All Forum Posts by: Jeffrey K.

Hey Di, 

I have some serious qualms with how one's credit score is calculated! If you open another credit card with a high limit or distribute you debt across multiple cards your credit score goes up. Doesn't it seem backwards that you can increase your credit score by taking about another line of credit?

Either way, this should not be ignored. Credit score is one of many metrics to use to make your decision. Since it seems like you have their credit reports, what are the reasons for the lower score. It is 30+ late payments on multiple tradelines? if so, this is a serious red flag! Or is it one derogatory account, but with the tenants limited credit history...it made a huge impact.

If it were me in this situation I would look at some other factors. Make sure to conform with your areas legal requirements, because in Boulder, CO you are not allowed to ask for income information. But some info that would be of value in your decision would be: Do the tenants have enough income to cover the rent (i.e. 30-40% of their income), Are their rental references verifiable and positive, are they able to get a co-signer?

Another potential solution that I use from time to time is to put them on a month to month lease. This way if they do not pay, you can give them 30 days notice and take the security deposit to cover delinquent rent.   

With all of my alternative suggestions, I will leave you with 1 caveat. I have had the unfortunate experience of putting an inferior tenant in a unit because I was hungry to get a unit rented quickly. I learned the hard way that red flags up front can lead to an expensive and adversary conclusion. 

Hey Albert,

I think I can shed some light on your situation, but I will warn you that this is a very "inside baseball" explanation. 

Basically the bank takes the most conservative approach unless you can prove otherwise. Therefore, they are hitting you with the full liability in case you simply have an extra property for your in laws. Unfortunately, in an underwriters eyes this is a all of nothing issue

Here are some potential solutions:

1. Are you paying the mortgage out of your account or are your in laws paying it? I ask this, because Fannie and Freddie are willing to exclude a mortgage if you can show that you are not the one who has been paying it. If you are able to show 12 months of payments from your in laws, the underwriting guidelines for conventional loans will allow you to remove this from your monthly debt. However, this can be difficult if the income is claimed on the schedule E of your tax returns and you will not be able to use the income from the property to qualify.

2. You may not even need to solve this problem! If you are paying the mortgage, you can offset the debt with the income the property generates. Basically, if the schedule E on your tax return shows enough income (after add backs such as depreciation), it will essentially nullify the liability in your DTI calc. Here is a link to the calculator that many lenders use to determine what the effective income of your rental property is: https://new-content.mortgagein...

This is more accurate than previous posts suggestion that you use 75% of the rents because the Fannie/Freddie guidelines state that you only do the 75% calc if you have rented the property less than a year. Obviously, tax information is personal and I would never ask you to share that info. However, if you are willing to send me the "theoretical" numbers on your schedule E without the rest of your returns...I am absolutely willing to do fill in the calc. 

3. Quit claim the property into a non pass through entity and refi it into that entity. This solution can be a mine field because you would need to not personally garuntee the loan for it not to show on your credit report. The downside is that your would either not use the income generated from the property or go through the extremely laborious self employed process. Warning!!! I am not an account or lawyer.

4. Find a credit union or local bank to work with who is apprised of the situation and willing to take your unique situation into account. They would need to take your future acquisition on as a portfolio loan which likely means higher rates and lower leverage. These relationship are usually built over time, thus adding another hurdle.

5. Use hard money for your next purchase. Hard money can be scary, but if your next purchase is 100% a rental property, I know a lender that will lend just off the cash flow of the deal (and credit score) without doing a DTI calculation. Feel free to direct message me if you would like this info.

I know this is A LOT of information, so please let me know if you have any questions. The best weapon in your situation is having the knowledge to correctly present yourself to a lender. More often than not loans are ruined by the borrower giving too much information instead of the right information. 

Hey Patrick,

Congrats on your first acquisition! I love how you went big with your first property at 5-6 units.

Can I ask how you got a traditional 20% down loan on a 5+ unit property. In my experience, 5+ units count as a commercial property as far as lenders are concerned. I would seriously appreciate your recommendation on the bank you used to finance this!  

Hey Gilbert,

That is definitely a doozy! Is your insurance paying out for the rehab on the property? 

If it were me in your shoes, here is how I would proceed: 

1. Get the property fixed up.

2. Do an owner occupied cash out refi at 80 LTV. By my calculation, you will walk away with about 40k.

3. Keep the property as a rental after you can move both of your rescues ;). This is assuming it will have the ability to cover the new mortgage and with management fees.

4. Get a bank loan for the land. These are usually 50-65% LTV, but the proceeds from the refi should easily cover this.

5. Look for a way to redeploy the left over funds to buy more real estate.

Step 5 is just me pontificating! It depends on your goals, are you looking to grow an empire or is your end goal living on this piece of land unencumbered? As a final note, if the seller is working with you....would he be interested in owner financing. It could be a win win! I.E. he can make some interest and have regular note income while you can reduce your out of pocket expense. 

Hey Joseph,

I think there are 2 common adages that will ease your mind a bit. First, time makes genius investors of us all. Basically, if you are in an appreciating market and can hang on to this property, you are going to realize gains. Second, often times, the only things that separates the successful and unsuccessful is the willingness to take action. 

