REI Brokers

WHY REFINANCING AT A HIGHER RATE MAY BE YOUR BEST MOVE

As an investor eyeing a refinance for your rental properties, you're sitting on the fence waiting until commercial rates drop from their current 7.5% average. Your existing rate stands at a favorable 5%, but your portfolio boasts a nice chunk of equity you're thinking about using for another project. Does this scenario sound familiar?

Back during the financial crisis, investors were sitting at an average Loan-to-Value (LTV) ratio of 81%. But now, it's down between 50% to 60% or even lower. That's a big improvement, and it gives you a huge advantage.

Let's break it down with an example. You have a current $50K loan with a 30-year fixed rate mortgage rate of 5% on one of your properties. The property is worth $140K and you have $90K equity. Your feeling pretty good about your leverage but still thinking of tapping into that equity.

Here's the numbers:

$50,000 loan
$1,335 yearly taxes
$875 yearly insurance
$745.33 PITI monthly payment
$15,600 yearly rent ($1,300/monthly)
$6,656.04 yearly net income (Yearly Mortgage - Yearly Rent)

But when you start looking deeper, you find you've got other debts, short term hard money/private lender loans and credit card debt financing renovations. Here's an example of what that might look like:

$25,000 private money loan at 10% = $208.33 interest only/monthly
$15,000 credit card debt at 22% = $275 interest only/monthly
$483.33/ total monthly interest payment

$745.33 PITI + $483.33 = $1,228.66 - $1,300 rent = $71.34 monthly cash flow.

Here's another way to look at it:
$50,000 mortgage loan
$25,000 private money loan
$15,000 credit card debt
$90,000 combined debt
$1,228.66 total monthly payments

Your blended interest rate is a whopping 16.253%.

And you want to wait until commercial interest rates drop? Suddenly, you're seeing the financial situation in a whole new light. You realize you need to pay off those debts.

As it stands at the time of this writing (3 May 2024), the best commercial loan interest rate available is 7.4% at 75% LTV cash out with a $105,000 loan.

Here's the breakdown:
$105,000 loan amount
$908.67 PITI monthly payment @ 7.5% interest

$908.67 - $1,300 = $391.33 monthly cash flow.

All your debts are paid off, you increased your cash flow 18%, and you still put some money in your pocket after closing costs.

Instead of just focusing on waiting for lower mortgage rates to arrive, you can tap into your current equity and tweak the loan-to-value ratio to lower the rate and maintain a cash flow positive position. Consider a lower LTV (from 75% to 70%), buying down the rate 1 point, and extending your pre-payment penalty period. All this can lower your refi rate even more. Essentially, you're restructuring your debts, narrowing the gap between your current and future mortgage payments.

This strategy may not work for every scenario, especially if you lack equity in the properties. However, for those with ample equity, it's a game changer.

By shifting your mindset, you can adapt to changing market dynamics and effectively expand your portfolio.

IM or email to [email protected] if we can be of further assistance.

27. BRRRR – TOP 10 REASONS A LOAN IS DECLINED
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Typically, loans are denied when issues are discovered during the underwriting period. Here is our top ten list.

1. Borrower FICO score does not meet the minimum required prior to loan closing. Often, lenders will pull credit a soft credit at time they receive the application and a hard pull after the appraisal value is agreed upon. I had one lender deny a loan because the borrower FICO was 559, not the minimum 660 required.

2. Any judgements that show up against the borrower on their credit. B prepared to provide a recorded copy of a Satisfaction of Judgement from the county clerk. If the judgement has not been resolved, your loan will be denied.

3. If you have any late payments on either your primary mortgage (the one you live in) or any other mortgage from an investment property, you loan will be denied.

4. If the appraisal value falls below the minimum value required by the lender, they will cancel the loan.

5. As rates rise at the time of this writing, there are lenders who are adjusting their loan programs. If an adjustment is made and your property falls below their minimum loan requirements, there is a very good chance they will cancel your loan. Very rarely have I seen a lender grandfather in a loan after program revisions.

