My Newbie Qs

22 Replies

About Me
Hello, everyone! I'm Jeff, a 29 (soon-to-be thirty) year old looking to explore the world of real estate. Specifically, I'm looking to buy, renovate, and rent out property. I have no experience, but I'm taking advice from my cousin and his father.

The two of them currently operate half-a-dozen or so rent homes. I'll definitely ask them for advice, but I also want to hear what the BP community thinks. After all, it never hurts to take in more opinions.

The Purpose of this Thread
I don't want to create a thread for every question I've got for which I'm sure there will be many. Therefore, I'll rather condense it to a single thread and not spam the forums.

Questions

Situation: I'm looking to purchase a house for $50k. I'm pondering how I should finance the mortgage. A 5/1 ARM looks real enticing with its interest rate under 5%.

#1. Should I go with an 5/1 ARM? I literally began reading about them within 24 hours. Are there better options out there?

#2. I have enough capital to buy the house outright, but I'd rather finance the house with a $50k loan and put down 50% (if possible). This would allow me to have enough money in the bank should I go after another rental property sometime down the road (2-3 years). Opinions?

#3. Can I pay back the (ARM) loan back after 2-4 years before it goes into 'variable interest rate mode' without paying any additional fees? I ask this because the rate seems too good to be true. Is there a catch?

#4. Are there any minimum/maximums with ARMs? I'm using the search at Bankrate and based on where I live (Bossier City, Louisiana), it seems I get no results unless I use 20% down or less. (I'd much rather put 40% or more down. I hate paying interest.)

Hi Jeff and welcome to BP,

It sounds like you have some great resources with your cousin and uncle. And of course you now have BP as well!

Here are my responses to your questions and these are just my opinions:

#1) If you have the money to pay off the loan if necessary, ARM's can be a good avenue. You just don't want to get stuck in one once interest rates start to rise, which is a whole other discussion/debate.

#2) This is a matter of opinion. Some would say, use as little of your own money as possible, and there is some truth to that. Others will say, pay all cash and then refinance after you've fixed the place up and rented it out once you have another place to buy. There is no right or wrong way.

#3) This will vary based on each bank. Some may charge you a "pre-payment penalty" meaning that if you pay it off early you'll be charged a fee. Others will not. You will need to check with different banks. The rate will also vary by bank.

#4) Again, this is something that will vary by bank. Some banks have different minimums and limits. Bankrate is a useful site however they give general information. Rates and minimums will vary based on the bank and the borrower.

Best of luck!

Eric

@Jeff Lee interest rates are low enough that I would suggest a fixed rate loan. A 30 year fixed is less than 5% currently. There are other options (10 year, 15 year, etc). You always have the option of paying more monthly to pay down the loan if you desire but at least your interest rate will remain fixed unlike an ARM which will eventually change. You will need to search for lenders who lend less than $50K on a property not all lenders play in this lower end space. Good luck to you!

Well met Jeff! Its good to see another Jeff, especially one from Bossier City! If you are available this Thursday you should join us at our investor meetup! details here

I can' t speak to much about ARMs as I have never used one so take what I say with a grain of salt and I can only give my opinion on #2.

You mentioned liking a rate below 5% and I have used aimloan.com in the past and their current quote for investment properties are around 4.65% for 30 year fixed.

So as for #2: As long as your cashflow was acceptable and your goal is to acquire wealth long term and not need to live off of the income in the short term my personal preference would be 20% down over 30 years - freeing more cash for more acquisitons.  Because not only might rates be higher in 3 years, you will need sufficient down payments and reserves to continue to acquire. And as the saying goes - People when loan you money when you don't NEED it, Not when you do.

The power of using other peoples money in Real Estate can be one of this investment vehicles largest advantages ( When used with care! ). When considering the cons of paying interest it is very important to consider the difference of nominal interest rates and real interest rates....as in some market conditions paying interest can be virtually free! 

All of that said of course everyones situations and goals differ. I welcome you to the community and wish you good luck!

@Jeff Lee  welcome to BP!

Here's my take on your questions:

#1.  I would go for a fixed rate option if you have any?  One that comes to mind that will work with the numbers you mentioned would be a lending club loan.  They will loan up to 35k as long as they are in 1st lien position and it is a short term loan so that will help you keep the interest you pay low.

