First Investment Property - best financing options in high COL area?

Question

Hello everyone,

I am 29 years old and have a decent W2 income. However, I also have significant student loan debt. In the past 2 years, I have used my extra money to pay off student loans by interest rate. I am now at the point where my interest rates are <6%. I have decided that my money will be better spent on investing in real estate. I am interested in a single-family home to start off. The problem is I currently do not have enough for 20% down, especially in a high COL area in Connecticut. If I were to buy a somewhat distressed home, obviously renovations would add to that. What is the best way to finance this? Should I save up for 6 months - 1 year+ to come up with 20% down and reno funds? Is it worth putting <20% down and living in the house for 6 months with FHA? (This would add sig to monthly payments and limit cash flow). Any advice helps! Thank you

Wale Lawal · Answer

@Alex Smith

With only 3.5% in downpayment and house hacking being one of the live-in requirements for homeownership, FHA loans are a great way to start your RE journey as an owner-occupant. They have mortgage insurance premiums, while with conventional loans you will need to pay PMI until 20% in equity. FHA 203(k) loans The FHA provides financing for not only purchasing caps but renovating distressed properties generating an income through renting out rooms or units. FHA and conventional loans come in a 4 unit flavor, if the borrower intends to occupy one of them. I know this... Set yourself a saving target and time frame to save up more for that first deposit (down payment) on your purchase.

Good luck!

Andrew Syrios · Answer

If you can't get to the 20% down, I think your best option is definitely a house hack, preferably on a 2-4 unit property so you can live in one unit and rent out the other 1-3 units. This way you can get an FHA loan or even a lot of local banks will let you buy with only 5% down.

Nicholas L. · Answer

@Alex Smith

you have a few different, overlapping questions in your post. a few reactions:

-it's going to be very, very tough to make a great return on RE as a beginner in this market. not saying it can't be done, just that it's difficult. something for you to think about.

-it seems like you may be interested in house hacking. house hacking is the absolute best way to get started. and a house hack is not supposed to cash flow. it's just supposed to repurpose your housing payment. of course you generally want to be around break even when you move out if you can. but sometimes it's not clear when this will be. if i were you i'd put some effort into this. it's a funnel. how many properties have you looked at? (and I don't mean on Zillow - I mean in person.) How many have you offered on? how many lenders have you called? How many agents have you interviewed to find someone who knows what house hacking is?

-you ask about saving up 20% to purchase something distressed. however - distressed properties aren't typically purchased with a conventional loan; they may not even qualify. read up on the BRRRR process and see what you think. and just to pile on to what i said earlier - BRRRR is very, very tough in this market, and a BRRRR likely isn't going to cash flow. it's an equity strategy, not a cash flow strategy.

hope this helps

happy to answer any additional questions you have

John O'Leary · Answer

You’re looking for what's called a bridge loan. These are 1-year, interest-only loans where the lender will finance 80-90% of the purchase price plus 100% of the rehab funds. Rehab funds are issued through a draw system based on work completed. It's important to have enough capital for the down payment, closing costs, holding costs, and some cash to start the work. The exact amount depends on the purchase price, leverage, holding costs, and size of the rehab. There are many good lenders on BP that offer this product.

Alex Smith · Answer

Thank you for the response. I agree that house-hacking seems like the best option. I anticipate the main dilemma will be finding multi-family homes in my area. I know house hacking SFHs is an option, but I don't think possible with my family situation.

First Investment Property - best financing options in high COL area?

First Investment Property - best financing options in high COL area?

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