First Time Investor Financing?

10 Replies

Hello Everyone!

This is my first post on BP and I am hoping to get a question answered or perhaps some advice on a potential scenario. My backstory to this scenario, being that I have some capital for a down payment on my first investment property. My goal is to buy and hold a rental property. I live in South West Ohio near Cincinnati. The issue is that after talking to several lenders in my area they all want 20-25% down on any mortgage for any property that will not be my primary residence. My wife and I just bought a new home last year and there is no way for me personally to house hack or live in a single family or multi family property. This leads me to a potential solution:

I have a person that I trust who is looking to move from an apartment to a house for the next 12-24 months. I am considering buying a property with a conventional loan, with both of our names on the mortgage. Then drafting a contract/lease agreement, that would basically spell out that they would agree to live in this property for X amount of months, (long enough to satisfy any residency requirements for a traditional loan by a lender). They would pay the mortgage/utilities, maintain the property such as grass cutting, etc. Similar to any single family tenant, in return after this X amount of months I would refinance the mortgage into my name only, and rent this property out to a new tenant. Hopefully provided a win-win scenario, during this time they would further build their credit history with a mortgage, I can rehab the property as needed to build more equity, and the expenses would be paid during this time frame. 

If anyone has any advice, or has done anything similar and would like to share their opinion, I would greatly appreciate it. Also if anyone knows the exact amount of months for a conventional loan to meet the residency requirement?

Hello,

Also from Cincinnati here. I can't really give any insight to the majority of your question, but I can tell you the residency requirement for a primary residence is typically 12 months.

I'm not saying that this won't work but I see peril.  And whatever you do, don't draft the agreement yourself.  Use an attorney.  Anyone else have a take on this?

Originally posted by @Brett K. :

I'm not saying that this won't work but I see peril.  And whatever you do, don't draft the agreement yourself.  Use an attorney.  Anyone else have a take on this?

 Brett,

Thank you for responding, yes I will be having the contract/lease agreement drafted by an attorney. My main concern/question to answer at this point is if anyone has had success using any similar solutions with lenders.

It's not unlike when parents or other relatives help someone buy a home.  You might have to call your tenant 'cousin' to make it work.  I've seen stranger things. 

I ran into this same issue when I was starting out, I tried the hard money route for purchase and rehab funds which ended up being very expensive due to the high fees/points and interest rates. A friend ended up funding me with a private mortgage from his self-directed IRA (Equity Trust IRA Custodian). That is what I have been doing since for my buy & holds. I use a bank to cash out the private mortgage after 12-15 months.

Originally posted by @Ken Faler :

I ran into this same issue when I was starting out, I tried the hard money route for purchase and rehab funds which ended up being very expensive due to the high fees/points and interest rates. A friend ended up funding me with a private mortgage from his self-directed IRA (Equity Trust IRA Custodian). That is what I have been doing since for my buy & holds. I use a bank to cash out the private mortgage after 12-15 months.

 Ken, 

From what understand this friend (investor) covers all the cost of down payment and rehab, after 12-15 months you refi the mortgage into your name? If you don't mind what kind of return does your investor expect on these loans?

Originally posted by @Mark Nolan :

@Joseph Cornwell

Welcome to Bigger Pockets. Make sure to check out all the informative podcasts.

 Thank you! That is actually how I discovered BP, I found the BP podcast on YouTube when I first began researching real estate investing. I have watched about 15 of them so far, I hope to watch them all!

I purchase the house in my name and my private lender provides me with 100% of the purchase and rehab funds. I provide him a first mortgage and note on the property. (something my attorney drafts for $150) Terms are interest only monthly payments at 10%, 3 year balloon, I guarantee the note personally and include a 12 month pre-payment penalty to guarantee my private lender a minimum 12 months of interest. I refi with a bank anytime after 12 months which is how long my bank needs me to have owned it before they can use the new appraised value for my refi. On the refi I usually end up with 20-30% equity based on the refi's new appraised value.

Ken,

I started reading this forum and realized my partner and I are in need of very similar financing. We have much of our personal cash tied up in property already until we can refinance, but have other deals waiting in limbo. How would you recommend reaching out to private money and developing these relationships? We do have private investors that have worked with us already, but our business has reached the point where we need to start marketing to a broader scope of people. We invest primarily in the Hyde Park/Oakley/ML/Anderson area of Cincinnati. Any advice, help, contacts would be greatly appreciated.