Need advice on financing my first BUY and HOLD

29 Replies

Hello everyone at BP! First time poster with big dreams of real estate investing. 

BACKGROUND:

Ive been doing research for the past 6 months and finally starting to put together a strategy to go after my niche...but first, a little about me

25 years old, full time mechanical engineer, currently renting at $1050/mo, have 35k in student loans, and 25k truck payment. credit score in the 680-700s. not much in savings but starting to save heavily. 

I have realized that i want my life to be more than a career at a desk. Ive been a hands-on person my entire life and im very motivated to use my skills in a way to make money.

So far, i have decided that i want to buy a house that is already set up for a 2-3 units. I want to live in one of the units. idealy, id like to have a mortgage that i could afford with no units rented and more than pay for the mortgage when fully rented. I have looked in my area for potential properties and i need help with figuring out the right course of action to finance my dream. i have researched the 203k and FHA loans.

There are foreclosures in my area ranging from 20k-50k needing full rehab. Also properties in the 100-150k needing upgrades.

MY QUESTIONS: 

What financial route would best suit my situation? 

What condition property would be ideal with a given loan?

How much sweat equity can be done with a given loan? i read everywhere that the 203k loans do not allow sweat equity but i want to be able to lay flooring, install cabinets, finish carpentry..etc

i have a million other questions but this is a good start. thanks for reading if you bothered to get this far in my post! 

An FHA loan on a multi-unit might be a good possibility. Those can be had with a 3.5% down payment and sometimes you can get seller concessions for some of the closing costs. That's about the cheapest route, both in terms of down payment and the interest rate. The downside is FHA requires properties to be in excellent shape. A 203K may be an option if you find an acceptable fixer. Those are your best bets for long term, low down financing from a bank.

Another option might be some sort of seller financing.  A straight owner carried mortgage on a free and clear property would be best.  That's how I bought my first house, too long ago to think about.  There are other options, though they carry more risk because of the due on sale clause.

@Jon Holdman

thank you for your reply. Is getting a seller to agree to cover closing costs a regular occurrence? I feel the seller would have to be desperate to dish out cash to sell their home. can you lend some further insight?

is there a way to locate properties where sellers are offering owner carried mortgages? how did you find that deal?

thanks again.

@Kyle Gregg  

Owner financing is not easy to find. You need to be very lucky to find it on a house you like and is priced right - I have had no such luck.

It is not common to have the seller cover all closing costs, and is usually not acceptable by the lender. However asking the seller to contribute 2% towards your closing costs is both common and acceptable - for example, instead of offering $100K on the house, you offer $102K and ask for 2% seller assistance. The last few purchases I made with mortgages had this.

@Kyle Gregg -- I started in a similar situation that you described. If you can't get a 15-20 percent down payment together, FHA is a great route to go. You can finance up to a 4-unit owner-occupied property with 3.5% down, assuming your debt-to-income ratio is suitable. The downside is you pay monthly mortgage insurance as part of your monthly payment, and you'll need to refinance after you reach 80% loan-to-value in order to get rid of the mortgage insurance payment.

That being said, now is a better time than ever (well, best in several years) to go the FHA route if you have to. Interests rates are lower than they've been in a while, and beginning January 26, 2015, the cost of mortgage insurance for FHA loans will decrease thanks to Obama's mandate.

@Cole A.  

Appreciate the response. FHA or the 203k loan seems to be the easiest route to go for my first property. where would be a good place to talk to someone about possible loan financing?

Hi Kyle.  Very happy that you are getting into the real estate investment game. Smart move trying to purchase something that is within your budget WITHOUT taking into consideration rental income.  That's exactly what I did.  Regarding finding a seller willing to hold a note, I've found that elderly people (who don't want to take a lump sump on the investment property sale proceeds, for fear of getting hit with capital gains taxes) are sometimes willing to hold the note.  I've done deals that way and it worked out quite nicely (no banks involved!).  Best of luck to you and keep the questions coming!

@Kyle Gregg , you could really go to any lender to go the FHA route...Quicken Loans is the largest FHA provider. Wells Fargo is another option, and lots of private mortgage companies in your area I'm sure.

I would highly recommend looking in to a credit union though. Credit Unions are not for profit so I've found they always offer lower interest rates. Private lenders such as the ones mentioned above generally have an overlay and will charge you higher interest to meet their lender requirements (and thus making a profit).

I looked in to the 203k loan at one time but didn't go that route and don't remember all the specifics. I do believe you have to go through a contractor and prepare official bids and submit improvement plans before closing on the loan...but don't quote me on that. I'm sure a simple google search would provide all the specifics.