6. If your actual rents are much lower than your stated rents, your loan could be adjusted from 75% maximum cash out to a lower LTV such as 70%. This will increase the DSCR to the minimum requirement. If the DSCR drops below the minimum and you have no way of decreasing the LTV or increasing rents, the lender will cancel the loan.

7. If you were untruthful in any way on your loan application and it is discovered during the underwriting due diligence period, you can bet your loan will be cancelled. Bad debt, arrest, foreclosure, eviction, bankruptcy are all loan disqualifiers.

8. The property must be stabilized with tenant occupancy and minimal repairs required (discovered during appraisal). If the property needs excessive repairs, the lender will require those repairs to be made prior to closing. If it is beyond your budget or you simply do not wish to make the repairs, the lender will cancel the loan.

9. Failure to provide all documentation will place your loan on inactive status inevitably leading to cancellation. Inactive status does not always been a loan cancellation but if reactivated, underwriting will treat it as a new loan.

10. You need to document tenant deposits and rent collection from your property management software. Also, lenders will want to see these deposits in your bank account. If not documented or the numbers don't add up, the lender will not proceed with your loan.

Got questions regarding financing your BRRRR properties? Please reach out to us. We are happy to assist.

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader LLC (investment company), Real Equity Inc (real estate brokerage) and REI Brokers (money loans). He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 2,000 projects.

Like many of the loans we help secure for investors, we went through the exact same process for one of our rental portfolios we were seeking to refinance. We started the process a few months ago when rates were still in the low 4% range for a 30 year fixed/30 year AM loan on a 75% LTV cash out.

We were initially offered a 4.1% rate and as we proceeded through the underwriting process, rates started to climb to 4.5%, 5.1%, 5.5%, 5.99%, then finally to 6.5% (commercial lenders do not lock rates until after they receive the appraisals back). A 6.5% rate seems fine if you are refinancing one or a few SFR's. However, it does not work for an SFR multi-million dollar portfolio. This has a significant negative impact on our overall cash flow. A half point (let alone 2.4 point) rise is thousands of dollars in lost revenue.

With so much time invested, plus the $16,000 we spent on appraisals, the lender assumed we would still close. Instead, we opted to cancel the loan. Why? We had an alternative financing option ready. We were able to secure a 4.25% with a 25 year AM for five years with one of our local community banks here in Birmingham (rates increased to 5%). We recently completed the refi and received a pretty decent check at closing.

With rates rising, now more than ever, it is important to have a secondary option to financing. If you are seeking a similar loan, we can assist. You must be an Alabama resident and corporation. Reach out to me for further info.

I had the pleasure of being the guest on the Evernest Podcast discussing the Birmingham market, how I built a 100+ rental portfolio, my predictions on the housing market for the rest of 2022, the secret to managing turnkey properties as an out-of-state investor, plus Multi-family, short-term rentals, exit strategies, financing rentals, and more!

ERI #32: Jonathan Mednick Gray and Spencer talk to Jonathan Mednick, a local real estate professional with 20 years in the business and learn more about his story and his thoughts on ...

Joe Rusaw just closed on his 4th SFR refi with us here in Birmingham and put a cool $23,000 in his pocket.
https://youtu.be/SMTVXd6io5M

@ the Closing Table with Joe Rusaw We are Closing Table with Joe Rusaw discussing how he went from a $70K appraisal to a $130K appraisal and $23,000 cash out on his refinance of his SFR ...

The Birmingham Real Estate Investor with guest Jonathan Mednick n this episode, Spencer welcomes Jonathan Mednick, the managing director of REI Trading, LLC, and a financial broker with Real Equity Realty.Jonathan special...

REI Brokers is at the closing table with Conrad Ercolono who just completed a refinance of his Dayton, OH duplex. With a cash out of $55,000, Conrad discusses his approach to the BRRRR strategy and how he plans to use these funds to purchase additional properties.

https://youtu.be/YNrV8VjtBjc

@ the Closing Table with Conrad Ercolono Conrad Ercolono is @ the closing table discussing his refinance of his duplex in Dayton, OH. We discuss the challenges of the BRRRR strategy and how he was a...

