Want to start investing but can't get approved

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Want to start investing but can't get approved

Alick Patrick
Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes

Hi! I'm a newbie. I had two properties that went into foreclosure or short sale 6 years ago during the housing market crash. Up until last weekend I didn't think I can get another property again but due to an unexpected incident a broker run my credit and told me that I am qualified to get a property--with 3.5% down! Thus, I started looking. To cut the story short, I ran into a thread here at BiggerPockets and saw a real estate investor that have properties at TN for $80,000 or that can generate good cash flow. I was surprised because I'm from L.A. so the cheap properties I've been seeing are on the $200,000 range. With that price minus just the 3.5% down payment that I'll be putting down I don't see much cash flow coming out of the properties.

I know it will be my first real investment property and there may be a lot of problems having to have a property management company manage a property that is not local to me but I'm willing to take that risk for now. I prefer that risk over the risk of purchasing an expensive property in L.A. with little to no income being generated.

Anyway, so I called the guy and was sold to make a purchase. I asked him if he knows any lender that can assist me with a loan because the broker that told me I was approved said I am only approved for properties around Los Angeles. He gave me a couple of lenders and I started to work with them. So far one stated that he cannot approve me because my foreclosure fiasco 6 years ago is still on my credit report, and the other has been unresponsive after I provided her all the information she needs so I'm assuming now that I am also not approved.

Can someone please kindly advice me if there are other options I can take to get approved for a property in TN? Actually, any state would do too. If you have cheap income generating properties to sell and know of a lender that may be able to approve me at your state please advice.

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Shane W.
Professional · Santa Monica, CA · Member since 2014 · 186 posts · 81 votes
11y

@Alick Patrick adding to what @Lumi Ispas is suggesting. House hacking as they call it would be an awesome way to get back into the game. Plus it will still comply with the FHA rules regarding owner/occupier.

I've been looking at MFH's around your area for the past few months and you'll be looking around the $700k mark and higher for a fourplex needing work. So with 3.5% down that's still $24k plus closing costs (which is a lot in this price range) to get your foot in the door. You could of course find a run down property, live in one unit while fixing up the other units, but then with such a low down payment you would be relying on your own income to pay the expensive mortgage. You could also aim lower and go for a duplex or triplex?

I know @Matt R. is in the process of doing something very similar to what you're looking to do.

I would reach out to these people and see what they recommend.

I'm also a new investor so by no means an expert, but keen to network with other LA investors.

Good luck!

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  • Shane W.
    Professional · Santa Monica, CA · Member since 2014 · 186 posts · 81 votes
    11y

    @Alick Patrick that sounds like a FHA loan which normally requires owner/occupier for at least the initial period.

    1Reply
  • John Malahay
    SFR Investor · Lakewood, CA · Member since 2013 · 66 posts · 16 votes
    11y

    @Alick Patrick 1.  What do you want to do?  Do you want to rehab, wholesale or be a landlord?  2.  Hard money financing would help you determine whether the numbers will allow you some profit out of the deal.  3.  Have you networked with any of the LA investor's clubs like FIBIs?  Or even here with all the meetup plans going around - check 'em out.

    0Reply
  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    @John Malahay  I'd like to learn more about rehab and wholesale but I'm only new into this so I don't have much funds yet to get into that. I can only put $10,000 down initially. After subtracting all my normal monthly living expenses I only have an extra $10,000 each month that I can put into this going forward. Will that be enough to cover rehab costs? Also, for a newbie like me is it safe to start engaging on rehab and wholesale?

    I'll look into FIBI and those meetup plans. That will surely help! Thanks!

    0Reply
  • Peter Chan
    San Diego, CA · Member since 2014 · 31 posts · 7 votes
    11y

    @Alick Patrick 

    Is that "extra $10,000" a typo or do you really have an extra $10,000 free cashflow to put towards your real estate investments? 

    You can do A LOT with $10,000 net free cashflow... I would almost say you can do anything you want to-do with that. 

    On the lender front, just keep calling around. Those foreclosures are going to be on your credit history for a few more years, so the trick will be to find a lender who will not care. Every lender has slightly different underwriting requirements.

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  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    @Peter Chan 

    That's extra cash flow I have coming in from my employment. I work two full time jobs and net a little over $18,000 a month but after my monthly expenses on rent, cars, etc I can only put in $10,000 into this real estate investing. When you say I can do a lot with it does that mean putting more down payment on a property (coz' I'd like to avoid that as much as possible)? My mistake in the past was purchasing properties out of convenience and looks and went for a $675,000 house and $525,000 condominium. A year later the house was valued at $525,000 and the condo was below $500,000. I want to start off with properties a lot less than that so I don't have to put too much down payment.