#2. I would use the cash buyer's advantage to purchase the property ahead of the challenged financed buyers in this price range. You will also be competing with cash buying investors - cash is king. I also think you don't fully appreciate the power and advantages of leverage in REI. Also, only use cash to buy if you have sufficient cash reserves (~20% of cash available) after the purchase and repairs.

#3. If you go that rout, there's really no catch.  It will all be there in writing.  The only way it becomes a catch is when you don't take the time to read what you sign at the closing.  Unless you are a very fast reader, I would ask for all closing documents in advance so you'll have time to read them.  If they can't provide that, let them know that its your first closing and that you'll need time to read it all.  The vast majority of people who cry about getting "duped" into bad loan products are people who go along with the hasty process of getting everything signed and getting out of the closing.  I'm not suggesting that everyone is out to sucker you either.  You just need to take the time know what you are signing and check for errors.  I find errors all the time at the closing table, that have to be fixed before the documents get signed.

#4.  See my answers for #2 and #3.

Hope this helps a little.  See you around BP and maybe one day here in LA!

Thank you all for the replies.

@Robert Leonard - Your advice on requesting closing documents is very helpful. In regards to acquiring a loan via LC, what would be the lowest interest rate, assuming I'm good for it? 

I know grade-A personal loans from LC are ~6.7%. May I assume it would be higher because LC wants their cut as well? I'm trying to explore every avenue/lender and the respective interest rate before deciding. If the rate from an ARM or 15/30 fixed is lower, it would seem that I should bypass LC.

@Eric Black - The "pre-payment penalty" you mentioned, would Closing Cost fall into this category? I'm looking at Rate Quotes from Aimloan and everything has a closing cost. Sheesh. Is it just this service or are closing costs normal?

@Jeff Lee   No, the pre-payment penalty has nothing to do with closing costs. A pre-payment penalty will be outlined in the loan documentation, so ask your lender if they have this fee and as Robert said, READ the loan documents. Basically it will state something to the affect of: If your loan balance is paid in full prior to the loan maturation date of ##/##/#### buyer will be assessed a pre-payment penalty of $#,####.##. Again, this is my generic translation so don't go searching for that in the loan docs. :) And you're right, everything has a closing cost, which is something else you want to shop around. Compare origination, title and escrow fees between lenders. You can save BIG money sometimes.

Hope this helps.

Also, to use the @ Mention feature, once you type the @ symbol and the first couple letters of the persons name, look at the bottom of your reply window and you can select the user you are trying to mention. Otherwise it doesn't create a mention, it just shows up in your text. Don't worry, I did the same thing for quite a while when I first got here.

Best of luck!

Eric

@Eric Black Ah, got it.

In regards to closing costs, is there any way to negotiate to have it eliminated, reduced, or to have the seller pay for it? Is closing cost set in stone? Having to shell out a few grand for closing costs doesn't sit well with me.

@Jeff Nice work!

You can't negotiate to have them "eliminated" necessarily but yes, you can negotiate to have the seller pay some, or possibly all, of your closing costs. If it's a seller's market in the are you're buying then you might have a hard time getting the seller to agree but it never hurts to ask. If you're getting conventional FHA/Freddie financing then the max they can contribute is 2% of the purchase price of the house. So if you're buying a $100,000 property the most the seller can pay toward your closing costs is $2,000. If you're using private money there is no limit. If you're using a smaller portfolio lender you'll have to ask them what their guidelines are.

Greetings @Jeff Lee  ... so very glad to see someone from Bossier City. 

A couple of things for you...

1) as @Jeff M.  mentioned in his post a group of us that met through BP are meeting and he has provided a link to the information above. We would if you would join us. We have met once before and are trying to network with other like minded individuals. 

I highly recommend going through a local community lender or even the bank you use for your personal finances for your transaction and pose your questions to that banker. Maybe Gibsland Bank or Red River Bank are my suggestions. If you join us Thursday I could pass along any contact information of the lender I have used for my past few transactions and I'm sure the other attendees have their recommendations as well. 

