Acquiring My First Property

[Spencer Krautkramer]

Hey Everyone! I am newer to BP and this is my first post in a forum. 

I've been wanting to get into investing for a while now, however, I have never had the capital to do so. I have about $12k to start with, so I am planning on moving back to Milwaukee, WI where I'm from to invest where it's much cheaper. I'm hoping to acquire a duplex where I can use an FHA to do 3.5% down, and rent out the other unit to help pay down the mortgage. I would also like to acquire a place that needs some work (or at least cosmetic). I realize that if I take out a loan for some rehab work, I'd have an additional monthly payment, although I could eventually do a cash-out refinance once it's rehabbed.

Does anyone have any ideas on how best to fund the property as well as the rehab considering I don't have much capital to put down or use for rehab work? Or any other thoughts/suggestions on my plan in general?

[Mike Lowery]

If youre moving back from Denver, then you will most likely first have to establish employment here. Unless its a lateral transfer within the company or something like that. What is the total purchase price you are looking at? Even if you do a $300K duplex deal, you should be able to cover closing costs with your current capital. $290K @ 6.5% over 30 years is about an $1850/mo payment for principal and interest. Factor in taxes and insurance and your probaly looking at $2300/mo out the door. You should be able to cover half of that in rents received from the other half of your duplex. All that said, what it boils down to is how much are you paying in rent currently? Would there be any excess left over after debt service to allocate for property rehab?

Ideally you would want to find something where you are able to save $250-500/mo in terms of the new living arrangement vs current living arrangement. You can take the excess and start working on the unit you choose to reside in. Learn to do the work yourself and ask your friends for an extra hand. Hire the big ticket items (plumbing, electrical, etc.). You would be amazed at how reasonably priced you can rehab a unit/property for once you do the research and get solid people to help you out. 

Itll more than likely be tough at first, but know that this is only the beginning to something great. You have to start a foundation by actually digging into the ground, not just starting on top of the soil. 

[Conner Olsen]

Quote from @Spencer Krautkramer:

Hey Everyone! I am newer to BP and this is my first post in a forum. 

I've been wanting to get into investing for a while now, however, I have never had the capital to do so. I have about $12k to start with, so I am planning on moving back to Milwaukee, WI where I'm from to invest where it's much cheaper. I'm hoping to acquire a duplex where I can use an FHA to do 3.5% down, and rent out the other unit to help pay down the mortgage. I would also like to acquire a place that needs some work (or at least cosmetic). I realize that if I take out a loan for some rehab work, I'd have an additional monthly payment, although I could eventually do a cash-out refinance once it's rehabbed.

Does anyone have any ideas on how best to fund the property as well as the rehab considering I don't have much capital to put down or use for rehab work? Or any other thoughts/suggestions on my plan in general?

 You can do a 203k loan, but I recommend you save more than 12k. If one thing goes wrong you are out of luck. What if you bought a house and the roof starts leaking, that can be 15k to replace. I would live with roommates, cut expenses, and increase your income to give yourself a buffer. 

[Nathan Gesner]

Quote from @Spencer Krautkramer:

Welcome to the BiggerPockets forums!

It would be foolish to spend every dime you've got to purchase a property when you have no investment/landlord/homeowner experience, you're in a new location, and starting a new job.

Move, get settled, and save. The market is on a downward swing and you're more likely to find better deals in another 6-12 months. Make sure you have a reserve fund to handle a large emergency after occupancy (usually 3-6 months of rent income).

[Marcus Auerbach]

@Spencer Krautkramer welcome to BP and welcome back to MKE. House hacking in Milwaukee is a financial no brainer. Your wish about a property in need or some work is hereby granted, because almost every duplex sold will provide at least some, but often a lot of opportunity to rehab. After all most are between 60 and 120 years old. FHA is not the best loan to house hack, because the property has to pass FHA inspection, which is a concern to sellers and they rather sell to someone with a conventional loan, which can be had for 5% down. And also FHA comes with PMI for life. More info on house hacking on YouTube, just look up Milwaukee + House Hacking. Also, you should really save up a bit more money, because on top of the down payment you also have closing costs, moving costs and you need cash for rehab. 25k would be a good goal. You should by a place that is in good shape and just needs cosmetics, because a full rehab is expensive think 25k per unit and 40k for exterior (roof, windows, siding or garage or driveway)

[Cayden Standlee]

Welcome back home @Spencer Krautkramer! As others have stated, you are going to want to save up some more money in order to get a deal in hand. Also, when you are ready to find a deal that will work for your situation, you will want to be ready with all of the things that you need including POF/ Pre-Approval as those types of deals will have many chomping at the bit to get.

[Spencer Krautkramer]

Quote from @Mike Lowery:

If youre moving back from Denver, then you will most likely first have to establish employment here. Unless its a lateral transfer within the company or something like that. What is the total purchase price you are looking at? Even if you do a $300K duplex deal, you should be able to cover closing costs with your current capital. $290K @ 6.5% over 30 years is about an $1850/mo payment for principal and interest. Factor in taxes and insurance and your probaly looking at $2300/mo out the door. You should be able to cover half of that in rents received from the other half of your duplex. All that said, what it boils down to is how much are you paying in rent currently? Would there be any excess left over after debt service to allocate for property rehab?

Ideally you would want to find something where you are able to save $250-500/mo in terms of the new living arrangement vs current living arrangement. You can take the excess and start working on the unit you choose to reside in. Learn to do the work yourself and ask your friends for an extra hand. Hire the big ticket items (plumbing, electrical, etc.). You would be amazed at how reasonably priced you can rehab a unit/property for once you do the research and get solid people to help you out. 

Itll more than likely be tough at first, but know that this is only the beginning to something great. You have to start a foundation by actually digging into the ground, not just starting on top of the soil. 

Mike, thanks for the response. I've been looking in the range of roughly $270k - $330k, and having a seller credit of about $5-6k to cover closing costs. I'm currently paying $775 in rent so I'm trying to keep my portion of mortgage under that.  It appears it may be close to that, but hopefully in a few years I can refinance after getting about 15% equity and have better cash flow statistics. I'm a pretty handy guy, so I'm looking forward to any sort of renovations (preferably rather than fixing problems haha). Thanks for the words of encouragement.

[Wale Lawal]

@Spencer Krautkramer

You may consider other financing options, to fund their project.

Find a private investor

House flippers may be able to sidestep getting a fix-and-flip loan by working with a private investor. The private investor provides the capital to fund the house flipping project. While you may circumvent working with a lender, partnering with a private investor may create additional issues. For instance, you may need legal help to establish an agreement outlining the rights and obligations for your investor and you. Raising capital this way can also mean forfeiting some of your control and decision-making authority on the project.

Obtain a home equity agreement

Another option for house flippers who own their own home and have equity in it may be a home equity agreement (HEA). A HEA allows you to sell an interest in the home to a provider in exchange for cash proceeds. The amount you can receive will depend on your home’s value and the amount of equity you have in it.

Benefits of using funds from a home equity agreement include:

• No additional loans (which means no monthly repayments of principal and interest)
• Flexibility in repayment
• Lower credit score minimum requirements compared to traditional loans

The term of an HEA is typically 10 years, which gives you a couple of options for repaying the HEA provider. One is to sell the home within that period and repay the provider’s equity percentage with the proceeds. The other is to buy out the ownership interest at any time during the term of the agreement. The HEA provider would obtain an appraisal of your home’s fair market value to determine the buyout amount based on its ownership interest.

Good Luck!