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Finding a down payment!

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Kelly Madden

Navarre, Florida

Nov 09 '12, 06:16 AM


My husband and I are trying to get into REI here in Florida. Turns out that the guidelines are SUPER stringent. (Through a lender) Minimum down payment is 20%, no gifts allowed for help, closing costs are also out of pocket. We're just starting out and haven't won the lottery, so we're having trouble finding it without totally draining our savings (which wouldn't be smart). Advice is MORE than welcome!! Thank you!!



Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Nov 09 '12, 06:32 AM
8 votes


Well, the reality is that buying rentals is real estate investing. And to invest you need cash. 20% down for investment properties is actually on the lower end. 25%-30% isn't unusual. That's still better than buying stocks, bonds or bank CDs. Those all require 100% "down".

Also keep in mind that if you end up needing to sell, about 10% of the sales price will go to commissions, selling costs and concessions to the buyers. So, if you put 20% down, prices fall by 10% and you're forced to sell, you'll walk away with nothing. The banks want that protection.

You're wise to consider the need for cash reservers. Rentals have a way of waking up once in a while and saying "I'd like $3000 today, please." And they pretty frequently seem to call and say "I'd like $300 today."

And don't fall for the "cash flow = rent - PITI". Banks use the formula "cash flow = (75% * rent) - PITI". A slightly more conservative rule of thumb is "cash flow = (50% * rent) - P&I"

But I think you're asking how you can get into the rental property business with less cash out of pocket. One key method is some sort of owner financing. Get the seller to carry a note for the purchase rather than getting a bank loan. This works best if the seller owns the house free and clear. But it can work if they have an existing loan. If they give you a new loan, that's a "wrap" because the new loan warps the existing one. Or, you could do a "land contract", which is like a car loan. The seller keeps title to the property, you make payments. When you complete the contract, you get the title. Or you could buy "subject to" where you buy the house and take over the payments on the existing loan. Or you could buy with a lease option. That's where you lease the property (giving you possession) and also buy an option on the property (which gives you the right to purchase at a future date.) If you in turn lease out the property, that's called a "sandwich lease option". There's significant risk with many of these. In particular, if you buy without paying off the existing loan you violate the "due on sale" clause in the loan. That gives the lender the right, but not obligation, to call the loan.

Ways to come up with more cash include:
- Borrowing from a 401k account (puts your retirement at risk)
- Borrowing against existing property (puts your existing property at risk if the rental goes bad)
- Selling stuff
- Cutting spending and increasing saving

Yet another approach is to buy a property using hard money. That's short term investor financing. Rates are very high - 15% and four points is typical around here. You buy a dumpy property with hard money. Fix it up, lease it out. Then, after (typically, sometimes less) a year, you refinance with a bank into a more conventional loan. If you get the right deal (difficult), you can do this with less cash out of pocket than 20-25%. But finding a really good deal is very hard, and this is an expensive approach that will result in a higher debt load on the property than a regular purchase.



Jon Holdman, Flying Phoenix LLC


Rich Urban

Wholesaler from Miami Beach, Florida

Nov 09 '12, 06:47 AM


Kelly,

Jon is right, buying rentals is "investing". If you have little-to-no cash available, you have two options -

1. Build up cash reserves & then invest in rentals. Find amazing deals, lock them up under a contract, and then wholesale them to landlords that actually have cash. You won't be making too much on each deal ($5k-$10k per contract that you sell), but that is dependent on the types of deals that you are able to negotiate. The benefit of this strategy is that you don't have to lay out any money & you learn what is a good deal & what is garbage without any risk.

2. You can follow Jon's advice above. Look for homeowners that need to sell and are willing to offer owner financing, lease options or some other kind of desirable terms. This will take some money though - oftentimes, the homeowner will need to bring their mortgage current or a down payment for some moving money, etc... You'll also have to keep your holding costs in mind. If you can't find a tenant for the property, you will be responsible for the monthly payments.



Mark H.

SFR Investor from Phoenix, Arizona

Nov 09 '12, 06:47 AM


If your credit/income is good, and your debts are low, and the issue is truly just "reserve cash", there are still a few 0% for-a-year credit card deals out there that frequently send out "convenience checks". Chase does it a lot. Drop $20k into savings for a few months, qualify including the minimum payment, then pay it off before the interest hits.

If you don't have the down payment already, then there isn't an easy way, and if there was, you still shouldn't do it. Leverage + Unsustainable debt = bankruptcy.



Kelly Madden

Navarre, Florida

Nov 09 '12, 06:52 AM


Thanks, guys. We're easily able to afford the monthly payments, I'm guessing its' the initial "cash out of pocket" that's the hardest for us. Our assets are around $50,000, but that also includes things like IRAs, TSPs, a brokerage account, and College Savings accounts, which can cause penalties, etc. But of course I know you're all right, it IS an INVESTMENT.



David A.