My views on your questions: 

1) 5/1 Arm... I strongly belief that if you can qualify for conventional financing or even FHA you should go that route. My rationale is that with a fixed rate conventional mortgage you will be able to have a repayment period of up to 30 years at a fixed rate. With an adjustable rate mortgage it is not fixed and are at the mercy of the current economy. I feel that once you can not qualify for a conventional loan then move to adjustable rate mortgage options. I suggest getting together all of your financials, make a detailed list of questions that are on your mind, have your goals in writing you want to accomplish short-long term and talk to a banker.

2) When I read this question I said to myself. What are your goals? Are you looking for cash flow, are you looking for the tax benefits of rental properties or what...? If you were looking for cash flow-which is what I am looking for. I wouldn't dare spend more than I had to on acquisition. Think about it... if you bought a property for 50k and placed 50% down you would have approximately 25k left from your capital and an asset that has equity in it that you couldn't easily touch. You never know when a deal is gonna come up and having the access to funds to crucial for growth! Also, on a side note if you are serious about REI that 2-3 year timeline you gave is gonna go out the window and you are gonna wish you had capital to work with. If that REI bug bites you :)

3) On this one I would ask the banker. A good banker who has your best interest at heart won't put you in a loan that has a pre-payment penalty if they know your goals and communicate them clearly. I keep stressing letting everyone around you know your goals. A banker can't put you in the best possible financing option if they don't know where you want to go. So... develop within yourself a plan/goals

4) As I've said above... what are your goals? Do you want to pay that thing off as fast as possible or are you looking to stretch it out 30 years. Keep in mind the tenant is paying the mortgage for you. A qualified banker can answer any questions you might have. 

Hopefully I didn't ramble on to much and made a little bit of sense. 

If I had 50k capital to work with this is what I would do. 

-First and foremost I would get all of my financing straight with a lender and have together my plan. You know because with properties that are good deals they don't wait around. 

-Get with a broker in our area that deals with investors and tell them my plan. Not just someone you saw on a sign in a yard. Get referrals from people around you. A person that deals with strictly owner/occupied deals is not going to understand what an investor is looking for. This agent might bypass something that would align perfectly with your investing strategy. Everyone's strategy is slightly different. You must know where you want to go and what strategy your going to take to get there. I am personally looking for cash flow buy/hold. I would have the agent look for properties under 50k in the target area that I set. I personally have a set area I look for my properties in since I currently work full time. It is much easier to manage properties a mile apart than it is driving across town. At least that's how I view it. 

-After I have chosen this property for 50k... I would choose conventional financing and place 20% or lower if possible down. 10k in this situation. Leaving me 40k for any renovation and working capital. 

-I would get a renter in there and see if I still have the passion for it. If I do I go into my 40k and repeat. 

There are so many options available for you. You just need to know what is your plan and timeline. 

Sorry for the long response.... I could talk for hours about REI because I love it!!!

Good luck and hopefully your schedule allows you to join us Thursday. PM me if you have any questions and I can forward you my cell number. 

ohhh.. one more thing. I feel the interest rate is not something to lose sleep over. Remember you can pass along this cost to the renter who is paying your mortgage. What I think you should dwell on is how much cash you are going to have to come out of pocket initially. As others have said there are tons of different view points on strategies. You just need to focus on what is best for you. 

@Michael Faulk

Fa Perhaps I should consider conventional financing. I'm very stuck up on ARMs due to the low-interest rate. Perhaps a conventional loan will offer a percentage that is slightly different but give it to me for 30 years versus the 5/7/10 of the ARM. I must be focusing on the tree instead of the woods.

I do agree with your example (about putting 50% down) that I should try to maximize leverage in the event another piece of property comes into sight that I'm interested in purchasing.

@Jeff M. isn't it loud at Buffalo Wild Wings? Last two times I was there, the music drowned out everything.

Hi @jeff lee. Welcome to bp. You mentioned your goal is to buy, renovate, and rent/hold. What kind of properties are you targeting? If your goal is to buy and add value by rehabbing you'd be targeting properties that are too beaten up to get financing on in the first place, so your concerns about type of financing to use would be moot. You may have no choice but to pay cash due to condition, or at the very least because you will he competing with cash buyers.

