agree or don't.

These loans are normally quick to close.  Like most others, the appraisals are the bottleneck right now.  There are few other things to note on these type of loans:

Lien can be under an LLC (size of LLC varies by lender)

Pre-Payment Penalties are almost always required 2-3 years (you can take a higher interest rate to reduce or remove this)

No appraisal waivers

Properties must be NOO (Non-Owner Occupied)

Multi-unit properties limited to 4 units

These are residential loans, not commercial.

Warrantable and Non-Warrantable Condos are Permitted

Cash Flow from the property determines qualification for program

Amortized over 30 years

Rate and Term or Cash-Out Options are available as well

Like many other programs right now, rates are jumping up and down on these across all my lenders.  Typically seeing these land around 4.5-5.5% Interest though.  These function much like conventional loans but with different qualification criteria and similar closing costs.

Hope that helps.  Let me know if you'd like to crunch some numbers.  I only serve Texas right now, but can give you an idea of rates in any state.

Cheers!

Nick Belsky