All Forum Posts by: Andrew Garcia

Hi @Karissa Sampson, it seems like you have crunched all the numbers and have everything in place to start this project! With a conversion, there are obviously more things that can go wrong but it seems like you are already prepared for a variety of situations. 

There are the things that could pop up (septic tank issues, survey issues, etc.) but with a conversion, there are also more likely to be permit issues, zoning issues, etc. but it seems like you have that portion under control.

There are also things that you may not think about (parking, splitting utilities, etc.). 

Hopefully, I gave you some sort of insight. The cash-out shouldn't be an issue since it falls under the conforming loan limit for triplexes. You could always go DSCR or full doc NON-QM but that is a discussion for another day. I am a lender so I constantly think about that with BRRRRs.

Hi @Samantha Kuhl, I'm a lender so I always get excited when I see posts like this. Below I have outlined a few of your options:

1. If you have been receiving income from this LLC for at least 2 years, you may be able to use conventional financing.

2. You can use the bank statements from the LLC as income to qualify.

3. You can use a no income and no job verification loan to qualify solely based on the pro forma cash flow of the property you are looking to buy. It is known as a DSCR loan and it is our most common investor product.

4. You can do a net-rent situation where they take how much you make per month and subtract the mortgage amount. The rest is counted as income. It is not based on the tax returns or Schedule E. It has slightly better pricing than DSCR but has stricter underwriting guidelines.

Don't worry, you are not making up anything. We do this day in and day out so if you have any questions, feel free to ask.

@Chris Dudine, A DSCR loan would be largely similar to a conventional loan. DSCR would not require an income or credit check, they would base it off the rent compared to the mortgage of the property you are purchasing. Underwriting will be easier with DSCR but the rate will be higher. DSCR is a better option if you want to move quickly once you get your FHA back because if you refinance into conventional with primary residence pricing, you will need to live there for 6 months after.

I would make sure that you get a side-by-side comparison between rates, fees, APR, closing costs, etc. to determine which product is best for you. Let me know if you ever want that or if you have any other questions.

Hi @Chris Dudine, I know I am a little late to the party but I just came across your post.

To answer your first question, it can be done up to 10 times. You can own up to 10 properties with conventional financing. 

There are pros and cons to this strategy so I will give a brief overview below:

Pros:
1. Lower down payment requirements. 

2. Lower interest rates with primary pricing.

3. Ability to buy a new one every year.

Cons:
1. Upfront Mortgage Insurance Premium. You will have to pay an upfront fee to the Department of Housing and Urban Development for doing an FHA loan. It is 1.75% of the loan amount. You can finance this into the loan amount, but it will increase your principal balance and monthly payments.

2. More stringent appraisal and inspection process. FHA is more risk-averse when it comes to appraisals and inspections. They have higher standards than conventional. Many sellers will not do any repairs in today's market, so it is more likely for a deal to fall through with FHA.

3. Harder to get offers accepted. Sellers and listing agents are not supposed to discriminate against FHA buyers. However, it is the harsh reality of today's market. They are scared that the buyers do not have the ability to close and of that more rigorous appraisal and inspection process.

4. When refinancing, you will have to pay a second set of closing costs and you cannot refinance until it is at 75% LTV for conventional financing. That means that if you are doing this for the down payment, you will have to wait until the home appreciates or you pay down the balance.

5. Higher monthly mortgage insurance depending on your credit score, LTV, etc.

I would also recommend looking at 5% down conventional loans because the PMI drops off at 80% and you do not have to refinance into an investor loan. You can just buy it with primary pricing then keep it.

Obviously, this is a brief overview but if you have more questions or want a mortgage strategy session, feel free to ask.

Hi Patrick, I see this a lot with sophisticated investors that can afford not to cashflow. Let me break it down with some good ol' fashioned math.

Let's say you are buying a $5 million property that has an NOI of $250,000 or a cap rate of 5%. It has 25 units each rented out for $1,500 a month. Rents are increasing faster than ever. In 3 years, you increase the rents by 10% or $150 per unit. Let's say the mortgage is $25,000 per month.

The NOI goes to $295,000 so you are still losing money every month. You lost $150,000 over the 3 years, worst case scenario (NOI - Mortgage). However, at the same cap rate, the property has appreciated by $900,000. It is a wealth strategy, not an income strategy.

With single-family, it is not as apparent since the appreciation is based on market sales, not NOI.

Hi Brian, it hinges on a few things. 

1. Is the primary residence that you are going to buy if you were to sell your current house in the same price range, condition, neighborhood, etc? If you are buying a new home that is similar, it will have virtually the same appreciation. So, that takes the appreciation between option 1 and option 2 off the table. From there, it really just depends on whether you would get better cashflow and appreciation with your current property or with two cheaper properties. You also have to factor in the time and energy you will spend managing two properties vs. one.

2. Interest rates. Your current house probably has a rate in the 2s or 3s. If you were to sell and buy 3 properties, your rate would likely be in the 5s and 6s, depending on a variety of factors. This will obviously factor into your monthly cashflow analysis. Furthermore, the HELOC vs. cash-out option needs to consider the interest rate as well. Rates are going up. The Fed is announcing a rate hike this week. If you are going to do a HELOC, it would be best if you paid it off in a short period of time. Otherwise, the rate will continue to increase past the rate of a cash-out. A cash-out will initially have a higher rate because it is a fixed-rate, not an ARM. However, if you plan on holding the property for an extended period of time, it could be worth it. The interest rate will be higher but if you are utilizing that leverage to generate a higher rate of return than the interest rate, you are making infinite ROI.

In short, you need to do two things:
1. Run a cash-flow analysis on buying 2 cheaper properties and compare it to the $1,100 cashflow from keeping your primary.
2. Compare the HELOC or cash-out refinance proceeds to the other cashflow analyses. You cannot buy another primary now if you go this route and declare it as a primary residence to get the best pricing. However, if you declare it as an investment property, you can keep your current residence, buy another primary, and buy an investment property. 

I agree that not maximizing the leverage is wasted potential. Since the huge appreciation, we have seen over the past two years, a lot of investors are leveraging their equity to build a real estate empire.

Hopefully, that was understandable and not too intricate. If you want me to run any mortgage payment scenarios for you so you can have more accurate numbers when running a cashflow analysis, let me know.

Let me know if you have any questions.