26. BRRRR – HOW TO SPOT A LENDER SCAM
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Your seeking short term funding to acquire a property to take through the BRRRR process. On the real estate investment Facebook groups, you come across someone offering you financing up to 100% with 4% interest only.

How do you tell if it is legitimate? Before you contact this person, you need to have vetting process in place.

1. If you found them on Facebook, go directly to their profile page. If the profile was recently created, about pages list interest from overseas, and they don't have much content, that's a flag. Often they will have photos of a 50+ year old male, mostly white. The profile was recently created to add legitimacy to their scam.

2. Email - If you receive an unsolicited email, most likely the scammer found your email when you posted it on Facebook. Email is usually short asking you to email them back for details. Most all of them will have Google email addresses. You do not want to respond.

3. Communications - If you are communicating with them, they will redirect you to web site to submit your loan application. Never do this until you can speak with someone over the phone. Call them to see if the number works. If it is a Google Voice number, it's another red flag for a scammer overseas.

4. Web site - Often scammers will text you, email, or post on social media a web site for you to review and submit your personal information. Do not provide any personal information until after you speak with them on the phone and fully screen them.

5. Upfront fee - Some lenders will require a Due Diligence/Underwriting fee or appraisal costs at the time you agree to the term sheet. I recently paid $15,575 for appraisals at the time I accepted the term sheet for a refi a 26 SFR portfolio with one of our lenders. Don't be put off with an upfront fee from a lender. This shows your commitment to moving forward with the loan. They will provide wire instructions with a reputable bank such as Bank of America or Wells Fargo. However, if it is a bank you never heard of, is located overseas, or if they ask you to send Western Union or through a cash app like PayPal or Venmo, it's a scam.

How do you tell the different between a real lender and a scammer? Insist on a phone call. Ask them to discuss the LTV, DSCR, escrows required, points, etc. If they explain in detail their loan process, loan types, general rates, and terms, you are on the right track. If they redirect your questions to completing an online application first, are sketchy on details or hesitate with their answers, they are probably someone you want to avoid.

Most importantly, ask for a reference from an investor who has already completed a loan with them. Often we post Zoom testimonial videos of our closed loans on our web site. Once you have their names, research to make sure they are legitimate investors before calling them.

And remember, if it sounds too good to be true, it probably is.

Got questions regarding financing your BRRRR properties? Please reach out to us at [email protected]

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader LLC (investment company), Real Equity Inc (real estate brokerage) and REI Brokers (money loans). He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 2,000 projects.

As if 2/6/2022, REI Brokers is assisting clients with the acquisition or refinancing of their properties totaling 213 properties and with an estimated loan value of $14,713,535.

Looking to acquire or refinance your investment properties (single SFR, SFR portfolio, or multifamily) into a a 30 year fixed/30 year AM? Time to lock in rates as low as 4.1% before the Fed raises rates. Contact us today.

25. BRRRR – Top 10 REASONS FOR CLOSING DELAYS

This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Closing day has finally arrived and you are ready to complete your third R of the BRRRR strategy. But wait! Are you ready? Here's our top ten list of reasons why your closing may be delayed.