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  • Lumi Ispas
    Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
    11y

    @Alick Patrick , Find a top producer lender in your area that is also an investor. Sit down with him and have him explain you all your option. From what I see you are approved as owner occupant to buy homes with an FHA loan. Ask them how long it will take until you can buy investment property, or in other words how long it will take until you can take a conventional loan.

    You have the option of buying a 3-4 flat right now in your area, occupy one unit and rent the other three. After living in one unit for a year, you can buy your next property owner occupant with a 5% down conventional, or if you have to wait longer than one year due to the short sale, than in couple years you should be able to take conventional loans.

    Save all the money you can, as if you can get conventional loans, or commercial loans a year from now, an extra 120K will go a long way.

    Hope that helps!

    1Reply
  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    @Lumi Ispas

    The 3-4 flat suggestion sounds like a great idea. Instead of paying for rent now I can settle with something like that and get a feel for an entire year of how being a landlord for the other units would be like. That might actually be perfect for my lack of experience before going into conventional and commercial loans. Thank you!

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  • Lumi Ispas
    Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
    11y

    @Alick Patrick that's exactly what I had in mind for you. Renting three other units might help you save even more money, as your housing expenses might go down, and you'll get some good tax benefits, which you really need due to your high income.

    In one or few years, I will invest in commercial property as you will have the income and down-payment necessary. The MF properties are going to give you even more tax shelter and will be easily to manage than the residential. 

    Let me know if you have questions!

    0Reply
  • Shane W.
    Professional · Santa Monica, CA · Member since 2014 · 186 posts · 81 votes
    11y

    @Alick Patrick adding to what @Lumi Ispas is suggesting. House hacking as they call it would be an awesome way to get back into the game. Plus it will still comply with the FHA rules regarding owner/occupier.

    I've been looking at MFH's around your area for the past few months and you'll be looking around the $700k mark and higher for a fourplex needing work. So with 3.5% down that's still $24k plus closing costs (which is a lot in this price range) to get your foot in the door. You could of course find a run down property, live in one unit while fixing up the other units, but then with such a low down payment you would be relying on your own income to pay the expensive mortgage. You could also aim lower and go for a duplex or triplex?

    I know @Matt R. is in the process of doing something very similar to what you're looking to do.

    I would reach out to these people and see what they recommend.

    I'm also a new investor so by no means an expert, but keen to network with other LA investors.

    Good luck!

    3Reply
  • Joshua McGinnis
    Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes
    11y

    Hey @Alick Patrick - I've got a great relationship with a fantastic direct lender. She will be honest and forthright with what is possible - even if it means referring you to another lender. Shoot me a PM and I'll happily introduce you two.

    0Reply
  • Peter Skobic
    Lender · Watertown, NY · Member since 2014 · 37 posts · 11 votes
    11y

    @Alick Patrick I agree with @Lumi Ispas and, as always, I am entertained by the 4-flat terminology used in Chicago hehe! But seriously, I think this is the best option given where you currently are in your investing career. While turn-key properties match certain investment styles, you need to keep in mind that many people will say a property has great cashflow when they are trying to sell it. Expenses are often greatly understated and properties frequently marketed significantly above market value. I also find that SoCal is often impossible to cashflow without adding value, but with your kind of income, you should be able to move into a building with 2 - 4 units and start exactly as Lumi suggested. Since you will be living in it, that 3.5% FHA loan should be within reach.

    1Reply
  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    @Joshua McGinnis

    Do all lenders follow a standard FHA interest rate or is there competition on that? If the rate is standard then I already have a couple of lenders that were able to approve me. It was trying to get a loan for an investment property at TN that I couldn't get approved for but it seems like I should in fact stick with an FHA loan and settle for a property in my area that has 3-4 units as @Lumi Ispas, @Shane W., and @Peter Skobic advised. Hence, if rates vary per lender then I would love the referral so I can compare the rates.

    Thank you all for responding to this thread! I'm very humbled with how people here are willing to help without expecting anything in return. I've actually spoken to a couple of members already and they spent a good time with me over the phone just to tell me the basics of REI. I'm a pretty good I.T. engineer but boy I am in kindergarten for REI. Thank God for BiggerPockets and its members.

    0Reply
  • Joshua McGinnis
    Rental Property Investor · Beverly Hills, CA · Member since 2014 · 472 posts · 272 votes
    11y

    @Alick Patrick My lender and I were just chatting about the business of mortgages. She was very clear to me that they don't make their money on origination fees nor the rate. She said FHA loans have very little margin primarily due to the regulations on what you may charge and for what. Where the lender makes their money is when they securitize the note and sell it off. I found this very interesting ...

    Mortgage brokers on the other hand do charge a premium on the rate and so it is usually to your benefit to price shop and negotiate for better rates.

