Re: NEWBIE NEEDS HELP: IS NEG CASH FLOW OK, IF THERE’S EQUITY? - Posted by JohnBoy
Posted by JohnBoy on April 30, 1999 at 12:05:10:
Here’s the problem you may have with trying to take out the extra equity after you close. Most lenders will only allow you to use 75% of the income to qualify for a loan on the property. If your already at a negative cash flow your going to have a difficult time finding a lender that will let you borrow additional funds against that property. The only other way that might make this possible is if you have enough other income coming in from other sources including a job. They will take all of your income and deduct all of your expenses to figure what your debt ratio is. This new deal is already going to increase your over all debt ratio by the $150 negative and the bank will probably only allow 75% of the $550 as income, which will add another $137 to your debt ratio. $550 x 75% = $412.50. That’s the maximum the bank will allow as income from that property to qualify for an equity loan.
Can the renter afford to pay more each month on the property if you offered to lease/option it to them? Then you can boost up the monthly rent to show more income to the bank. Use two separate contracts on the l/o. One for the option and one for the lease. Then just show the bank the lease without the option contract to show your monthly rental income.
Is the tenant under a lease currently? If so, how much time is left on the lease? If the tenant can’t afford a higher payment then tell them you won’t be re-newing their lease when it expires. Then you can sell the house on a lease/option for a much higher rent and get $3k - $5k down as non-refundable option consideration with a preset purchase price at 5% - 10% above retail value.
You have a nice piece of equity to deal with here. So you need to figure out all your options if you can’t get the equity out. How long would it take you to resell at retail? Calculate all your carrying costs until the property re-sells and if everything pencils out for you and the $150 negative isn’t a problem then it might be worth going through with the deal. Just don’t have to count on getting that equity out right of way incase the property takes a while to sell and if your tenant has a lot of time left on their lease.