Second Mortgage on Income Producing Rental

duplex, villa, rendering-1026381.jpg

Second Mortgage on Income Producing Rental?
Posted by: claudette Mar 25 2004, 10:18 PM
Bought a duplex a few years back-lived in one unit, rented the other. Due to a job change, moved into a rental in another state for a few years and rented out both units.

Now, I want to move back and buy another place, but want to get a 2nd mortgage on the rental in order to finance a home for myself. (I can’t live in the rental-signed leases and great tenants-and now it’s too small.)

The amount left on the loan is 94k. The property is valued at 260k. It brings in $1800 a month before paying the mortgage.

I am having a LOT of trouble finding a lender to give me an upfront quote or loan on this. I am not an experienced investor or homeowner (this was my first house) so I am not understanding why all the problems.

I also thought about re-financing the 6.5 rate and getting cash out, but I’ve run into the same problems.

Posted by: loanuniverse Mar 26 2004, 10:23 AM

The reason why you are having problems getting a lender to give you a quote is that you are probably talking to residential lenders that know that this type of loan would not qualify for the product that they sell. Taking into consideration that this is an income producing property, and that you do not occupy one of the units, they just can’t fit you into a “conventional home loan”.

You are probably going to have to get a commercial real estate loan. In order to find out how much loan the cash flow of the property can afford, you need to do some math. The rental revenue is a good start, but you need to account for all expenses and reduce the revenue by possible vacancies. In short, the math would be something like this:

Rental Income – Vacancies – Operating Expenses = Cash Available to Service Debt.

The cash available to service debt should be enough to pay for the debt service of the proposed loan and leave some leftover that would provide a satisfactory cushion for the lender. This is called the ‘Debt Service Coverage Ratio’ and most lenders want it to be at least 1.20 times the mortgage payments. You can find a little spreadsheet that will help you calculate this in the following link:
Sensitivity Analysis

Other Random thoughts about your situation:

1- With a value of $260K, you can probably get at least 75% of the value of the property in a refinance. This should be $195K However, the cash flow must be enough to service the debt. When you play around with the spreadsheet, change the number around to see how much loan the cash flow can afford.

2- I would think that the best bet would be to refinance the whole loan as a second mortgage might carry a higher interest rate due to being a riskier proposition to the lender. You will have to talk to a lender… Make that a couple of lenders in your area.

3- 6.5% might be hard to beat. I am not saying that you could not. In fact, a few of the loans that I have done recently have rates between 5% and 6%. However, it is all about negotiating skills, the size of the loan, and the value that the lender sees in your relationship. A loan of the amount you are looking for would not do much to help a lender meet its production quota. Negotiate! Negotiate! Negotiate! the fees… the rate… the length {longer is better}.

4- Do not expect your loan to be a regular thirty-year or fifteen-year long type of loan like residential loans are. You can expect to be quoted a five-year loan. Remember Negotiate! Negotiate! Negotiate! try to get a ten-year loan with a repricing at the end of the fifth year. There are also some banks that do fifteen-year loans that are fully amortizing look for one of those.

Good luck, and I hope this helps.
Posted by: CLAUDETTE Mar 27 2004, 05:33 AM
Under “other random thoughts” items 1-4, are you still talking about a commercial lender, or are we back to a conventional lender?

Posted by: loanuniverse Mar 27 2004, 08:16 AM
Under “other random thoughts” items 1-4, are you still talking about a commercial lender, or are we back to a conventional lender?

Talking Commercial lender here. I very much doubt that a residential lender can fit you into a loan. After all, you do not reside in the property.

Did I mention that you should talk to more than one?

If not then just remember to shop around.

Good luck.
Author: Commercial Loan Underwriter