All Forum Posts by: Jaren Woeppel

Hey, @Samantha Elliott. Great question!

Let me summarize what I understood and please let me know if I am off base:

You are moving and currently have a property with a great interest rate, strong rental market because of military base, and 15 years left on the mortgage. You are going to be moving out of state and want to purchase a new home in NE and keep the current property as a rental. The issue you are trying to solve is getting the cash in hand to purchase the new home, potentially looking at a financial product to access the equity in the property? Sound about right?

The first questions I would ask are:

What term loan is your current property? If it was a 30 year with 15 years left, that amortization schedule for your principal balance looks a lot different than if it was a new 15 year mortgage. 

Are either of you active duty or a veteran who is eligible for a VA loan? You probably would have mentioned if you were, but worth the ask.

Are both of you listed in the mortgage and deed? There are a lot of programs for “first time home buyers” out there right now, which pretty much means all you need to qualify is meet the IRS definition which is essentially cannot have owned and occupied your primary residence for the past three years. Again, probably not, but worth the ask. 

Where I am going with all this is, have you looked into low down payment options that you all may be able to qualify for and afford without having to use an additional financial instrument on the rental property? Keep in mind, if that property is rented, you should be able to use a portion of the rent for your debt to income calculations. 

You’re welcome, Allende

As far as the HELOC goes, if I am understanding correctly, there a possibility for you to use a HELOC on your primary residence, to put a larger down payment on the investment home and avoid mortgage insurance and have positive cash flow from the property?

When you run the numbers, there could be a scenario, on paper, where this makes sense cash flow wise, because of the interest only nature of the HELOC you have. However, keep in mind that you are using your primary residence as collateral in this case. If the deal were to go bad or an unfavorable circumstance arose, you could not only be in jeopardy of losing the investment property, but also your primary residence. We hope the situation never happens of course, but it's a possibility. My personal investment philosophy would avoid leveraging my primary residence unless I had plenty of reserves to ensure I would be covered in that kind of situation. Of course, if you run the numbers and understand the additional risk, the HELOC may be the best route for you.

The Family Opportunity Mortgage is an interesting program. Essentially the goal of the program is to allow a child to provide a place to live for their parent(s), whom would not be able to afford the home otherwise. The benefit being, both Fannie and Freddie recognize the program, and you will be able to price the loan as if it was a primary residence, not a second home or investment property. With that, your rate and terms are more favorable than with the secondary or investment loan product. 

My question surrounding cash flow; yes, probably using the 5% down product and paying PMI/MIP, it would be almost impossible to cashflow. However, if putting a larger down payment was an option, you could always price out the loan and see how large of a down payment is required to cash flow. I am not saying this the approach that should be used, just saying there are a few levers that can be adjusted depending on what your overall goal and financial situation is. Even if you were to put 20% and avoid the PMI/MIP, the Family Opportunity Mortgage program may still a beneficial program for you, because you would be getting rate and terms similar to a primary residency, not a second home/investment property.

Again, depending on your current situation and how much time/effort you want to put into this. There could be an option to use the BRRRR method and change it a little bit to fit your needs. Find a property and hopefully purchase for a good price in cash (or a similar result, hard-monty option), perform the required repairs for your mother and potentially get the second rental unit ready. You could then qualify the rent coming in and use a DSCR product to take your money back out. Depending on purchase price, cost of rehab, ARV, and rent in that area; you could potentially pull all or some of your money out of the property. This would be the "outside of the box" approach you may be looking for, but it is capital and time intensive. If done right, you should have forced a good chunk of equity in the property, and then you can refi at numbers that would also allow you to cash flow.

Best of luck, @Edna White!

I would love to know how it works out and what you ended up doing. Even if the deal doesn't go through, sharing your experience and tactic will be valuable information for myself and the entire BP community. 

Thanks for the additional info!

As far as confidence in the market goes, I hear you there! There are definitely still deals to be made, especially on the longer term timeline. How we are attempting to gain more confidence in our offers right now, is a little more conservative numbers in the analysis phase. For example, if you expect this property to be have a CAP rate of 10 after you repair and it comes time to sell, maybe run your numbers at 11-12 and still see if it would be worth it. Also run a few scenarios of costs and see how much over budget these repairs can go before you don't think it would be a good deal anymore. There is a fine line between testing the limits and analyzing yourself out of a good deal, so something to be cautious of as well. The biggerpockets investment calculators could help run some quick numbers.