    FHA actually is pretty explicit about their credit requirements. You can see them here:

    http://www.fha.com/fha_requirements_credit

    I'm thinking it's more likely that the original broker who said you could qualify for FHA was wrong. The good news is that it's been six years since the foreclosure and I believe they fall off after seven which would clear everything up for you.

    0Reply
  • Christopher Leon
    Realtor · Schaumburg, IL · Member since 2011 · 289 posts · 118 votes
    11y
    Alick Patrick here's some advice and it's worth exactly what your paying for it: DONT BUY YOUR FIRST DEAL ACROSS THE COUNTRY. Go buy a small condo somewhere in CA before you buy a place in TN. Help yourself and learn the business by physically being able to go to the property, manage it, AND the tenant. If you think your hitting a home run in TN I'm afraid to say it's more like a bunt. This business is all about cost effectively managing your product - not just buying, hiring a dip-**** manager to cheat you out your money, and keeping the unit barely afloat. Sorry if this is harsh, just don't want to see you / hear you lose your ***. Good luck
    1Reply
  • Andy Mirza
    Lender · Ladera Ranch, CA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    @Alick Patrick I'm glad that you intend to go the house hacking route as others have suggested. Rent the other units out and, if you can tolerate it, get some roommates in your unit to maximize your rental income.

    You're doing the right thing by getting yourself educated here on BP. Start going to the good local Meet Ups and REI clubs that provide education and networking opportunities for minimal costs. Don't pay an arm and a leg for the guru courses! Be patient, learn, and save your cash. You don't need to hurry into your next investment. Get your fourplex, educate yourself, network, save your money and you'll figure where and what you want to invest in. There are so many aspects to RE (flipping, landlording, wholesaling, apartments, commercial, notes, etc) so give yourself some time.

    There are actually cheaper properties than you're used to if you want to stay local. I bought a bunch of condos in and near San Bernardino for $20k-55k a couple of years ago. They're worth about double now and I've stopped buying but there are still opportunities if you can get cheap financing. Good luck!

    0Reply
  • Lumi Ispas
    Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
    11y

    @Alick Patrick , the rates are the same for all FHA lenders. The closing fees might differ a bit. Give a scenario, or a property to few lenders, and ask them what your payment will be per month and what your closing cost will be. That's how you'll be able to differentiate the lenders.

    The standard down-payment for an FHA loan is 3.5%, however in the case of 3-4 units, most of the time the down-payment is increased to 5%.

    The rate of PMI- Private Mortgage Insurance is high right now, about 1.5%, however at the end of January it will lowered to .85%, which is a huge decrease. This low PMI combined with low interest rates, makes it worth while for buyers that bought a year ago properties with FHA loans to refinance their properties through streamline FHA.

    You'll learn some terminology while talking to people.

    Regarding purchasing a small condo, I will not do in in your case. You are in a high tax bracket and you need all the tax shelter you need. Buying a larger building is the way to go, and living in the property it will give you the hands on experience for furthering your investments in the future.

    0Reply
  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    @Andy Mirza

    Did you purchase the $20-$55k condos at San Bernardino to keep and wait for appreciation or did you rent them?

    I didn't know San Bernardino was once that cheap but if I can find other similar areas that have the potential of appreciation and are selling at that price range I may be able to save some funds and purchase one or two while also saving up down payment for bigger investments like Lumi was suggesting I do after a year. I know I won't get approved for another loan just months after purchasing a fourplex but I'm thinking with a $20k property I can possibly purchase it directly and I can also let is sit temporarily without renting it out if I find the first time landlord experience with the fourplex too challenging. What are your thoughts on this?

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  • Alick Patrick
    OP
    Investor · Torrance, CA · Member since 2014 · 29 posts · 4 votes
    11y

    Thank you @Joshua McGinnis and @Lumi Ispas for the lender shopping advise. The learning keeps pouring in! 

    And you're right again Lumi, my tax person keeps telling me every year that I need to purchase a house because I am paying so much in taxes but I wasn't paying attention to her because of my mistake and bad experience with my previous foreclosures. Just after listening to those Rich Dad, Poor Dad audiobooks three months ago did I learn that I should instead invest the money I will be paying for taxes into real estate and write it off. That pretty much made me start looking into real estate again, although this time I'll be coming into it as an investor--wiser person, hopefully.

    0Reply
  • Logan Hicks
    Business Owner/Investor · Millersville, MD · Member since 2015 · 191 posts · 71 votes
    10y

    @alick

    Im actually from TN, and Im an active investor in that area.

    Since we have similar cash flow excess, and are investing in the same area, would you like to team up? With the combined income, we could just cash offer properties each month, and we can use one of my property managers I know in the area. Most of them I grew up with, so I know which ones are good, and which ones are horrible beyond reason.

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