In our market (I'm licensed in MD and deal primarily in Balt/Harford/Cecil counties)  seller help towards closing costs is practically expected.  I recently received a contract back that was just at asking price and 6% closing costs help.  I tell my sellers to factor in 4% for closing costs average because the fact is, buyers ask for subsidies.  When doing the math on our first flip, I factored in 4% buyer help as part of our selling costs to make sure it would be profitable.  My preferred lender will allow up to 6% help from sellers towards closing costs.

If I were you, in your current situation, I'd find a 2-4 unit in the "livable but needs upgrades" category... make sure that it's in good enough condition to finance using an FHA loan. Put 3.25% down and have the seller pay for as much of your closing costs as they are willing. Then you can put in all the sweat equity that your heart desires without the restrictions of using specific contractors.

Sam & Heather Jones 

i like the idea. how far can i reach towards the 'unlivable' side before the FHA wont consider financing?

Pretty far, actually.  A good agent will help you determine what qualifies.  A lenders definition of livable is very different from my own ;)  Stay away from major defects and mold - a good foundation, working mechanicals, a toilet, and a stove are pretty big requirements ;)

Read this: http://www.investopedia.com/articles/mortgages-real-estate/11/fha-minimum-property-standards.asp

Sam & Heather Jones 

Great read! I appreciate the help. 

Seeing that i dont have much in savings and most of my money going towards down payment/closing costs...do you have any suggestions on funding renovations?

From my brief research, i found Home Depot's Project Loan that lends up to 40k at a fixed 7.9%. 

thoughts?

Sellers paying the buyer's closing costs are common when the market is more of a buyer's market. Less so as markets turn toward seller's markets. They're not really coming out of pocket. Rather, those costs are deducted out of the cash the seller would receive. Asking for up to 3% should be OK with most lenders. I have sold a house to a buyer who was getting an FHA loan, down payment assistance from the county and I paid their closing costs. We had agreed to 3%, but the actual costs were closer to 2.5%.

Originally posted by @Kyle Gregg:

Seeing that i dont have much in savings and most of my money going towards down payment/closing costs...do you have any suggestions on funding renovations?

From my brief research, i found Home Depot's Project Loan that lends up to 40k at a fixed 7.9%. 

thoughts?

 Kyle, have you considered talking to a Private Money Lender? Dilapidated properties that are in need of repair are going to typically sell for a discount, if you can get a contract on the property cheap enough, you can roll those improvements into the rehab loan with little to no money out of pocket.

Private Lenders are able to be more creative with their funding, and work deals hard money or conventional lenders will not entertain. Many private money lenders are going to secure the loan based on the asset, and not your savings, or credit etc. 

Not sure if this helps but hope it does! 

@Kyle Gregg There's a Streamline 203(k) and a regular 203(k) loan. The Streamline 203(k) allows repairs up to $35k and, if you do less than $15k in repairs, you don't need to have a 3rd party inspection. I'm not an expert in how to do this and I got it directly from HUD's website:

http://portal.hud.gov/hudportal/HUD?src=/program_o...

http://portal.hud.gov/hudportal/documents/huddoc?i...

In my market, it's normal that FHA buyers' ask for the seller to cover their costs because, typically, they're having trouble coming up with the down payment in the first place so they need all the help they can get. Usually, buyers and sellers will meet somewhere in the middle and the seller will pay some of the closing costs.

Whatever you do, please build up your cash reserves because having no savings puts you in a bad financial position. Do what you have to do to get into your first place but a top priority should be to save a minimum of 6 months of living expenses in case of emergencies. Once you're a homeowner and something unexpectedly breaks down, you'll be thankful that you set some money aside.

@Jon Holdman  

definitely an eye opener. i feel more comfortable with exploring deals knowing there might be room for seller assistance. thank you.

@Daniel Fleming  

I have not done much research in private money lending. if it allows for more flexibility on the ways the work gets done (as i want to do some of the work), this might be a good financial path. Are PMLs looking for buyers that want to flip houses or buy & hold? A PML will just fund the initial purchase and rehab then i could refi into a conventional loan? Thanks for the insight.

You can get FHA loan with as little as 2%. Depending on programs in your county, you can get conventional loans with at little as 3% down(My case).

You can use the FHA loan to house hack up to a 4-plex. You can also try a live-in fix/flip if you have the expertise?

@Jared Vidales  

I think the live-in renovation on a multiplex property is what im looking for. Seems to be the easiest way to free up money for future investments. 

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