Rural BRRRR where the exit lender's loan minimum is bigger than my refi

I went back over this a second time. Why do the rural comps make the appraisal harder, is it just that there are fewer sales, or is it that the ones that exist are too different from each other? I keep seeing rural discussed as cheaper and easier and this thread reads like the opposite.

@juniper it's both, and the second one hurts more. In a subdivision the appraiser has ten sales of the same floor plan. In a town of 4,000 the four sales are different vintages on different lot sizes and the adjustments start doing all the work, so the number depends heavily on which appraiser you get.

@hollow the insurance number is the thing I'd chase before the loan decision. 1,910 on a 135k house is high and it eats a fifth of a month's rent. Have you had a second and third quote, and is that quote replacement cost or actual cash value on the roof? Also, is the water well and the waste septic? If so your reserve needs to be bigger than a city house's and I'd want that in the cash flow before I decided how much cash to pull back out.

I'd take the smaller loan. You have a house with 1,150 of rent and no debt maturity hanging over it, and that is a thing I would own for twenty years without thinking about it. 37k back sounds great until the year the balloon lands in a market nobody likes and you're refinancing into whatever's available. Patience is cheaper than optionality you have to buy at the worst moment. But I'm the wrong person to ask about capital velocity, I've never needed it.

The two loans are not really competing on rate, they are competing on who carries the 2030 risk.

Small loan floors are a real structural feature of the non-bank rental lending market, because origination costs are largely fixed and a 75k loan does not pay for the file. That is why you see minimums in the 75k to 150k band and rate adds below them. It is also why community banks and credit unions end up holding a lot of rural rental paper on balance sheet with shorter terms and balloons. Both are ordinary products. Terms and minimums vary by lender and change often, so get both term sheets in writing and compare them on the same day.

What to price on the balloon: at 8% over a 20 year amortization, a 101,250 loan pays down meaningfully by year five, probably to the low 90s. So the refinance in 2030 is against a smaller balance on a property that has had five years of rent growth, which is a materially easier refinance than today's. Your risk is not the balance, it is whether that bank or another one is lending on rentals in that town at that time, and whether the appraisal holds. Ask the bank directly what happens at maturity if you are current and the DSCR is fine.

Also model it the way it will actually behave: at 8% on 20 years, the payment is roughly 847, plus 115 taxes and 159 insurance, about 1,121 against 1,150 gross. That is thin. Before you decide how much to pull, subtract vacancy at a rural rate and a capital reserve for well, septic and roof if those apply. The recovery of 37k is only real if the property still covers itself afterward.

@rena-expert 1,121 against 1,150 is the number that stopped me. @hollow that's not a rental, that's a bet on rent growth. Even at the 75k loan the payment is smaller and you keep 30k in the deal, which I'd take, though I'm still on my first purchase so treat that as an opinion from the cheap seats.

Check what the lot lets you do before you decide the ARV is 135k. In a lot of small towns those older lots are big enough to split, and if the zoning allows a second dwelling the highest value of that parcel isn't the house at all. Won't help your appraisal, appraisers work from comparable sales, but it changes whether you want to keep it in the first place. Zoning and any split process is county specific so you'd have to read your own ordinance.

Nobody's priced management. You're an hour out, so either you drive it or you find someone local, and in a town that size the someone local might be one part timer with fifteen doors and no backup. On the rentals I manage the rural ones cost more per door in windshield time and turn longer between tenants because the applicant pool is thin. If you're carrying a 1,121 payment against 1,150, one 45 day vacancy is your whole year of cash flow. I'd build the vacancy assumption from the actual applicant flow you saw on this lease, not a percentage.