Where is the rehab money coming from, cash or financed? You may have already ran these numbers, I would first see what the balance of the subject to loan and the PI payments. Depending on how far along this loan is in the amortization, there could be additional benefit in keeping the original mortgage in place because more of the PI payment is going to principle, opposed to if you were to take a new loan, where a majority of the PI payment will be going towards interest.

As far as the negotiation goes, my method is to simply do run a few scenarios, making sure to add in whatever ROR or whatever metric you want to have as your investment criteria. From there, back calculate an offer price you would be comfortable moving forward with in this current market. You can share as much of the information as you want with the seller, but I typically share the overview of my numbers, explain where the numbers are coming from and why its needs to be this purchase if I am going to do the deal. At that point, hopefully the seller has a firm understanding of your requirements for an investment and its a simple yes/no response. There is some room for further negotiations, but now you have placed an anchor price and showed the criteria you need to get the deal done, so the ball is in the seller's court now. 

Hey, @Allende Hernandez

What a wonderful question and also a very worthwhile investment. 

What is you appetite and or ability to put a larger percent down? Is your main goal with this property cash flow while providing a home for your mother? I ask because of course there is the ability to put more money down to get more advantageous rates and also lower payments because your are borrowing less, but this will affect your cash on cash ROR. 

There are some pretty good products out there available for investments, where you can do seller paid temporary rate buydowns. For example, you could do a 3-2-1 temporary rate buydown where the rate is 3% lower first year, 2% lower in the second, 1% lower the third year and goes back to the original rate for the rest of the loan. The beauty with the seller paid is that the money goes into an escrow account and if you refi or sell during the buy down period, the left over funds go towards the principle, so it’s not lost like if you were to buy down the rate with points and then sold/refi in the next few years.

Hope that makes sense but let me know if there’s any other considerations or something I misunderstood and we can continue brainstorming!

Hey @Kisaki Nicole Kaopua - Great question. 

Based on the initial information provided, I agree with @Kristine Ann that there does not seem to be enough spread between the asking price and sales comp, considering the work that needs to be do. 

A thing to note would be, it may be difficult or impossible to get a qualifying mortgage if there are significant repairs that need to be made such as completely new flooring. If that is the case, you will most likely have to use more of an “investor” loan product, which will have a higher rate associated with it. 

There may be a price point at which this deal would make sense, my wife and I have done similar scenarios to live-in flips and I think it's a powerful tactic done right. The biggest thing that sticks out to me is, if the property is in good enough shape to qualify for a conventional mortgage, there is a larger pool of potential buyer, so there may not need to be enough spread between purchase and ARV. If it's not able to have a conventional mortgage right now, you may be able to use that as a negotiating point because the pool of buyers are going to be smaller. Please let me know if I've misunderstood any of the situation and we can keep thinking this over!

Good morning, @Edna White

It looks like you have already found a potential deal and identified a potential tactic (subject to) to make the deal work, well done so far!

What exactly are you wanting advice on putting together because I can tell you’ve already thought through it a bunch? A few helpful clarifying questions, hopefully help get your wheels turning as well, would be:

What are you planning on doing with the property and what is your exit plan? A lot of what goes into your offer will depend on what you want to do with the property. 

It seems as if there will be some upgrading of the units, are you anticipating a sale or refinancing out of the subject to different mortgage afterwards or is that the long term debt instrument you want to keep?

Hey, @Nathan Owens. Great Question

Few clarifying questions for your scenario:

-What kind of mortgage product is the 160k mortgage? I would check to see if the loan is assumable, like a VA product. Definitely talk with a real estate attorney, but presumably the mortgage is currently being paid by the estate of the deceased. There could potentially be an option for the heirs to assume the mortgage when the estate is settled.

-The idea ending place is your sister living in the main house and a separate tenant living in the ADU, right?

-In the scenario it is just you financing the property, would your sister be paying rent to live in the main house?

There could be a pathway out there to pay off the original note for 160k. You could then do a cash-out DSCR loan, and take out enough to pay back the original and funds to build the ADU. In order to get the most competitive rate this way, you'll probably have to stay below 70 LTV and above a 1.3 ratio (that is why I was asking about if your sister would be paying rent). The DSCR product is a non-QM loan and will not be sold on the secondary market to Freddie or Fannie, so there are lenders that may will not require a seasoning period.

Great information from @Matt Miller!

Just a small bit of information to arm yourself in regards to the lease and your wife's sister's DTI. Most of the time, lenders will only qualify a percentage of the rent towards your DTI. For example, if rent is $1,000/month and your lender will qualify 80% of the rent, you may only be able to qualify $800/month of that towards the DTI. May not affect your situation at the moment but something to keep in mind as you grow your portfolio.