Wholesaler from Fort Worth, Texas

Nov 09 '12, 10:22 AM


Mark, I am trying to better understand how to use these convenience checks. I get them 2-3 times a month from discover for 10k and 12k no interest for 12 months. Would i be able to deposit these into my account to use as proof of funds. I have some funds set aside and an extra 20k could put me into the game to offer cash for some fixer uppers around my area.



Robert Adams Donor

Real Estate Investor from Las Vegas, Nevada

Nov 09 '12, 10:46 AM


Gave Jon a vote on this one. Well said.



Medium_rothwell_gornt_logo_smallRobert Adams, The Adams Team at Rothwell Gornt Co.
E-Mail: [email protected]
Telephone: 702-349-9175
Website: http://www.LVrealestateHELP.com
Broker (Las Vegas NV) (Massachusetts) & (Rhode Island) MArealestateHELP.com RIrealestateHELP.com


Jon Holdman Moderator

SFR Investor from Wheat Ridge, Colorado

Nov 09 '12, 10:56 AM


Originally posted by @David A.:
Mark, I am trying to better understand how to use these convenience checks. I get them 2-3 times a month from discover for 10k and 12k no interest for 12 months. Would i be able to deposit these into my account to use as proof of funds. I have some funds set aside and an extra 20k could put me into the game to offer cash for some fixer uppers around my area.

David A. please start a new thread for your question.



Jon Holdman, Flying Phoenix LLC


Jeff S

Private Money Lender from Los Angeles, California

Nov 09 '12, 11:48 AM


Assuming yours is a traditional IRA, @Kelly Madden, you can easily convert it to a self-directed IRA and use it to invest in real estate; assuming of course that you have sufficient assets.

Companies like Pensco and Entrust offer a wealth of information on their websites. The rules are strict but easily learned. This could provide another option and enable you to tap into existing assets. Search around and you’ll see that this is a well discussed topic here.

Even if you don’t have enough money to buy, you might have enough to loan or partner, which is yet another way make money in real estate without necessarily owning or managing the physical assets.

Jeff



James H.

SFR Investor from Texas

Nov 09 '12, 12:07 PM


Originally posted by Kelly Madden:
Thanks, guys. We're easily able to afford the monthly payments, I'm guessing its' the initial "cash out of pocket" that's the hardest for us. Our assets are around $50,000, but that also includes things like IRAs, TSPs, a brokerage account, and College Savings accounts, which can cause penalties, etc. But of course I know you're all right, it IS an INVESTMENT.

Do mean you can easily afford the payment without the rental income? If so, you should be able to set that money aside to build up your cash. It might take more time than you like (maybe a year or two), but what doesn't?

If you currently own and are willing to move, you should be able to find an OO loan requiring only 5 percent down and leave most of your money alone. Of course, your current resident would need to be profitable if you converted it to a rental. Plus, there are costs associated with moving your primary that add to the 5 percent down such as appliances, window coverings, etc, that can add up pretty quick.



Kelly Madden

Navarre, Florida

Nov 10 '12, 07:01 AM


@Jeff S - With the self-directed IRA, doesn't the money ONLY go back into the IRA?? As in, it can't be pulled out? I'm so new at this and it's a lot of information. Thank you so much!



Jeff S

Private Money Lender from Los Angeles, California

Nov 10 '12, 08:38 AM


Yes, except for your annual contributions, all funds must come from and go back into the IRA.

Jeff



Mark H.

SFR Investor from Phoenix, Arizona

Nov 10 '12, 08:43 AM


Originally posted by David A.:
Mark, I am trying to better understand how to use these convenience checks. I get them 2-3 times a month from discover for 10k and 12k no interest for 12 months. Would i be able to deposit these into my account to use as proof of funds. I have some funds set aside and an extra 20k could put me into the game to offer cash for some fixer uppers around my area.

Drop them into savings - many banks will put extremely long "holds" on them, some won't take them at all. But after it's "cleared", it's your money, it's cash, and it's "available"..



Jon Klaus Moderator Donor

Real Estate Investor from Garland, Texas

Nov 10 '12, 09:04 AM


Originally posted by Jeff S:
Yes, except for your annual contributions, all funds must come from and go back into the IRA.

Jeff

Even your annual contributions can't come out unless it is a Roth IRA. Until age 59.5 that is, or unless you pay tax and penalty. Or take a 72(t) distributions. Yeah, IRAs can be complicated.



Jon Klaus, SellPropertyFast
E-Mail: [email protected]
Telephone: 214-929-6545
Website: http://www.sellpropertyfast.com


Lucas S.

Centreville, Virginia

Apr 12 '13, 11:41 PM


Originally posted by Jon Klaus:
Originally posted by Jeff S:
Yes, except for your annual contributions, all funds must come from and go back into the IRA.

There are other complications with not being allowed to work on your property, manage your property, or do anything personnaly to increase its value (as this would be effectively extra contributions to your IRA). I have seen some people claiming you can structure a LLC or something around the investment/IRA to get around this, but I don't understand that part of it.



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