All Forum Posts by: Nick Coons

Quote from @Mike Dymski:

You covered it well.  #2 needs to be an option regardless of market conditions to allow for rehab challenges and surprises.

I agree, I think it's just important to not let this be a subset of "analysis paralysis"? As in "Should I ever get started in REI? Not sure if I have enough cash on hand..."

Quote from @Matthew Crivelli:

 @Nick Coons

You are really thinking ahead here. It happens all the time actually. People will use a DSCR loan to refi out of a bridge loan and the appraisal will come in short OR the property can't cash flow at current rates if the new loan is 75% of ARV. 

The investor has to then make a choice, 

1. Come to the closing table with cash to pay off the original bridge loan and complete the BRRR

2. Sell the property as a flip  

You want to be in a position to have a choice, its always good to try to complete the rehab ASAP and why most HML's will require a borrower to have a good amount of reserve cash on hand when the initial bridge loan is given. Hope for the best and plan for the worst and you should be okay!

It sounds like you're basically agreeing with my initial assessment of ways to hedge against this possibility, is that right?

What you're saying here makes sense: "People will use a DSCR loan to refi out of a bridge loan and the appraisal will come in short OR the property can't cash flow at current rates if the new loan is 75% of ARV." Exactly! Every analysis I've run (unless the property can be purchased for 65% or less of ARV, sort of a pipe dream) means that I'm either leaving money in the property or I'm cash-flowing negative. The idea of being able to get all my money back and still cash-flow positive (or even break even) seems not really doable. I can float the negative cash-flow, but probably can't get a DSCR loan that way.

Here's where I'm at right now. I have about $65k cash available, and looking for something ideally <$250k (so $25k down on a 10% down HML). I plan to put up to about $50k into rehab, which I can use a LOC for (and I can cash-flow those monthly payments from other income indefinitely if needed). This leaves me with about $40k in reserves to cover holding costs and other possible expenses that I can't pay for with credit.

Aside from things I can't cover with credit (like unexpected repairs), I'll need to take into account additional holding costs if the rehab process takes longer, putting more cash into equity when I refinance in case the appraisal comes back lower than expected.. what else should I be looking out for?

Quote from @Ryan Swan:

It's impossible to eliminate time risk, but a 3 month window is about as short as you can get, and thus has a pretty low risk. I don't think there is any strategy out there that would eliminate the risk of a market dip as you described, so I just look at it as something that comes with the territory of short term real estate investing. 

Sure, you could acquire properties at such a discount so that the worst 36 month price decline would still be above what you have into the property. But as you pointed out, that's nearly impossible right now in the hypercompetitive metro Phoenix market. 

Have a couple exit strategies: convert to long term rental, convert to STR, sell as is and make a little money or break even.

To be clear, it's a long-term investment, no short-term investing in what I've described. The risk I'm trying to eliminate isn't the risk of losing value in the investment in the short term (i.e. a decrease in equity), it's the risk of being stuck in a bad position that I can't refi my way out of because of something that happened at the wrong time (like a market dip).

Making it a long-term rental wouldn't really be a conversion since that's the original plan. As I described, if I had a short-term HML that I'm stuck in because of a downturn and I can't refi out of it.. how would you suggest holding onto this property as either a long-term or short-term rental? Selling it would be a good option, one I mentioned in my initial post. :-)

I'm an avid consumer of the BP podcasts, and to some extent the content on these forums. So I understand that any buy-and-hold strategies don't generally care about short-term market conditions. When asked "if the market is down, do you buy?" or "if the market is up, do you buy?" or "if the market is X, do you buy?" the answer always seems be a resounding YES. Buying deals is a good strategy any time, and blips that last a few months or a few years don't matter in the grand scheme of holding something for 10+ years. Timing the market is tough, so don't bother. That all makes sense to me.

My question is regarding something like the BRRRR strategy, or any strategy really that involves getting a short-term loan (like hard money) to purchase something, rehab it, then refinance to hold.

So.. theoretical: Purchase a property in April 2022.. it takes three months to rehab.. in June of 2022, the market dips 10% in a quick correction (might recover in a few months or a year, but isn't relevant now), rehab completed in July 2022.. can't get the appraisal needed to refi out of the HML because of the down turn.

Given that timing the market isn't really a viable strategy, I'm trying to think of ways to protect against this possibility. Here's what I've come up with so far:

1) Find better deals. In an appreciating market (particularly where I'm looking to invest, Phoenix), this is very difficult. While something like 65% of ARV would be great, the reality is that something at 85% of ARV is pretty standard, and 80% of ARV is considered amazing.

2) Have more cash on hand (either my own, or a partner that'd be interested in tying up some capital for years). I'm basing my initial assumptions on a HML with 10% down, then a refinance at 75% LTV (this is where a market downturn could negatively impact my forced appreciation efforts). So perhaps this means putting 20%+ into the HML (or at least having the cash available just in case I need to put it into the refi).

3) Sell as a flip. While a downturn could eliminate the ability to do a 75% LTV refi without putting in more cash, that doesn't mean the property is upside down (that would have to be a crash as bad as or worse than 2007/2008, which I don't think anyone expects, so I don't think I should be taking precautions against this), which means I should still be able to sell it for a profit (which also gives me more cash available for my next deal to implement strategy #2). I actually came up with this thought as I was writing this post, so perhaps I answered my own question (because I wasn't a big fan of #1 or #2 :-) ).