1. When underwriting has received the appraisal and everything is as expected, you can expect to close within approximately 10 days. Check to make sure the name of the borrower is correct and your satisfied with the appraisal amount. If anything is incorrect or you dispute the appraisal amount, this could delay closing an additional 2-3 weeks. Especially, if you dispute the appraisal and the lender allows you to order a new one (at your cost).
2. All lenders will perform a third-party secondary valuation of your property about a week before closing to account for any possible pricing fluctuations between receiving the appraisal and the actual closing date. You only hear about this if your secondary valuation comes in lower than the appraisal amount. If it does, the lender will finance the lower of the two (it occurs 1 out of 100 properties). If this happens to your property, you can either close with the lower value (meaning less cash out) or you can cancel the closing. Most all lenders will not allow you to dispute their secondary valuation.
3. As I have discussed in a previous post, all lenders require a revised insurance policy adding them as an additional insured. They will also require specific replacement cost coverage and rental loss coverage. Is your insurance policy up to date with the lender's requirements? And make sure to obtain a paid invoice or an invoice to be paid at closing for your policy. You want to provide this both underwriting and your title company prior to closing. The lender will provide instructions to provide to your insurance company.
4. Title issues can occur at any time even up to the closing date. Typically, it is a chain of title issue or outstanding lien. To avoid surprises, check with your closing attorney at least two weeks prior to closing.
5. Often underwriting has approved the loan only to find out it has been delayed because of their legal department. Legal will review everything including the mortgage documents before final approval of the loan package. This is the second and final review stage before the lender will agree to close and provide closing instructions to your closing attorney.
6. If you are closing after the first of the month, the lender will require your previous month's bank statements. Make sure you have the minimum liquidity required by the lender in the bank account. If you do not, the lender may require you to move funds into the bank account and provide a snapshot of the account showing the funds have cleared. This will need to happen before closing.
7. If any leases need to be updated or corrected, an estoppel letter will be used. This document states the tenant's info, rent, deposit and lease dates are correct. It is signed by the tenant and you. Make sure you have provided these letters if requested by the lender. Electronic signatures are fine.
8. Reviewing the preliminary HUD closing document. This document outlines all costs, and the closing attorney should send a preliminary one to you 1-2 days prior to your closing. Make sure all costs are correct.
9. If you have an existing mortgage on the property, this will need to be paid at closing. Often obtaining the payoff letter is the one document most overlooked by the borrower prior to closing. It is your responsibility to contact this lender to request a payoff letter. Most will email you a copy to provide to your closing attorney, but some may take 2-3 days to issue it.
10. And finally, the dry closing. There are two scenarios that can delay receiving your funds on day of closing. First, you attended closing and signed all documents. The closing attorney must scan and email all documents to the lender to review before releasing funds. If you closed in the afternoon, you could expect the lender to review and approve release of the funds the next day. Second, if you are doing a mail away (not physically attending closing), the closing attorney will email you all documents. You will print, sign and overnight them back to the closing attorney. For documents that require a notary, the closing attorney or lender will usually arrange a mobile notary for you. Even though everything is dated and signed, funds are not released until after the original documents are received by the closing attorney. We recommend you always close in the morning. Hopefully, the lender will have the time to review and approve release of your funds by end of the day.

It is in your best interest to always anticipate and resolve any delays by keeping in constant communications with the lender and your closing attorney. Doing so will significantly increase your chances of closing on schedule with no surprises.

Got questions regarding financing your BRRRR properties? Please reach out to me at [email protected].

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader LLC (investment company), Real Equity Inc (real estate brokerage) and REI Brokers (money loans). He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 2,000 projects.

24. BRRRR – DOCUMENTATION REQUIRED
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Once you have accepted a term sheet, you shall be provided with a list of documents you will need to submit to underwriting. Let's shed some light on what exactly you will need to submit for review to obtain a commercial loan.

1. The lender application which includes personal information about you.
2. The credit card authorization form. To pay for any up-front application/due diligence fees required to start your loan process, obtain your credit, and pay for appraisals.
3. Personal financial statement form. You will provide complete disclosures on all your finances, both personal and corporate.
4. Last two months bank statements. You will need to show at least 3-6 months liquidity of the PITI payments.
5. Driver's license.
6. Tenant leases, Section 8 HAP contracts, 3-6 month rent rolls, and estoppel letters, if applicable.
7. Current property management agreement from your PM along with a PM questionnaire. Most lenders want to know the PM is a licensed, valid, and reputable brokerage.
8. SREO Schedule. This includes a list of all the properties the corporation owns including the ones not being financed.
9. Corporate documents include the borrowing LLC formation docs, articles of incorporation, operating agreement, IRS EIN letter and certificate of good standing from the state in which your corporation is based.
10. Insurance Certificates showing current coverage is paid in full.
11. Payoff Letter from Existing Lender, if applicable. You can obtain this directly from the lender.
12. If you are incorporated in a state different then the subject property, you will need to obtain a Foreign Entity Certificate from the state where the property is located.
13. Voided corporate check for ACH. This is for the auto draft PITI payments. The lender will set you up with automatic payments each month.
14. Contact info of your title/closing attorney, property management, and insurance carrier.

