Confusing question on home equity...

Billings, Montana
Creative Real Estate Financing
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Confusing question on home equity...

Buck Dabill
Member since 2022 · 25 posts · 4 votes

I have purchased 6 properties in the last few years and held them as long term rentals. I purchase the properties and fix them up using a line of credit and then refinance them paying off the credit line. I bought a property for 45k and fixed it up for 100k, so i am into it for 145k. I have only worked with one bank on all of my deals. This Bank is saying I do not have enough equity left in the property to refinance a mortgage for 145K and get my 100k line of credit back to use on the next project. The property is worth 300k. They are saying because the property is a rental they only use a cap rate to define its worth not what it could sell for so they are only giving it a worth of 109k. Do all banks value single family properties this way? I should add it is currently renting at 1,550. I have 6 properties that have a total value of 960k if I were to sell them, but they are only saying they are worth 688k in their book. They will lend up to 75% of the 688k which is 516k. My most pressing issue is a property I just bought for 256k that I need 50k in order to fix up so I can turn it into my first STR. I would appreciate any advice you might be willing to give on my situation.

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Cory J ThorntonBusiness Member
Real Estate Agent · Raleigh, NC · Member since 2021 · 240 posts · 281 votes
3y

@Buck Dabill - About two years ago I left by W2 and landed in real estate ... then realized that the W2 would have been super helpful to secure debt for investment properties (learning curve). Since then my wife and I have been able to scoop up six SFH as long term rentals. We had to get creative for each deal we found.

Not all banks offer the same product. You need to start looking at different types of debt. I talk to a minimum of three banks for every loan ... I've also got one property where I have talked to over a dozen lenders and I'm still debt shopping. 

- Find a mortgage broker and they will check with a bunch of different lenders. Mostly likely, they will come back with a DSCR loan option.

- Check with some local banks to see what their commercial debt options are. With commercial debt you will need to refinance in 5 - 7 years, but the terms I am getting on 5 year debt at the moment are significantly better than 30 year debt. Whatever you do, I would advise you don't mess with adjustable rates. 

- When calling a bank I usually explain the situation, what I want to accomplish, then ask them to describe the product they think will get me what I want. I found this opens up a lot more options than just asking for a quote on a 30yr fixed rate. 

- When talking to banks, get the following list of info from each of them, then use it to compare products and pick a lender. If you know you will qualify then you can get all this answered before wasting time sending financials back and forth. 

1) Loan to value 

2) Term (5yr, 7yr, 15yr...)

3) any prepayment penalty? 

4) what is the origination fee? 

5) amortization rate? 

6) what is their target DSCR (Debt service coverage ratio)

Most banks require a 1.25 DSCR or better on a property. If you use the BP rental calculator tool it will show you the DSCR. With a 1.25 and decent credit, finding debt shouldn't be impossible.

Best of luck! If you need help locating a good DSCR lender or a mortgage broker, let me know and I'll see what I can do to help.

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  • Cory J ThorntonBusiness Member
    Real Estate Agent · Raleigh, NC · Member since 2021 · 240 posts · 281 votes
    3y

    @Buck Dabill - About two years ago I left by W2 and landed in real estate ... then realized that the W2 would have been super helpful to secure debt for investment properties (learning curve). Since then my wife and I have been able to scoop up six SFH as long term rentals. We had to get creative for each deal we found.

    Not all banks offer the same product. You need to start looking at different types of debt. I talk to a minimum of three banks for every loan ... I've also got one property where I have talked to over a dozen lenders and I'm still debt shopping. 

    - Find a mortgage broker and they will check with a bunch of different lenders. Mostly likely, they will come back with a DSCR loan option.

    - Check with some local banks to see what their commercial debt options are. With commercial debt you will need to refinance in 5 - 7 years, but the terms I am getting on 5 year debt at the moment are significantly better than 30 year debt. Whatever you do, I would advise you don't mess with adjustable rates. 

    - When calling a bank I usually explain the situation, what I want to accomplish, then ask them to describe the product they think will get me what I want. I found this opens up a lot more options than just asking for a quote on a 30yr fixed rate. 

    - When talking to banks, get the following list of info from each of them, then use it to compare products and pick a lender. If you know you will qualify then you can get all this answered before wasting time sending financials back and forth. 

    1) Loan to value 

    2) Term (5yr, 7yr, 15yr...)

    3) any prepayment penalty? 

    4) what is the origination fee? 

    5) amortization rate? 

    6) what is their target DSCR (Debt service coverage ratio)

    Most banks require a 1.25 DSCR or better on a property. If you use the BP rental calculator tool it will show you the DSCR. With a 1.25 and decent credit, finding debt shouldn't be impossible.

    Best of luck! If you need help locating a good DSCR lender or a mortgage broker, let me know and I'll see what I can do to help.

    1Reply
  • Tyrek Brown
    Lender · Freehold, NJ · Member since 2022 · 33 posts · 32 votes
    3y

    @Buck Dabill - To add on to Cory's comment,

    I don't think a DSCR lender is the best choice in this scenario, unless you were to raise rents. The LTV you need would most likely be 70% after you payoff the current loan, pay closing costs, and get the $50,000 cash out. However, rates are between high 7s to high 8s for DSCR lenders right now. This means that your monthly payment would be higher than your rent, which is pretty tough for DSCR lenders.

    I know a couple DSCR lenders that go under 1.000 DSCR, but the max LTV is 65%. If you plan on refinancing a couple properties though...it could possibly make sense to do it if you need the funds. 

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  • Matthew Wolk
    Lender · Tampa, FL · Member since 2022 · 79 posts · 28 votes
    3y
    Quote from @Buck Dabill:

    I have purchased 6 properties in the last few years and held them as long term rentals. I purchase the properties and fix them up using a line of credit and then refinance them paying off the credit line. I bought a property for 45k and fixed it up for 100k, so i am into it for 145k. I have only worked with one bank on all of my deals. This Bank is saying I do not have enough equity left in the property to refinance a mortgage for 145K and get my 100k line of credit back to use on the next project. The property is worth 300k. They are saying because the property is a rental they only use a cap rate to define its worth not what it could sell for so they are only giving it a worth of 109k. Do all banks value single family properties this way? I should add it is currently renting at 1,550. I have 6 properties that have a total value of 960k if I were to sell them, but they are only saying they are worth 688k in their book. They will lend up to 75% of the 688k which is 516k. My most pressing issue is a property I just bought for 256k that I need 50k in order to fix up so I can turn it into my first STR. I would appreciate any advice you might be willing to give on my situation.


     Buck, I shot you a message, I can offer you some options on this. 

    0Reply
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