I'm interested in what others' thoughts are on this.

@David Garner I would love to know some specifics if you're interested in sharing. I've only "theoretically" heard of 65%, not seen it in practice and certainly not as a "usual". :-)

Quote from @Jonathan Taylor:

@Nick Coons I'm an investment property lending expert and there are negative DSCR or no DSCR loan options that can help you obtain a property. Usually requiring 25% down since the lenders I work with approach lending in high value markets with a common sense approach. Rates will be higher than DSCR programs but this would allow you to obtain the property and be in line with your goals.

When you say "25% down", does this also equate to "up to 75% LTV on a cash-out refinance", for instance, if I'm changing out of a HML used to purchase/rehab?

Quote from @Jake Kain:

@Nick Coons Hey Nick! I am no mortgage expert, so I can't answer with 100% certainty, especially on your first question about them looking at the single property vs business entity.

We just closed on a triplex, using a DSCR loan. From my understanding, they are only looking at PITI (and probably HOA if there is one, ours does not) in comparison to what it brings in in monthly rent. The property we purchased was fully rented so we had to provide leases showing the current rent. We are currently only bringing in about $140/month without taking into consideration any other expenses, cap ex, vacancy, etc. So we are definitely negatively cashflowing on actuals until we can get the rents up to market value. If the units were vacant, I am not sure how the underwriter determines "market rent" and if they use the full amount or a percentage like they do for calculating DTI.

If you want I can get you in touch with who I used, he is local here in AZ. He would be happy to answer all of those questions.

That's good to know that they're using "hard" expenses and not the projected expenses (like capital expenditures, vacancies, etc). I'd have to re-analyze the properties I'm looking at to see if they calculate as cash-flow positive from that perspective.

I'm at the lender interview stage, so while I have a preference out of the ones I've talked to so far, I'm not currently working with anyone, and certainly open to new introductions.

Quote from @Kristen L Garner:

DSCR ratio calculations are monthly expenses (principal, interest, taxes, insurance, and HOA if applicable) divided by the rental amount that comes back in the appraisal. If the percentage comes in below 1% the loan can still be done, you just get hit with .5 points (might vary lender to lender). Rehab costs, PM costs, etc. are not included in the calculations. And we look at the property itself, not your business entity or investment portfolio. For my borrowers that are deciding between conventional and DSCR I usually run both scenarios so they can compare and make the decision that best suits their goals and strategies. If you are already working with a lender they should be able to do that for you as well.

That's good info to have. But darn, I was hoping the lender would have the option of looking at the business as a whole rather than the individual property. That way I could have other revenue sources to help qualify.

My concern with a conventional loan, and maybe I'm wrong, is that there's a limit on the number of these that one can hold. There's also a limit on the number of properties that I can support with negative cash-flow from a qualification perspective using my personal income and DTI. But maybe I'm not looking at this correctly, so hopefully you can fill me in on the ways I might qualify in a situation like this.

I'm working on investing in Phoenix (just because I'm getting started again after years, so I don't want to complicate things by going long-distance). This is a high-appreciating market, which means finding properties that cash-flow positive is very difficult. Most DSCR lenders that I'm looking at require about a 1.2 ratio.

I'm content with the idea that if I purchase a rental property, rehab it, etc, that I might cash-flow negative for a couple of years. To me, that's still worth the other wealth-building characteristics of rental properties (appreciation, tax deductions through depreciation, mortgage pay-down, and future cash-flow). However, this seems like it would make it difficult to qualify for a DSCR-style loan since my ratio would be below 1.0. So here are my questions:

- When a DSCR-lender is looking at income/expense ratios, are they looking at just a single property individually, or are they looking at the business entity as a whole that owns the property. For instance, let's say that the property itself cash-flows negative, but the business entity that holds the property also has other sources of income.. which is the lender looking at?

- When calculating cash-flow, I'm taking everything into account. That is, not just holding costs (like PITI and utilities), but funds I'm putting aside for repairs, capital expenditures, vacancies, and management (even though I'll be self-managing). Is the lender looking at "expenses" the same way, or are they just looking at actual monthly outflow of cash?

It's possible that a DSCR-based loan may not be the best option, and I'm also fine with a conventional mortgage that uses my personal income, credit score, and DTI to qualify. I'm just exploring options.

@Scott Bidwell

A couple of others have touched on the idea of DSCR loans, so I wanted to contribute an idea along that same line.

You could purchase your first property with cash, rehab, and rent. At this point, your CoC return would suck, but your positive cash-flow should be really high. Make sure this property belongs to an LLC or similar.

Purchase your second property (also as a a business entity) with a hard-money loan (which doesn't require income because, as others have stated, it's asset-based). Once the rehab is finished and a tenant is placed, using your business entity's combined rental income (i.e. including your first property), you should have no problem exceeding a 1.2 DSCR ratio and be able to acquire a loan that way, even if the second property were in, say, a high-appreciating market that doesn't cash-flow well. You can keep this strategy going using your first property, fully paid off, as the cash-flow engine that qualifies you for more DSCR loans on each additional property. At some point, you reach the experience level where you can mortgage the first property to pull out most of your cash to be able to accelerate your acquisitions.

That's one option. Another might be to partner with someone who has an income, but not your cash resources, so you both bring something to the table. You have the financial stability to make the project work, and they can qualify your partnership for the mortgages.