Starting out... And Raising Capital?

Question

Hello everybody!

I'm new here and this is my first post so I'm hoping I'm posting in the right category!

I'm currently 20 years old and pursuing my degree in Business, and lately all I've been thinking about is investing in a property and using it to rent/lease out.

I've found some condos ranging from $60,000-100,000 that I think would be ideal, but my main problem is creating ways to get approved. I know 2-3 people who would be also willing to put in/invest with me onto some of these properties and figured it'd be a good opportunity to take advantage of. I'm confident in securing the property down payment and credit scores, but my main concern is my history of income (as I'm young and don't have much to offer in that category).

What steps should I take to secure this condo as my first purchase of property, and what can I do to increase the chances of me actually being able to obtain it?

Adam Hershman · Answer

First of all don't worry about about offending me with newbie-ness, I assure you that you probably already know more about real estate than I do, I'm simply really well versed in the world of finance. Having said that most of what I say will come from that perspective, maximizing potential and returns while minimizing risks and costs. You'll find that in a lot of cases you will get advice to the contrary, and from what I understand what I consider to be "bad rates/bad loans" are often common in the RE investing world, so by no means should you take my opinion as fact.

Secondly, I'm not saying stay away from banks for lending, I was saying the situation you described would yield little results for maximum time spent at a bank. Banks are great, and usually have really good rates, but they operate with higher restrictions and risk tolerance thresholds than most other financial institutions, which means if you're "on the bubble" or in that gray area where the approval decision becomes overly subjective, your time is better spent pursuing other options.

Which leads me to your income, if you can prove $20-30k annually and have a partner who can do the same, you might be ok to go to a bank. There are going to be a few big questions that will determine how likely they are to approve you. First is going to be what your job is, you said variable 20-30k so I would guess either service industry or work study at your school, not that it matters. If you are, for example, a waiter, you will need to be able to prove your tips in addition to your W2 wages. If all of your income is W2 great, if not figure out the lowest amount that you can prove and stick with that.

Second will be how much debt you have, you said you don't have any expenses except tuition which is good, but do you have any student loan debt or are you managing to pay as you go? Banks are going to look at what you make vs how much you spend a good goal that most financial advisors will set is your residence shouldn't cost you more than 28% of your income, but that's a fairly lofty goal and most people don't actually achieve that. Banks understand this but will still want to see lower than 35% for someone with your credit length. They will also want to see a good down payment. Basically it might be worth your time to apply to a larger banking institution, my advice is check with your current personal bank. I won't say which large bank I use but they offer discounts on everything from mtg rates to online brokerage trades. Plus they have known you the longest so they have more of a reason to approve you. If you took your income @ $20k, you can't be paying more than 25% in taxes, so your worst case gross is $15k a year. 35% of your gross income would be around $437 a month. A 60k 30yr @ 9% is around $500 and a 100k is around $800, so you can see if you had a partner with similar income, and neither had any other obligations (debt), and you apply to bank that knows you, you might have a good chance at being approved.

Adam

By the way...

If you're managing to pay as you go to school and not take on debt, then you're a rockstar, and you probably won't need your degree or my advice to be sucessful!

Franklin Romine · Answer

@Christian Astorga For me personally the DAY JOB W2 was my greatest asset when starting out in 2008 right out of college.

Frank

Mike H. · Answer

Sure. But first, if you've been at your job for a year, you might be able to qualify with a local bank or credit union. But you are definitely going to need some money in the bank. Just make that part of your deal with your partners.

If you need 30% down and the condo is 100k, then each of the 3 of you need to put in 12k. That would cover 30k down payment plus allow you to put 6k in the bank.

You're going to need to have at least that in the bank when holding rentals.

In terms of flipping though, that might be a path of least resistance in terms of financing. Just need to find a hard money lender that will lend to a beginner investor. They should be able to roll the rehab into the loan and then have you put down 10 to 20% total.

Either way, you're going to have a very good deal and, if you do, then you can go try the hard money lenders and/or private money lenders for a rehab loan. The one year of employment should be ok.

But it still comes down to your income needs to support your loan. If it doesn't, then you need to look at the first 3 items and try that.

If you're making 10k to 15k a year and you're trying to take down a 100k property, thats probably not going to happen - either via hard money for a flip or local bank/credit union for a buy and hold.

