BiggerPockets

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.

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.

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.

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.

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.

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

Jeff

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.