This is 90% of the heavy lifting required by you. Remember, most lender’s underwriting team will not start the review process until all these documents are submitted. Once submitted, the lender will also request the appraisal.

Make sure you have a complete list of all documents required before committing to a loan. You want to have all your documents ready after you agree to the term sheet.

Got questions regarding financing your BRRRR properties? Please reach out to me. I am happy to assist.

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC, Real Equity, Inc and REI Brokers. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,900 projects.

23. BRRRR – UNDERSTANDING THE TERM SHEET

This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Often when I present term sheets to a client, they occasionally are surprised at the closing costs.

Most assume there are minimal financing charges like purchasing your own home using a traditional mortgage company.

Those costs are not comparable to financing a non-owner occupied investment property through a commercial lender.

Let's dig more deeply.

1. Origination points - This is the cost the lender charges for their services. Depending on the type of loan and structure, this can be 1-4 points. Once you determine your loan structure (cash out vs rate and terms), LTV, interest rate, buydown option, etc. the number of points could change.

2. Document and processing fees - This is the due diligence cost for underwriting to review and approve the loan. Most lenders charge a nominal fee between $600-$1500 per property. For a portfolio loan, the costs are different. Lenders will charge a fixed fee dependent on the number of properties. For larger portfolios, we can negotiate this cost.

3. Title services - Lenders will estimate this to be 2% of your loan amount. Some are required by their legal department to include this cost in the term sheet. You can certainly use your own title company for closing which may result in lower costs. Remember, some lenders may charge a lender attorney fees typically .5% to 1% of the loan. These covers reviewing the final underwriting package along with preparing and issuing the loan docs.

4. Taxes and insurance escrow deposit - This can be confusing. Many lenders will require a set number of months of initial escrow. After closing, you will still be required to pay monthly tax/insurance at part of your monthly payments. These future funds are escrowed and paid by the lender at the end of the year. Unfortunately, most all lenders will not let you pay taxes/insurance directly out of escrow. Every lender is different in their escrow calculations. Make sure you understand the requirements before you commit to your loan.

5. Prepaid PITI - All lenders will require 3 months of your monthly payments at time of closing. This will include principal, interest, taxes, and insurance. They will be making your first three months payments on your behalf. If you close on March 1st, expect your first payment to be due on June 1st.

Remember that your escrow and pre-paids are not a hard dollar costs but funds to be applied to your loan after closing. All other fees will be hard dollar costs to close your loan.

Finally, each lender will require a minimum liquidity of funds in your bank account to begin the underwriting process. This is usually 6 months of loan payments. Make sure you have these funds in your bank account when start the refi process. Be sure to keep this minimum up to your day of closing.

Got questions regarding financing your BRRRR properties? Please reach out to me. I am happy to assist.

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC, Real Equity, Inc and REI Brokers. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,900 projects.

22. BRRRR – LENDER INSURANCE REQUIREMENTS
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Like any loan, the lender will require you to have adequate insurance coverage for the property you seek to finance.

The following general insurance requirements for commercial property will apply to your loan. Please adhere to them when obtaining the required insurance for your loan and discuss any issues that may arise with your Loan Coordinator.

First, is the evidence of insurance. Prior to underwriting and loan approval, the insurance company must (1) have an “A-” rating or better in the latest edition of “Best’s Insurance Guide”, (2) be licensed to do business in the state in which the property is located, and (3) be licensed to transact the lines of insurance required.

Second, a Certificate of Insurance (for liability) and Evidence of Insurance (for hazard, flood, or windstorm) must be provided prior to closing.

Third, evidence of payment. You shall provide a paid invoice of insurance for full coverage prior to closing. If policy has been previously financed or paid in installments, the balance must be paid in full prior to or at closing. After closing, future insurance payments are escrowed and paid by the lender.

