Financing for Newbie

17 Replies

Hello everyone I am a newbie trying to get started. I have meet some very successful investors, some that have written books on how to invest in real estate both for flipping homes and cash flow. I have been told that you can get started with no credit and not use any of your own money or borrow from banks. 

My question is have any of you started out with no money, small down payments, low to no credit and still been successful at purchasing properties? 

Kenneth, I am in the same boat as you. I would also be interested in hearing about this. I have not had a lot of real world experience with financing and from what I have heard, the best option for those in your particular situation would be some form of creative financing like doing a seller financed property, lease option, etc. 

But again, I am like you and want to hear from some people who actually have had some measure of experience/success with these sorts of deals. 

Good luck Kenneth!

Hey,

I'm very green aswell but I thought I'd share. I currently have a Tri-plex and SFR. I purchased the SFR first. I lucked out and secured seller financing for a 5 yr term. The Tri-plex I actually pulled cash out of a paid for asset to cover the down payment. Both properties are cash flowing.

I for one am a little weary of some of the "creative" financing such as credit cards and things.  Not to say I will never do them but it'll have to be a little more seasoned for me to sleep at night.

Welcome to BP.

There are many ways to buy real estate without having a lot of money on hand. Based on your statement, you have to go with creative financing particularly owner financing. 

It's NOT very easy, but possible. After the 2006 collapse of real estate market, lending guidelines have taken a 180 degree swing and those days are gone where you could get money without showing any income or even with no credit. 

Again, creative financing is your best solution at this point.

Derek, I too am a bit wary myself when it comes to the creative financing, that's why I want to know what other peoples' experiences have been.

James, what has your experience been with owner financed deals? What sorts of interest can I expect to pay typically and what do you think people want in terms of a down payment, if any? I know this is always going to vary wildly depending on the person and on the market you're in. But what have you seen personally in this regard?

It seems to me that the easiest way to get started is to find a 2-4 Unit MFH and live in one of the units. Get an FHA loan with as little as 3% down and make sure you can fill the vacancies with good tennants.

We got started through personal properties. They are 0-5% down depending on the property. What is your goal? We were buy and hold in a transient career. So this worked very well for us. Our first house was a buy, fix and rent when we were transferred. Than we continued to pursue our careers and were able to start saving enough money were we invested on income and lived off the other. 

This place is often. IT talks about tons of different options. You just need to figure out what works best for you.

@Kenneth Stump   It looks like podcast 92 is on this very topic.  You may want to check it out.

@Derek Woods What terms were you able to get on your Seller Financed SFH? Was it a property where the seller had a large amount of equity or did they wrap their existing mortgage for 5 years to give you time to build some equity and refinance?

Depending on your situation, following along with Elizabeth Colegrove said, personal properties with low down payments can be a good way to get started.  A good start would to be buy a multi-family property like a tri or quad plex, live in one unit and rent the rest out.  If you are going to be moving around a lot this could work, or you can buy a place that need some fixing up.  Fix it up while you live in it & rent it out when you move.

I bought my first place as an owner occupant with 100% VA financing. Unfortunately, we didn't plan on it being a rental so the numbers aren't that great. I have purchased the rest of my properties with 25-30% down through traditional lending sources. This helps us avoid PMI & increase monthly cash flow. We are currently looking at a few small apartment building 9-20 units, and will be putting offers in for low down payments with seller financing with a 3 or 5 years balloon. This will give us time to bring up the rents, pay down some principle and get the property rolled up with our other properties under a blanket commercial loan.

It does take money to get going, however, it doesn't always have to be your money.  You are really only limited by your creativity & a few lending rules.  Hope this helps.

JW

@Jesse Waters  

Is the goal to roll it into the commercial blanket loan with other properties with decent equity to bypass the need to pay pmi on the multi unit property once you are ready to refinance it?  Do commercial real estate loans have pmi if they are under 20% down?  

Or just because it is simpler than refinancing it separately?

