BRRRR - Refi Hurdles
Real Estate Broker · East Brunswick, NJ · Member since 2020 · 38 posts · 20 votes
Hey, everyone. I am hoping to get started in BRRRR this year. While I know what the acronym stands for and enough about hard money, I don't understand the refinancing area.
We have a mortgage specialist in my brokerage (NJ) who explained to me that purchasing a rental property requires 25% down and that it's "very difficult to qualify" since they only count 75% of rental income. She went on to say that you have to have a lot of reserves and that it gets harder and harder to do with every deal since you will have increasingly negative income every time. I have no idea what she's talking about.
So how do people refinance if this is the case? How do you even get started in BRRRR and get around this road block?
Looking for any and all advice! Thanks in advance!
Hi Jennifer, I think those issues are more related to residential mortgages. HML's can do fix and flip loans, but also long term rental loans. It would be good for you to connect with a HML DSCR lender that will only lend under the business name based on rental income, not your personal income.
Another thing that I think either she isn't considering, or they don't allow per their guidelines, is that if you secured a lease on the property they can use 75% percent of that rent as your income or 100% if you have filed that rent on your taxes. So essentially so long as you are charging more for rent than you are paying for the mortgage (which is very likely), then you should have a problem getting further properties. It might be best to wait to refinance until you have that lease on your taxes to help you out.
Hope this helps!
Hey, everyone. I am hoping to get started in BRRRR this year. While I know what the acronym stands for and enough about hard money, I don't understand the refinancing area.
We have a mortgage specialist in my brokerage (NJ) who explained to me that purchasing a rental property requires 25% down and that it's "very difficult to qualify" since they only count 75% of rental income. She went on to say that you have to have a lot of reserves and that it gets harder and harder to do with every deal since you will have increasingly negative income every time. I have no idea what she's talking about.
So how do people refinance if this is the case? How do you even get started in BRRRR and get around this road block?
Looking for any and all advice! Thanks in advance!
I'd find a new loan officer.
If it's cashflow positive with the 75% of rents offsetting PITI, your DTI should actually go down with each purchase. If they think it's "difficult" because of the "increasingly negative income," I'm guessing they aren't doing the math right (which could/would jam you up down the road). The most common error here is that they add the rent to the income column of DTI, and add the PITI to the debt column. For investment properties, that's wrong (that arithmetic is correct for owner occupied real estate, which is where the common error arises from). For a rental property, you subtract the PITI from 75% of gross rents, and what's left goes into the income column if positive, debts column if negative. Assuming cashflow positive real estate, the subtraction (correct math) will yield increasing income as additional properties are acquired, but the division (incorrect math) will produce "increasingly negative income every time" (which is what they said).
Here's some example math.
Rent is $2k/mo, PITI is $1200/mo.
75% of $2k is $1500.
Incorrect math for a rental property:
$1200 / $1500 = 80% DTI = loan denied
Correct math for a rental property:
$1500 - $1200 = $300. Add the $300 to income. $0 / $300 = 0% DTI. DTI goes down. Loan approved.
Obviously your car payments and day-job income and personal housing expense also goes into the math, I'm using a silly example producing an 80% and 0% DTI to highlight the difference - one makes your DTI go down (good thing), one makes your DTI skyrocket (bad thing).
Your existing 401k typically takes care of the reserves.
EDIT:
Just noticed --> "We have a mortgage specialist in my brokerage (NJ) who explained..."
Yeah, watch out for that, and for who you refer to them. That loan officer is there because he's giving kickbacks ("desk rent" or "shared marketing" or whatever, to make it legal) to your broker, not because they're good at doing math correctly. As a Realtor, nothing will make you worse than referring clients to someone doing math leading to them telling people "no" when it should be a "yes," or "yes" when it should be a "no."