On every insurance policy financed, you must include a mortgagee clause to include the lender as an additional insured. There is a section of the insurance binder to include the lender’s information.

All evidence of insurance for the covered property must be provided to the lender on or before the closing of the mortgage.

Even though your current insurance coverage may be adequate for you at present, the lender will have their own minimum requirements for coverage. You can expect higher coverage requirements thereby slightly increasing your overall cost.

For example, the lender will require full replacement cost coverage. A replacement cost coverage policy helps pay to repair or replace a damaged property without deducting for depreciation. Basically, it is how much it would cost to reconstruct your home as it is now.

Liability coverage will average $1 million per occurrence/$2 million minimum general aggregate limit. This is the maximum amount of money an insurer will pay for all your covered losses during the policy period, typically one year.

For the deductible, it cannot exceed the greater of 1% or $5,000 per occurrence for portfolio and/or single asset mortgage loans but no more than $25,000. You must cover out of pocket for any damages up to deductible amount before your coverage takes effect.

Flood insurance may be required even though your property may not be in a flood zone. The appraiser will note if it is or not. If not, the lender may allow you to waive this coverage, but you need to request it. A separate windstorm policy is required if the property damage insurance excludes any type of wind-related events, If so, a separate windstorm insurance policy must be obtained. This will cover 100% of the full replacement cost of the property.

Is your head spinning yet? Don't worry. The lender will provide a document with all insurance instructions to provide to your insurance carrier. Obtain an estimate from to provide to your lender. This estimate enables to lender to set up escrow in advance. We recommend you obtain an insurance estimate to provide during the initial underwriting review period. Don’t wait until your closing date to do this or your closing may be delayed.

It is in your best interest to understand the type of coverage required when financing through a commercial lender. Just remember, it is simply part of the process.

Do you have questions regarding financing your BRRRR properties? Please reach out to me. I am happy to assist.

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC, Real Equity, Inc and REI Brokers. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,800 projects.

21. BRRRR - FINANCING FOR FOREIGN NATIONALS
This is the next installment in a multi-post series on financing your rental investment properties using the BRRRR strategy.

Often foreign nationals classified as non-US citizens assume commercial financing is not available to them.

However, there are three certain conditions that if met, allow a foreign national to obtain commercial financing here in the U.S.

First, you have an approved legal entity such as a US corporation and can provide the EIN IRS letter (tax ID number), articles of incorporation and operating agreement.

Second, you have established a US bank account and can provide at least two months bank statements.

Third, you have an OFAC search with no findings. This is the process by which organizations identify whether any parties involved in a transaction can be found on watch lists maintained by the Office of Foreign Assets Control (OFAC). All lenders will search a person or company's name in an OFAC search on the U.S. Department of the Treasury website.

When seeking financing for your projects as a foreign national, there are some limitations on the maximum LTV lenders will allow.
Estimated maximum LTV''s for US citizens versus foreign nationals:
1. Purchase - US citizen up to 80% of LTC. Foreign national up to 70% LTC.
2. Rate Term Refi (no cash out) - US citizen up to 80% of LTV. Foreign national up to 65% LTV.
3. Cash Out Refi - US citizen up to 75% of LTV. Foreign national up to 60% LTV.

Depend on your level of investing experience, project, and loan structure, lenders reserve the right to offer a term sheet different than the standard above LTV’S.

If you meet these three conditions, you can apply and obtain a commercial real estate loan like any US citizen.

To view previous post for this BRRRR series, follow us at www.facebook.com/REIBrokers

Looking for funding? REI Trader, LLC has purchase, refi and fix and flip loan programs for your SFR, rental and multifamily portfolios. For rates and terms, please email to [email protected]

Jonathan Mednick has been real estate investor since 2002. He is a co-founder of REI Trader, LLC and a licensed real estate broker since 2011 with Real Equity, Inc. He has extensive experience in all areas of real estate investing and lending. To date, he has completed over 1,700 projects.