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ADU and DSCR
Did you know, we can count rental income from an ADU on a DSCR Loan and allow for multiple ADU’s.
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6 Replies
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Tom, do you guys do non-qm loans after bankruptcy and foreclosure with no waiting period requirements. Many non-qm wholesale mortgage companies used to have non-qm loans one day out of bankruptcy and foreclosure with no waiting period requirements but have changed the waiting period requirements.
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What’s an ADU, is that like an additional building on the property?
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I was wondering the same thing. What is ADU? There are so many acronyms these days that you cannot assume everyone knows what they are all are. Many people do to not know what LTV, DTI, CLTV, HELOC, HECM, DU, LP, AUS, and other acronyms are or what they stand for.
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ADU is added living unit like an illegal in-law Suite or basement or attic space converted to a living unit. In Chicago there are a lot of illegal basement apartments that has been converted without permits
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John, is there a link for a webinar on commercial lending on loan officer support. I asked Dianne to start posting one commercial lending topic a day on the forum so our loan officers can start getting familiar with the commercial lending business model we have and how it works. I know how to do apartment buildings and complexes but Lending Network has so many different types of business and commercial lending options available that it will take time to digest. If you run into links on business, consumer, and commercial lending, please post it here. It will be greatly appreciated.
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That’s great! It’s interesting to think about how debt service coverage ratio (DSCR) loans can still be obtained through an accessory dwelling unit (ADU) rental stream, especially for properties comprising more than one ADU. This way, the borrowers can maximize the income-producing aspect of the property, making it more favorable to obtain financing regardless of the absence of an income check. Below are some useful financing options as well as advice for the management of properties, particularly those that have ADUs:
Financing Options
Use ADU Income: Renting out an ADU or ADUs that you own can help you become buoyant to DSCR loans, which in turn increases your qualifying ability for larger loan amounts.
Multiple ADUs: In some instances, lenders can include income from more than one ADU, further increasing the loan eligibility and the property’s potential income.
Bootstrapping: If you hold a mortgage, you should only re-borrow at current lower market rates or, even better, extract equity to improve or purchase further property.
Creative Financing: Use other techniques, such as engaging a seller to finance the purchase, leasing with an option to purchase, or even teaming up with interested investors.
Tax Benefits: Take advantage of the tax that can be deducted from mortgage interest paid, depreciation on rental property, and rental properties maintenance costs.
Pointers For Effective Management
Engaging As Property Manager: Enlisting the services of a property management company can entice cut-down processes, resolve tenant issues, and ensure the state of the dwelling units is up to mark.
Schedule Regular Upkeep: Properties have to be looked after, and regular maintenance will eliminate the chances of expensive repairs and achieve a satisfied tenant.
Select The Right Tenant: Set up a comprehensive tenant screening procedure. This will only approve the good tenants, minimizing the chances of late payments and property defacement.
Marketing Strategy: Use local SEO and ads to effectively advertise the rental apartments and promise clients to rent your units.
Software Solutions: Implementing certain software in relation to property management—rent, service requests, and interaction with clients—reduces the workload.
The combination of maximizing the income potential and managing the properties will contribute to the profitability of investment real estate.
Let’s dig deeper into some of the points:
Investment Secure Against Property: HELOC: When you have considerable equity against your property, you may consider getting a HELOC. It serves to unlock equity in a property to make upgrades to the property or acquire more properties.
Loans For Investors: A portfolio loan is a loan for someone buying multiple properties. It allows pooling together several mortgages into a single loan, thereby making the management of the funds easier.
Bridge Loans: These are great for an investor who wishes to finance the time necessary to buy a new property without directly selling the old property. They function as a stopgap until the long-term financing is rolled out.
Some Practical Advice for Managing the Property
Tenant Retention Programs: Good tenants should be encouraged to stay by introducing minor renovations or terminating them with incentives tied to loyalty programs. They are less likely to leave and are more likely to take care of the property.
Regular Inspections: Check and evaluate properties regularly to notice what needs maintenance. This also protects and maintains the condition and value of the property.
Responsive Communication: You and your property manager should promise to respond promptly to questions and tenants’ requests for maintenance services. This will strengthen communication and satisfy the tenants.
Energy-Efficient Upgrades: Couch covers, LED lights, and highly efficient machinery are some energy-saving things that you should consider getting. This will save you and your tenant’s utility costs and improve the property.
Technology Integration
Property Management Software: Use Buildium, AppFolio, or Cozy to simplify life and work. These online platforms also have many features, like tracking tenant payments, keeping up with maintenance requests, and communicating with tenants about concerns.
Smart Home Technology: Swapping out normal thermostats/systems for smart ones and smart security systems, along with multiple IoT devices, may increase the property’s value and what rent can be charged.
Online Marketing: You can market your properties through Zillow, Trulia, and Craigslist. Upload good photographs of your property and write better descriptions to attract more tenants.
Additional Tips for ADU Income
Understand Zoning Laws: Ensure your ADU property fits the locale alongside local zoning rules and regulations. Certain locations have different requirements for the construction and rental of ADUs.
Rental Agreements: Have a clear rental agreement with the people occupying the ADUs that states the terms and rent to be remitted. This minimizes the risk of misinterpretations and disagreements.
Tax Implications: Be aware of the tax implications of renting out an ADU. Speak to a tax consultant to determine how income from rentals will affect your taxes and what is deductible.
These strategies and tips should help you improve your investment and manage your properties more effectively.