As stated by others, one of the best things about RE investing is the ability to use other people's money. I would not put down 50% on a property, especially with interest rates so crazy low. I'd also do fixed for 15 or 30 years. These micro loans cost more, but there are lenders who do them. Ping me and I'll give you a contact.

You said you have family who invest. Would they lend you money short term to buy and rehab? If so, consider getting them to fund your purchase using a private note. You pay "cash" with their money. Buy at a discount and borrow enough to cover your purchase and rehab costs. Add enough value from rehab such that when you do a rate - term refi at 75% of the ARV you pay off the private note, roll you loan costs into the new loan, and own the property with no money down and 25% equity.

Happy hunting.

@Jeff Pollack

"What kind of properties are you targeting?"

Properties that are in decent condition that can be rehabbed and ready to use as a rent house in 3-6 months. (I threw that number out of my butt. I have no idea what the avg. time is to get a house rehabbed and ready to go.)

"You said you have family who invest. Would they lend you money short term to buy and rehab? If so, consider getting them to fund your purchase using a private note."

Could you be a bit more specific? How much (%) would they be lending me to buy property? Example if you would.

"Buy at a discount and borrow enough to cover your purchase and rehab costs."

Assuming the cost of the house is $50k, does your scenario suggest I pay $30k with my own cash and $20k borrowed (from my relative)?

@Michael Faulk "As I've said above... what are your goals? Do you want to pay that thing off as fast as possible or are you looking to stretch it out 30 years."

This being my first dance, I don't want to under or over-do it. Based on what you've stated, I'm thinking about a 15-year fixed loan.

If I decide I want to continue doing this after the initial 1-5 years, I'll have committed very little capital that I can search for new properties.

If I decide it isn't for me, I may just pay off the loan and let it be. Opinions?

@Jeff Lee True, the interest rates can be lower on the 5/1 ARM but I agree with what others are saying. It's better to finance for 15 or 30 years at a fixed rate and not need it, than to get an ARM and need the long-term financing. You need more than 1 exit strategy. Your plan is to sell in 3-6 months but what if something changes? What if you can't for some reason? Or what if you decide you don't want to? Also, I would calculate the "savings" you'll really be getting with the 5/1. On a $50k loan the difference between 3.5% and 4.5% is going to be about $29 per month. Is that extra $90-$180 really something to stress over? Just food for thought.

Based on all of the feedback, I think the 15 year loan would be the best choice.

New questions:

#5. Would a single member LLC be the best entity for me and my goal (to acquire homes and turn them into rent houses)? I've read that profits from the company passes onto me like regular income and the business itself pays no taxes. Sounds pretty simple.

#6. Should I look into hiring a CPA or is it possible to read up on tax-related information (e.g., deductions), use Google, and wing it? Maybe a combination of using a CPA for a year or so and then flying solo?

Use a CPA (my opinion) . Build your team and the foundation for your business. It is well worth the expense and your going to be glad you did in the future... especially if your doing REI in addition to a full-time job. You want to start early trying to structure a team to surround yourself with.

Think of an LLC in terms of asset protection. If you have a property in an LLC and someone sues you they come after everything in that LLC. If the same happens and the property is just in your name they come after everything under your name. This is the very very simple way to look at it. I formed my LLC myself through the secretary of state for like $80. So forming the LLC I would recommend doing yourself but on taxes my take is having a professional complete them.

One of the early podcasts (BP Podcast #5: Dealing w/ Death-A financial discussion w/ Neil Frankle) if I am not mistaken he briefly talks about LLC's and asset management.

@Jeff Lee  

@Jeff Lee   BWW can get noisy but we sit on the patio and it wasn't bad last time except for some windy rain that blew in near the end.

Besides, with friends as passionate about REI as @Michael Faulk  is the music doesn't stand a chance.

Awesome! See you on Thursday evening. 

Origination Fees

1. Are mortgage points and origination fees the same thing? (Good Faith Estimate)

2. If so, what is the typical percentage charged for a loan between $50-75k?

3. Is there any way for me to get (i.e., negotiate) a lower point amount?

4. If so, will the bank stick the cost somewhere else to make up for their loss?

5. If so, where or what will they increase?

6. Are there any other upfront fees?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.