First Deal Financing

Nadia N. · 2022-04-30T06:53:17-07:00

Hey everyone! I’m in the beginning stages of trying to figure out a game plan for the purchase of my first rental property and looking for some advice. My original plan was to BRRRR a LTR using the money from a HELOC on my primary residence to buy the property in all cash then refinance afterwards. I'm currently in the process of obtaining the HELOC with the potential to have about $100,000 in that LOC but the bank is already telling me my DTI would not allow me to tap into that much. If I'm already having issues with my DTI, how will I be able to refinance after I purchase the property with my DTI being even higher? Also, from my understanding of the BRRRR method, you should find a lender that will refinance the property from the beginning before you purchase the property. How does that work? I’m a little lost and would appreciate guidance or any tips would be greatly appreciated.

Karl McGarvey

Real Estate Agent · Houston, TX · Member since 2019 · 763 posts · 500 votes

4y

Yea if a lender is telling you now that you have DTI issues, then you need to focus on just that, your DTI. Reduce your debt to prepare yourself for being able to afford owning properties. The bank is taking a risk on lending to you, and if they say your DTI is not good, then it's not good. When lenders evaluate the loan, they evaluate the person getting the loan AND the property. It is a package deal - cant approve the loan if one of those two do not meet the standards.

Also call more than one lender. Different lenders have different products that may be able to help. I am also a fan of making friends with local banks that you can sit down with and present the "plan" so that it is more than an online application. There are HM lenders out there who also do conventional financing to get you through the refi portion of the project, so if the deal does not make sense from the start they wont lend on it.

In this scenario, I would be looking at doing a house hack where you can get into a primary residence that becomes a rental later. Take the first year or two fixing the place up while you work on reducing your debt and then turn it into a rental while you move on to home #2.

1 Reply

Steven Goldman

Lender · PA · Member since 2019 · 535 posts · 461 votes

4y

Nadia this is a common problem. The funding companies who are private lenders will make you a debt service coverage loan based only on your credit score and the minimum debt service coverage. You will pay a higher rate becuase thi is considered a Non-Qm loan. The current range is 6.25-7.5. They will refinance using the ARV six months after your purchase. You should get an approximate refinance quote before signing a contract. That will insure you have a sufficient spread between your current value, and your after repair value to get most of your capital out.

Because of rising rate you must create enough space between CV and ARV to make sure you can recover your money on the refinance. Good luck!

3 Reply

Andrew PostellPro Member

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

4y

@Nadia N. there's a couple of different layers to what you are saying so let' tackle them one at a time:

1. Current HELOC Lender - if you feel comfortable with your current HELOC lender then feel free to stick with them. That lender saying your DTI does NOT mean that every other lender will say the same thing. Frankly your lender should be guiding you in this area. I use certain lenders for specific things too but just know on your NEXT lender they should be offering a little more comprehensive approach. Meaning, they need to talk through why DTI matters and why it doesn't matter (as mentioned in the above post as well).

2. Price point - If you have a HELOC for less than $100k...what types of homes are you going to be purchasing? Are you saying you can BUY and REHAB for less than $100k? I'm asking for specific reasons here. I started out with $30k properties so I do know a little about this topic. It is possible to do but you might be in a little "different" type of neighborhood. Maybe talk to us about what you are hoping to target when you purchase a property and maybe we can help. The idea behind a HELOC is that it's a giant credit card. With credit cards we don't carry long term debt on them - because the interest rate is higher and the rate will adjust....just like your HELOC. So we need a plan to pay it back too. So give us a little more of what you were thinking to do with it if you don't mind.

3. Refinance Lender - Yes, you should 100% find your lender BEFORE you find your next property. That lender should be able to PREQUALIFY you for that next rental property. It acts just like the prequalification you received when you went and purchased your current home that you are getting the HELOC on. Same concept. That way you know what your rate, payment, terms, budget, etc. all are. It would stink if you purchased a home that was outside of what you could "afford" to refinance. Being prequalified will tell you what you can do. And here's a hint: your lender should be using that new rental income to help you qualify.

Anyway, I hope these things help in some way but feel free to post anything else if you need. Thanks!

2 Reply

Nadia N.

OP

Winchester, VA · Member since 2018 · 13 posts · 4 votes

4y

@Andrew Postell What a great and detailed response, thank you! So I'm thinking maybe I should pivot and change strategies. I would have the $100,000 LOC, then an additional $50,000 cash available. But even with that, in my market, I don't think it will be sufficient enough. My plan was to use the HELOC then refinance and reuse that for another property. Realistically, I won't have enough capital to buy a property (in my market) for all cash.

Another option would be to cash out refi and use that money as a down payment for one or more properties as well as for rehab.
Or I could continue with HELOC and use a hard money lender. What do you think?
I honestly think using this money as a down payment may be a better option for me as I would be buying a better property that would need less renovations. As I’m also constrained with time (working two jobs and mother to a toddler). And it may be a better starter property in order for me to learn. I just wouldn’t be able to recover that capital.

I appreciate all of the responses and appreciate the time you are all putting into these responses. Thank you!!

0 Reply

Andrew PostellPro Member

Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes

4y

@Nadia N. ok, I think I'm tracking with you a bit better. Buying a "move in" ready, "turn key" property is not a bad strategy. I can show a rate of return of about 12% even with using 4% appreciation on the home. So it's still a pretty good investment method. But if I want to buy MULTIPLE properties then it becomes really hard since I have to come out of pocket so much. Which is where the BRRRRR method comes into play. But the BRRRR method will demand even MORE of your time. I mean, you are looking for a house, managing a construction site, finding tenants, then refinancing again, etc. It can be very time consuming. And to be clear here - you would need to leave 25% equity in the property with a cash out loan even going the route of buying with cash. So you are still leaving money in the property.

So if I'm leaving money in the property anyway, and my life is already busy, why not just buy a property off the MLS? One that won't require all of my time? And that's what many people do. It's totally fine to go this route. After owning that property for 5 or 6 years you can sell that property and buy 2 properties and keep the train moving in that way. Lots of ways to make this work. Hope all of that makes sense. Thanks!

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Jon Martin

Member since 2022 · 1k+ posts · 1k+ votes

4y

The problem with a HELOC and your DTI is that some lenders will use a worst case scenario as your estimated payment with a variable rate. So even if the rate is 5% when you sign, lenders could base your future monthly payment on a 10% rate. That will eat up a huge chunk of your lending power.

Also, look at your other monthly debt payments. If you have a high car payment, either pay it off immediately or refinance it out over more time. The bank doesn't care that your $800 payment only has 10 months left.

In terms of your options, you could use part of that HELOC to cover the down payment and the rest to fund the rehab. You also have the option of a 10% down second home loan, however you can only carry one of those at any given time.

1 Reply

Nadia N.

OP

Winchester, VA · Member since 2018 · 13 posts · 4 votes

4y

Yes, thank you for your advice!!

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