How is rental income factored in when getting a loan?
I understand it is factored in and can bump up the amount you can get for that property, but I don't know anything beyond that. Do you still need 20-25% down-payment as well or does that number decrease?
[{"id": "iojv2gj", "text": "Yes, you almost always need a 25% down payment regardless of the rental income.\n\nEDIT: I would be extremely skeptical of any lender promising you 100% financing. Especially if they are charging upfront fee\u2019s.", "replies": [{"id": "iojwun3", "text": "Okay, so how does rental income history on the property affect the loan?", "replies": [{"id": "iojxmbb", "text": "It is used to underwrite the ability to service the debt. if the property has been producing income for the last five years and tenants have 5 years remaining on their leases, the lender can feel pretty confident the tenants will pay their rent to the borrower and the borrower will repay their debt.", "replies": [{"id": "iojy8j8", "text": "To confirm, rental income does not affect the downpayment? It doesn\u2019t lower the amount required?", "replies": [{"id": "iok30qu", "text": "Not in my experience. Not for the average person with no history with a lender. You will see deals get financed with little down but there is more to the story. Buyer has a long history with lender, used a different property as collateral, etc. in this environment lenders are gonna want 30% down. \n\nSBA loans you can get with 10% down but they are for operating business not for investment property.", "replies": [{"id": "iow04au", "text": "Do you know if it's better to use a property as collateral or take out a loan and have cash in hand from that?", "replies": [{"id": "ip5v2en", "text": "I\u2019m not sure I understand the question.", "replies": [{"id": "ip5wji9", "text": "Nevermind on that one.", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}, {"id": "iol7pm0", "text": "Not in my experience. If you build a relationship with the lender/s then you have more of a chance to get reduced down payments required. Not going to have any luck if it\u2019s your first property/loan with the lender.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iojxp9i", "text": "It depends on the property type. In California, the only loans with 20-25% down are owner/user properties...which typically do not have any rental income. Multi family units right now are requiring around 45-50% down in many cases.  NNN investments with less than 5 years remaining on the existing term require close to 50% down. \n\nMost banks want to see a DCR (debt coverage ratio) of at least 1.25% right now....meaning if the loan payment is $1,000 a month, the rents need to be $1,250 a month.", "replies": [{"id": "iojytb3", "text": "That's really sad. That makes it harder for a person to move up then. I don't think it's that way in Texas.", "replies": [{"id": "iok2p5g", "text": "the deals just won\u2019t cash flow with higher leverage (less down payment) so if you want to borrow you need more money down. It is like that in Texas as well which we just call California Junior now.", "replies": [{"id": "ioky3e3", "text": "So you think that 50% is necessary for cash flow?", "replies": [], "depth": 4}], "depth": 3}, {"id": "iokx3t9", "text": "While there are a lot of people who try to make investing in real estate look easy, it is not easy. I would not waste your time trying to invest in real estate unless you have actual money to use as the down payment that is at least 25% of the purchase price. If you know people with money you could try partnering up with them but you\u2019ll need to convince them that investing with you is wise and if you don\u2019t have any experience, that is going to be an uphill battle. You can also try wholesaling which is where you put properties under contract but then flip the contract to the actual buyer and make a spread. But ultimately, in real estate you usually need money to make money. I am not saying this to be mean or discourage you because nothing in life is easy, I just don\u2019t want to see you waste time for something that might not be realistic. My recommendation would be to probably find a good job, keep your expenses as low as possible until you save up $50,000 or some amount of money, and then use that as your down payment.", "replies": [{"id": "ioky01o", "text": "I have money. I just get the impression that going big is better than small. For $250,000 I could get a single family house, but if I look in a slightly different area I can spend the same amount of money for a multi-family. So trying to put as much into it to get as many units renting for as much as possible seems like what's best to help us further ourselves.", "replies": [{"id": "iol2hgd", "text": "You might want to consider being a passive investor / limited partner in a commercial real estate syndication. You would not have any control though and those are illiquid investments but this way you could invest in a larger and potentially better property.", "replies": [{"id": "iol4quf", "text": "What's the best way to start meeting people for that? It is something that I have contemplated.", "replies": [{"id": "iol6lx5", "text": "LinkedIn is very popular with the commercial real estate community. I\u2019d find local professionals and reach out to them on LinkedIn, explain you are looking to get in to the space and wanted to pick their brain or learn about what they do. I\u2019m guessing many people would be happy to hop on call or meet for coffee to teach you about the industry. You can also attend conferences and events but that can get expensive.\n\nEDIT: If you specifically want to meet syndicators, there are a ton that have websites that you can find on Google. If they know you have money to invest they\u2019ll gladly talk to you.", "replies": [{"id": "iow0065", "text": "Thanks", "replies": [], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iok4iig", "text": "The rental income will be the underlying repayment source for the subject request. If it cannot cover at a 1.25x minimum DSCR on an amortized basis, the lender will require the borrower to cough up more equity to lower the monthly payments and be serviceable from the rental income. \n\nLenders are also starting to stress test repayment capacity by simulating the rising rate environment we are currently experiencing. Typically increases of 150bps to 200bps is what I do to ensure cash flow is sufficient and if the repayment sinks below 1.25x DSCR amortized, it\u2019s as good as dead most times. \n\n25% down payment is the minimum required in most cases since it\u2019s investment real estate purchase transactions. Obviously no equity injection is required on refinances.", "replies": [], "depth": 1}, {"id": "iok64an", "text": "Income affects debt service coverage ratio but don\u2019t expect to do any better than 80 or 75% LTV no matter how good the deal is", "replies": [], "depth": 1}, {"id": "iok6wmw", "text": "DSCR is becoming hugely important to lenders!! 1.25 range", "replies": [], "depth": 1}, {"id": "iokexsj", "text": "I\u2019d Call a loan officer for the most accurate answer to your questions. Good contact to have as well", "replies": [{"id": "iokrtpl", "text": "Good call. I reached out \ud83d\ude0a", "replies": [], "depth": 2}], "depth": 1}, {"id": "iolqxcy", "text": "Trying to be as nice as possible, but if you\u2019re asking a question like this maybe this type of investment isn\u2019t for you", "replies": [{"id": "iolr2cy", "text": "Thank you. I have to start learning somewhere and I wasn't clear based on what I was reading.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iom7vng", "text": "I did a quick scan of the comments here and didn\u2019t see this mentioned but lenders will underwrite both a LTV typically 25-30% (depending on the type of property) and then they will run the DSCR and they typically want to see at least a 1.2 ratio there. Then they will offer you the LESSER of the two which means you could be required to put down much more than the 25% if the income doesn\u2019t support the deal strike price. I spoke to a commercial lender that changed from a:\n\n- 75% LTV\n- 25 yr amortization \n- 5 yr term\n- 5.75% interest\n\nto\n\n- 70% LTV\n- 25 yr amortization\n- 5 or 10 yr term\n- 5.5%-5.75% interest (depending on term)\n\nBecause he found out it was a retail property even though it has a medical tenant and a publicly traded company as occupants. \n\nThe type of property matters. \n\nBanks typically price their mortgages 160-250 basis points above the federal home loan bank (where they source their funds). \n\nDo not trust someone offering 100% financing.", "replies": [], "depth": 1}, {"id": "ip9succ", "text": "20% down min. Depends on lender credit score and Dscr ratio", "replies": [], "depth": 1}]