Financing large houses, partial rental

[Thomas M.]

Hi I am looking to see if anyone has any creative ideas here for me on my rental business and financing.

I'm doing RE investing in Los Angeles.

I have a business that has been going for about 3.5 years now where I buy houses and rent them out to guys in a self help program for a year. I rent the houses out by the room. I get anywhere from 3K to 5K per month for each room. I own 2 houses and I make about 10k in profit on these houses every month when they are full. It's been a great business. I've never made less than 5K in a month, even when I'm changing over a lot of tenants.

I also have been living in a 4000 SF house myself, and renting the rooms out to renters from craigslist, and this allows me to live in a mansion while keeping my own rent low, about $400 a month, and free up funds for RE investing. I have been doing that for about 4 years. The house is huge and awesome, so I never really have vacancies.

In 2009 I bought a 1100sf 3BR REO for 420K, did an upscale renovation for 60K, and I've had it rented out ever since for about 9K per month (all rooms). Mortgage+taxes= $2700 per month.

In 2010 I bought a 3000 SF short sale for 860K, renovated, now it's got 6 bedrooms and renting out for about 18K per month, mortgage+taxes are about $6500 per month (15 yr mortgage)

There's some other business expenses as well with these houses.

The business of renting out the self help houses is maxed out. I can keep these 2 houses mostly full, but it doesn't look like I'll be able to fill a 3rd house.

So I figure the next move is to buy a 3rd house which I will rent out to the craigslist renters, and live in it myself, and build equity for ME, not my current landlord. I have the experience to keep the house full, it's a piece of cake at this point.

One thing I know, however, is that in order to make that work, the house has to be very impressive. It can't be mid size or ordinary. It's got to be bad ***. People in hollywood will pay decent $$$ for a bedroom in a mansion. The house I'm currently renting with roommates is worth about 1.2M I think. I would need to get something similar.

Since I don't have a regular job where I'm on salary, and I am a business owner, it's pretty tough for me to qualify for financing. I show about 180K a year on tax returns. My credit is 715. I've already got 2 mortgages sitting on my credit record, and gotta show tons of documentation proving that those are rented out. Even though I get way more than the mortgage in rent, they still take a chunk out of my income to payment ratio, because lenders don't let you deduct 100% of the rent you show, only 60-80%, and they won't let you deduct more than 100% of the mortgage. There's a lot of stringent rules on a guy like me, since I'm a business owner and I have 2 rental properties.

It was tough for me to qualify for 420K in 2009. It was CRAZY to qualify for $860K in 2010. I was sitting on 300 grand in the bank, and no one would lend me money. I had to pay a higher interest rate and pay a 1 point finders fee to someone who set me up with a "low doc" loan. It was very hard to find and I almost lost the deal a few times.

At this point, my goal is to buy a property around $1M or maybe $1.2M where I can live there and rent out the rooms. I don't need a whole place to myself. I travel a lot and I like living with roommates.

Can anyone give creative financing suggestions? Traditional lenders don't like my application much, and only offer me small approvals. Should I just forget it? Am I being unrealistic? I'm trying to stick to what I'm good at and what I have a track record in, which is renting out rooms in large properties.