David Huynh · Answer

Congrats on starting young! I purchased my first condo when I was 20 years old with 5% down on a 50k loan. Both of my tax filing years were under 30k - not to steer you towards the bank but have you spoke to someone at the bank? Perhaps to get a feeler if you would or would not get approved? I'm interested in seeing how people will respond to this post. I'm in a similar position as you now. I've acquired property but cannot verify additional income through the banks. So other/new methods are the way to go.

Christian Astorga · Answer

Hey Mike!,

I appreciate your response!

Unfortunately my parents aren't int he position to be able to co-sign me =/ I have two other friends who earn about the same amount of income as me (20-30k variable annually). And I've considered reaching out to some family friends/private lenders - just unsure how to go about that.

When I say income I mean in regards to the amount of time I've had at a job (only one year) and the history banks look at of how long you've been with the job, the income you've made in general, etc. Alongside this, I also have no substantial amount retirement finances that the bank can see as collateral. I've made most of my money from freelance/sole proprietary work which adds together with my current job!

And funny you mention flipping! Aside from mentioning that I'm interested in purchasing a property to rent - yes I am DEFINITELY interested in flipping houses, and following up with that, I'm also looking to try and find out how to go about raising capital to purchase the property temporarily (alongside business partners that may help out financially with initial costs).

You mentioned options in terms of flipping, can you please elaborate? Thank you!!!

Christian Astorga · Answer

Thanks for the response Adam!

Yea, just like you said, I make about 20-30k annually on a variable basis and I don't have any expenses except for tuition - so it's definitely been tough.

And I have a million questions as I've of course never have had to deal with property before! So please excuse my newbie-ness aha.

So to sum up your response, you're saying to refrain from the bank because of the odds of getting approved! So my other question is: How do you approach buying a property without the involvement of a bank loan? It is based solely off of having the pure cash at the moment of want to purchase, which is why you stated to get a loan from somewhere else like someone in my network (i.e. friend/family)?

The extent of my conversations with my parents about buying property always goes back to banks, coming from buying a primary-residence for a family perspective.

I want to know the process from an investment perspective, and what kind of barriers/processes do you have to go through when buying from someone selling?

Sorry I hope I'm not confusing you aha!

Mike H. · Answer

Can either of your parents co-sign on the loan? That would be one way.Another way would be to get a partner that has the income and credit to get the financing. Another option might be to find a private lender that would lend to you.

When you say the income thing is an issue because your young, is that because you have little to no income? Or because your income is relatively new (i.e some new job)?

There's a big difference there. If you have little to no income like most students, then I don't see any way outside of the possible options I mentioned above for any bank out there to give you a loan.  No income = no loan.

If your income is new (i.e. been at a job 6 months but the income would be enough to qualify), then maybe you could try going to local banks and see if they'll let you slide by on the typical 2 year income requirement (i.e. averaging 2 years of income).

Outside of that, I don't know of too many other ways you can pull an investment off. No income is pretty close to being a non-starter in terms of getting a long term loan. If you were going to try to flip, then you might have some options there.

Adam Hershman · Answer

Hey Christian,

You sound like you have really done your research on getting started in investing. Like you said, you're young and have a short income history, and I don't know if you're working while going to school, but I cant imagine you're making a ton of income right now, but if you are please correct me!

Obviously this presents a problem to banks, then don't make a habit of loaning money without some basis that it can be repaid. You mentioned that you have 2-3 people looking to invest with you, is there any chance one of them has a higher income, or more established credit? Your other option is to take a loan, I know you are still in college so you probably haven't had much of an opportunity to build a retirement account, but do you know any family members who might loan you some extra funds from their 401k? Most family members will take a loan on their 401k and loan you the money as long as they believe you're responsible enough to pay it back, they aren't going to retire in the next 5 years, etc. It works well for them because they are essentially earning as much interest as your willing to pay them (they will have to pay prime +1-2% on the loan) in their 401k, plus they get the good vibes of helping out family. It works well for you because you can actually get a loan, which you might not otherwise be able to, and it will certainly be a at a lower rate than what a bank would charge.

Make sure to expand your outlook, banks aren't the only sources of money, just be sure you're not rushing into unfavorable terms because you're excited about the process!

Adam