Loan amount based on rental income for SFH?

Question

BP Universe, Is there ever a way for a lender to use the rental income to determine a loan amount rather than an appraised value?

I renovated a single family home in Dallas, Texas and it looks great and should cash flow great. But the cash flow is only good because of a separate 1/1 apartment from a converted carport (ADU). Not many comps to work with. Only one, to be exact. So my appraiser came up with a value that isn’t helping me. $162,000 to be exact.

But rents should be about $2,100/mo. Just listed it and hoping to place a tenant rather quickly.

Help! Please point me to a lender that you think might be able to work with my situation and loan me $150,000 or more.

Mahalo! (Thank you!)

Joe Splitrock · Answer

@Ted Kawabata it sounds like this is multifamily and not single family. There is two units. The appraisals I have seen for my investment properties (single or multiple unit) include both the comparable approach and income approach. The comparable looks for sales of similar units and the income approach uses rents of similar units.

Really the bank just wants to know that if you default and they have to sell, that they will get their money back. I would look for my own comparable properties and include duplex in the search. Bring that to the attention of the appraiser, explaining it is a duplex not a SFH. That should increase the value.

Joe Splitrock · Answer

That is weird, he gave you $25 per square foot? Did you ask how he figures $25 is a reasonable number? Honestly even $90 is probably not even replacement cost.

How long ago did you buy the property and what was the sale price? When you are trying to refinance, appraisers will be very conservative and your purchase price can hold down your appraised value. Their job is to protect the bank, not help you.

Maybe you can show him calculations based on the average CAP rate for duplex that sold recently. Basically work backwards from rent to determine selling price based on average CAP for small multifamily in the city. Do you understand how to calculate that? You could even share it with the bank and explain that the appraiser is valuing the property as an owner occupied single family, but it is an investment property.

Ted Kawabata · Answer

@Joe Splitrock Thanks.

The only great comp is a similar place with a similar ADU, only the main house is 310 sf smaller.

The appraiser gave an adjustment on the square footage issue of plus $7,800.

But at a conservative $90/sf, that adjustment would have been more like $27,900.

Trying to ask the appraiser to consider this logic but not having any luck...

Joe Splitrock · Answer

@Ted Kawabata what is your purchase price and rehab costs?

Another method to prove value is showing previous purchase price and value of improvements. For example if you purchased it for $150,000 and can show $20,000 worth of improvements, that could substantiate value of $170K. Of course it depends on improvements.

What do you believe you could sell if for today? In other words what do you believe the appraised value should be?

Another question is what is the value per square feet and how does that compare with other properties that sold recently?

Why do you believe it should be worth more than the comparable property?

Guifre Mora · Answer

@Ted Kawabata the reality is that you could rent the home for $5000. But if you were to sell it, what is the market value? Not the rent size but the market value of the SFR. SFR even if in the commercial space they are not seen as a real commercial income-producing like retail, multi-use or industrial. If your Zoning allows it you might have a chance to turn it into a legal duplex in witch you have a chance of getting a higher value.

JD Martin · Answer

Sure - just have the track record to prove it will rent for $2100. That might mean putting more of your own cash into the deal on the front end, build a year or two of rent rolls, and then refinance.

Ted Kawabata · Answer

@Joe Splitrock Thanks for the input! We’ve scoured the area for comps and nothing useful pops up. Not even duplexes.

So without a higher appraisal, I’m finding 99% of lenders won’t go higher than the loan amount I’ve already got going for me. Which is 85% lLTV on the appraised value of $162,000 —> $137,700

Looking for a “special” lender!!!

Loan amount based on rental income for SFH?

Most Popular Reply