Now for more in the weeds feedback! If I were you, and investing is something you want to do long term, I would rent out both bedrooms. While having extra space is nice, if you are in a pinch for money and you have the outlook this is an investment...you should do what you can to optimize the return. It can definitely be cumbersome for awhile but it does get better. During the first house hack I did, I lived without ceilings while doing the work I could for almost 2 years. I am not suggesting anything that dramatic, but now that property is full rented, cash flowing and has appreciated 40%.

If you have limited funds for reno, ask yourself where would my cash make the most difference? Unfortunately, landscaping can give you property curb appeal but is usually not considered a value add during an appraisal. If you can create another bedroom to rent in the basement, you will drastically increase the cash flow on your acquisition. There are always caveats though, like: Do you need permits to do the conversion, do you have egress so the bedroom is legal for someone to sleep in and will someone want to live in a basement "unit" without a stove?

From the ARV you listed, I would (personally) focus on optimizing cash flow. Make this one work and there will be many more. I am not a pro investor by any means, but your initial post reminds me of when I bought my first property. At the time, I felt that is was too deep into the process to back out...then I ended up with a house lol. Even on the next one, I had a nagging voice saying "is this move too big for me, am I getting my self into trouble." Now I try to live by: if you dont feel uncomfortable, you are not moving forward.

Was there probably a better way to do this? almost assuredly! But, I talk to people all the time who want to get started but never get over their initial fears. You should be commended on your willingness to take action! There is no substitute for hands on experience. Good luck and if you found my feedback valuable, please feel free to reach out.  

Hey Landon,

I use the bigger pockets lease. I am not a lawyer, but I believe that this issue is usually addressed as "Joint and severable" clauses. This means that every tenant is responsible for the full rent amount. Restated, if roommate 1 cannot pay...everyone in the unit is responsible for paying the full rent amount. 

My personal opinion is that having a different leases for every tenant will only serve to get you wrapped up in your tenants drama. For example: if roommate 1 has their boyfriend over an he stumbles and knocks over roommates 2's guest. Who's security deposit does the wall repair come out of? 

I require 1 check in order to avoid minutia. The only advantage I could see to doing individual leases is if you get higher rents. 

Hey Lamont, 

There are a lot of variables to consider here and so many ways you could structure this. What value are you adding to the deal? if you are going to manage it and collect rents, that would be worth 8-10% at least based off of what a property manager would cost? Are you going to GC ant renovations? That would likely save the project 30% of materials. Did you find the deal? If there is day 1 equity, you would have another strong argument for increasing your share.  

Another interesting facet of your deal is that you are crossing an important lending threshold. A property with 4 units or less qualifies as residential real estate: where as, 5 units or greater are technically commercial. There are pros and cons to each, but you will likely have a more expensive and higher LTV at 5 units.

Final answer...Take a look at what you are contributing, what your benchmark is making the deal worth your while and what is going to make the investor likely to invest with you again :)  

Hey Josh,

It basically sounds like you are just in a tough market. This thread reminds me of my anxiety and qualms with the 1 % rule and how no property in my area will ever meet its criteria. 

I live just outside of the very competitive market in Boulder, CO. The majority of investor I talk to in this market are primarily, if not exclusively, are appreciate investors. I often hear about how friends realize significant profits but eating $200/ mo in negative cash flow. However, the common thread is that these investors are usually rich and established.  

I think that the key questions here are: how long can you sit on an investment without pocketing gains and can you support the negative cash flow. I dislike sitting on equity when I could be doing more with it. If your market has big year to year appreciation growth and you are okay with a slow return, you may be able to make your market work. However, if you are starting out and cognizant of the velocity of your money....I would look elsewhere. 

This is all me pontificating on my approach, but its basically all up to the strategy you would like to pursue.

Either way I would still recommend a 30 year, but here is the logic behind that decision. 

30 year loans offer lower payments. If you are focusing on cash flow it leaves more room for expenses and investment in future deals. There is value to leverage; i.e. you can buy more properties and have more flexibility with how you spend your money. This means you could buy more with the money that you would be using to pay down a 15 year loan. However, it does come with a higher interest rate. But if you were to add extra payments on top of your regular mortgage payment, it is directly counted against the principal balance on the loan. 

There is an alternative theory that the more you pay down a loan the more room you have to adapt if you need to pull out equity or change positions. Restated, when everyone else is crumbling you will have options if the market changes. 

In my mind, principal pay down is only 1 of 4 profit sectors. Appreciation, tax benefits and cashflow (the other profit sectors) yield more benefits across multiple properties when compared to a single home on a 15 year term. But its a balancing act, 1 great property is worth more and will cause you less stress than 3 sub par 30 year fixed problem properties.  

Hey, 

I have a lending background and would be willing to answer any of your specific questions on financing details. I would definitely recommend establishing a relationship with a loan officer. Believe me, loan officers are very hungry to establish a relationship and I could probably hook you up with someone that would be responsive and educational.

There are 2 routes you could go: 1) An established loan officer that knows everything and is more likely to be creative to get deals to go through, but would have less time for random questions 2) A hungry and newer loan officer that would give you all the time in the world, but may not have experience with tweaking details to make things work. 

It all depends on the client base, property details and your comfort level. It wouldn't be a bad move to have both in your back pocket. Let me know if I can recommend either.