Financing Options For Low Dollar Value Rental Properties

[Joseph Lavoie]

I recently purchased and rehabbed a two bed one bath rental unit in Birmingham, AL that will be rented to section 8 tenants. The ARV on this property is just under $100k and I am struggling to find lenders who are willing to lend on such a low dollar value. I do intend to do more BRRRR deals in this area but the financing piece has been a hurdle. Has anyone else run into this issue with lower dollar value properties? I am open to any suggestions. Thank you!

[Ko Kashiwagi]

Hi Joseph,

As you experienced, most lenders won't go below 100k, but there are options out there. Happy to take a look

[River Sava]

Hey Joseph, 

As mentioned, a lot of lender won't go under 100k loan amount. Have you talked to any brokers? Might be worth it to have them shop around for you. 

Also, I am from AL and grew up in the northshore (Newburyport if you know it). Would love to connect with you. 

[Karolina Powell]

Look at your small local banks.  Here in Pittsburgh, I don't know many brokers that will do sub 100K loans but both the small banks I bank with don't have a minimum.

[Aubrey Ford]

I just recently closed a loan on a BRRR with Defy Mortgage for $56k and I am closing another this Thursday for $75k. I say reach out to them and see what they can do. DM me for the person I worked with.

[Bryan Montross]

I agree with @Karolina Powell that one of the best places to look would be small local banks. They are more relationship based and will look at your overall business plan and will lend smaller amounts knowing you will use them for more business later.

[Erik Estrada]

You can go under a $100k loan amount however the minimum loan is $55k and the minimum value is $75k. Fees will also be high on these loans 

[Shane Dreffs]

@Joseph Lavoie I live and invest in Birmingham area, I have a couple sources that will loan under $100k (hard money loan w/construction loan) I have used if you are interested. 

[Stacy Raskin]

Some DSCR lenders will go down to a $75K appraised value and a $60K loan amount. These options vary state by state.

For fix and flip loans, lenders generally want the combination of the purchase price and the rehab budget to be over $100K while also factoring in a 10-20% down payment from the buyer. 

It's the same work to do a $50K loan as a $500K loan so the fees will be higher due to the loan amount but will still be much lower than what a lender or broker gets paid on a higher loan amount. 

In case helpful, here's more info on DSCR loans:

DSCR loans won't use your income to underwrite the loan.

DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760-780+ generally gets best pricing for investment property loans with most lenders. From there every 20 point increment affect pricing differently. So for example, a 761 credit score will be in the 760-779 credit category, then going down to 740-759 and so on.

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Prepayment penalties- usually 1-5 year terms. The shorter the prepayment term has an impact on increasing the rate.

4. Are you cash flowing the property? More on how that is calculated below. Is your DSCR ratio greater than 1-meaning are you cash flowing (according to the lender's criteria of mortgage, property taxes and insurance (and HOA) if applicable). Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit. This criteria is for 1-4 and 5-8 unit programs.

I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350, Insurance = $100, Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100, Association Dues = $25

Total PITIA = $1875 Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

If a purchase, you also generally need reserves / savings to show you have 3-6 month payments of PITIA (principal / interest (mortgage payment), property taxes and insurance and HOA (if applicable). If a cash out refinance, many lenders will allow the cash out to satisfy the reserves requirement.

DSCR lenders generally let you vest either individually or as an LLC. It's a great way to increase your net worth and these loans can also be used to pull cash out of a property as it appreciates allowing you to reinvest money into new deals.

Happy to discuss further.