Hey @Anna Shaver yes, our goal is to roll it into a commercial blanket loan. Some of the properties that I am looking at are renting below current market value & I would have trouble getting a lender to finance the property as is, the rents would need to come up. I have run the numbers a few times & even getting these properties with 0 down, in 5 years we will have enough equity. The thing about commercial lending is that the rules are different. Generally speaking, they don't care what the purchase price of a property, they are concerned about the appraised value & that value is based on the property's income. So, if a property is selling for $500k and the appraised value is $600k with 75% LTV then I would only need to come up with a down payment of $50k. Where as a residential lender would require $150k down payment. Also, each lender is different, but the ones that I have been talking with require a LTV of 75% for a blanket loan, with a minimum between $500k-$1mil. With commercial, there isn't PMI. PMI on residential real estate generally goes away after you have 20% equity.

Going with a blanket loan has both advantages & dis-advantages. One payment, easier to leverage the equity in one property towards another one, rent increase drives up the value of the whole package etc. The down side is interest rates are higher than residential loans, the minimum amount of properties can be higher, my lender requires a minimum of 5 units, so you can't get a commercial blanket on 4 SFH & the loan terms are shorter, requiring re-fi every 5-10 years. Also, they have prepayment penalties & its harder to sell one property out of the package.

Hope that answered your question.  Sorry @Kenneth Stump wasn't trying to hijack your thread.

@Anna Shaver  The owner, owned the property out right.  I got 5yrs on 5%.  That will actually pay the loan off completely.  The reason being it was previously a rental property, the last tenant lived their for 31 yrs.  He was the first and only tenant in this house.  He passed away and the owner felt he was to old to do anything with it and let me have it for a great price.

@Adam Gresch   Owner financing really doesn't have a set of "standard" rates, fees, and down payment requirements.  This is completely a deal between you and the owner at whatever terms you can negotiate.  Obviously this negotiation is going to depend greatly upon the position of the owner.  Is the owner distressed and motivated?  Is the owner looking for cashflow or a bigger payment up front?  There are a ton of possible scenarios that will greatly impact the negotiations.

I suppose that a good starting point for you as a buyer of an owner financed deal would be maybe 5% down and 2% over the going mortgage rate or the existing mortgage rate if it's not free and clear.  This would give you some negotiating room and unless they have the property priced way under market I personally probably wouldn't go much over 10% down and 4% over current rates.  Of course this really comes back to the price of the property, condition of the property, local market, what your exit strategy from the property is, and a whole host of other questions.

Not sure if this helps much, but remember that this is a deal between you and the seller.  You can get what you can negotiate.  The better you are at negotiating, the better terms you are likely to get.

@Anna Shaver I just talked with the guys doing our commercial mortgage, and it seems that I passed on some bad information. My apologies to all on this thread. At least this particular lender does have some additional requirements as far as far as the down payment goes. True, they will finance 75% LTV OR 75% of the purchase price, which ever is less. It seems that I had misunderstood this and passed it on that they would finance up to 75% LTV regardless of the purchase price and potentially require little or no down payment. The did tell me that they will re-fi after a year to 75% LTV with a new appraisal.

Again, to all on this thread, you have my most sincere apologies for passing off bad information.  I am still working to find out if they have restrictions of down payment funding sources, and how they factor or account for that.

I am also trying to find out if I tie up a property under seller financing, if they will count a year of that as seasoning for a re-fi under their LTV & seasoning requirements. I'll update once I know.

@Anna Shaver  That is one of the questions that I did address.  The lender told me that they have no restrictions on the source of the down payment.  So, you could arrange for seller second or carry back, 401k loan, crowdfunding, line of credit or what ever other means that you can come up with.  However, before you start cashing in all your credit cards for a down payment, be sure that you can afford to service all the debt.

I looked at the Freddie Mac program.  It looked like it was for higher priced properties, starting at $1mil if I remember correctly.

@Jesse Waters   I am currently reading Brandon's new book on buying with low or no money down.  The challenge with our 401K loan plan is it has a 5 year payback.  The rate is good ~5% but I wouldn't use it unless it really made sense.  The other challenge I have is that they require a set payment. If you wanted to pay it off early it would require a full repayment.  You don't have the option to make extra payments towards it.  I guess I could just start a reserves account with any extra money I had and wanted to use towards the extra payments until I had enough for the payoff.  For each person this can be different depending on your plan administrator.

Equity lines of credit have the advantage of a 10 year payback which is better.  I still don't want to do it unless I found the right opportunity where it really made sense.  

While I could easily use credit cards I have no interest in going down that path.

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