Starting out- Go big or go home?

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Starting out- Go big or go home?

Michelle Melchione
Pueblo, CO · Member since 2016 · 42 posts · 7 votes

Hi, we're going to be looking into investing in buy and hold SFR. Everythings approximated because I'm in the very first stages, as in deciding if we're really going to do this. But say we decide to bite the bullet. By the end of August we should have everything in order. About $50000 cash, decent credit and 25% DTI. Is it better to put the 20% down on one house (approx $180000), or 10% on two with the hopes of getting LPMI. Say we put 20% on one, leaving a 144000 loan at 4.25%, payment $708, tax and ins $200. Trash and water? 80ish. Rents for $1400, about $400 cash flow. Remember all estimates, numbers could be more or less. Now in theory say we do two at $180000 with 10% down on each, leaving 162000 on each at 4.5 (higher for LPMI). Payments would be 820 plus tax ins and utilities, bring it to $1100 each, rents for $1400. Leaving $300 cash flow each. So is two better than one? It it too much to start? More cash flow rules right? We aren't dependant on cash flow, I'm thinking college tuition or retirement, so setting ourselves up for at least 10 years in the future. Not opposed to selling when opportunity knocks or any other reason.

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Scott TrenchPro Member
Rental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
10y

Hi Michelle, 

I'm thinking that you should meet with a variety of investors and really start educating yourself on the ins and outs of real estate prior to going in on this investment. From a couple of comments in this thread, I question if you are as close to the reality of qualifying for conventional financing and ready to buy as you might think right now. For example, you mention you don't have a paying job right now. Do you have prior landlording experience? If not, you may find that you have trouble financing the properties, even with the sizable chunk of cash you have saved for the downpayment. Will you have a co-signer or income source that will help the lender out? I'd get on the phone with a few to make sure that you stand ready to purchase property right now. 

Regardless of whether you are presently qualified, I would begin absorbing lots of information on real estate investing. Books, the BP Podcast, etc. You need to be able to speak the language and understand the pros and cons of the different strategies, then make a choice about what works best in your personal situation. For example, my strategy of buying properties, managing them myself for several years, and once the cash flow grows to an acceptable level, outsourcing management may not work for you if you don't want to manage yourself. Or, you may want more or fewer units. You may find that you can't make those decisions reliably until you've soaked up many stories from many investors. 

I will punctuate by saying that if I could buy $200K in real estate in Pueblo, I'd be looking for as much cash flow as I could get. 

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  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    10y
    Ralph R. The pueblo market is through the roof on rentals and going up, just like the rest of Colorado. Most of my rentals in pueblo are over $900/month.
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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    10y

    @Ralph R. I think it would make the most sense for @Michelle Melchione to do the refi as it does away with the Mortgage insurance on their current loan and lowers the interest rate. It probably has about a 2 month recovery time frame.

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Robert Herrera For a $50000 SFR?

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  • Robert Herrera
    Investor · Denver, CO · Member since 2015 · 492 posts · 267 votes
    10y
    Ralph R. Yes I bought one in the west side, it rents for $900/month it's about to go up to $950. My house in the east side rents for $925
    0Reply
  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Bill S. That could be but that's why she should do some due dilligance. Remember many HELOC's are simple interest and can save thousands on interest when compared to the compound interest on standard home loans. It also takes some extreme discipline to make a strategy like that work. You gotta weigh all options. RR

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    1. I actually dont have PMI, because of VA loan.

    2. We were really really really stupid when we bought the cars. 

    We went from basically minimum wage in Pueblo to $65000 in Denver overnight and naturally thought we were rich. Young and stupid. So immediately we traded in our vehicle which we still owed on for a brand new car. His credit was terrible and the salesman said he could get us in a new vehicle easier than a used with no money down. So sign us up. Its at an 11% rate. We could pay it down to what its worth and refi at the lower rate. Same with the second vehicle, used and 8% rate. Paying them off completely would save $5000 in remaining interest.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    I'll get on the calculating and researching for HELOC.

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  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    10y

    @Michelle Melchione you should really read the loan information. Some car loans front load the interest payments so that you pay all the interest in the first year and the rest of the payments are principal. Don't assume that your car loan follows conventional amortization. Check your loan documents and see what you have. It is likely one of those kinds of loans if you got them from a dealer. Credit Unions do the typical amortized loan for car loans. 

    Here is a discussion on the different approaches.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    Oh yeah, they already collected most the interest (like I said extremely stupid). The 5000 is what would be paid in interest over the next 4 years until both are paid off, averages saving 100 a month in interest. Or using 12000 to pay them down to what they're worth and refi them would free up a couple hundred a month, and save a couple thousand in remaining interest. 

    HELOC could be an option since we could repay it fairly quickly is need be. Would the benefit be not losing the first two years of interest we already paid, and two years of time for that matter. We've paid $20000 in interest which is what the 65000 cash out would cost, averaged out over 30 years, about $640 a year. HELOC would just be interest until paid down? So say we got 50000 in heloc at 5% for 5 years, thats about $11000 interest. Which is almost half of what we'd lose in refi, not including time. The interest payments over the two 30 year mortgages are exactly the same.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    The interest amount might be less on heloc I did some janky math there, but the theory.

    Also the payments are about $850 a months for the cars. The 530/month has 3 years left. The 313/month payment has 4 years. So should I spend the 29000 to pay them off, for 850 more a month, and the remaining interest savings. Pay the 12000 to refi, for 200-300 more a month and a little interest saving, or just keep the cash in reserves or for investing? 

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    I'll double check on the cars amortization though. It could be more or less on whats left in interest.

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  • Ralph R.
    Investor · Bethel, AK · Member since 2013 · 1k+ posts · 852 votes
    10y

    @Michelle Melchione get the HELOC or refi whichever you decide and get rid of those car loans. They are going to hurt your DTI. It's cheaper to pay them off with the HELOC or refi. 8% is too much interest. If your a risk taker get the highest deductible you can stand on your collision ins. Put the savings to the loan. When and if you get your rental claim it on your taxes. After a year or 2 when you approach the bank for money they will allow you to apply a portion of the rent to you income. This helps DTI also. Remember the HELOC should be simple interest not compounded. There's a thread on here I saw the other night wher a lady used her HELOC to pay her primary loan off. I don't rember all the details but she paid off a 750 k house in 7 years. She put all her w2 wages and rent income towards the HELOC then used the HELOC to pay her house pmts what she was doing was turning her higher compounded interest loan into a lower simple interest loan. RR

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  • John Lee
    Santa Ana, CA · Member since 2016 · 39 posts · 54 votes
    10y
    Originally posted by @Michelle Melchione:

    It could be because I'm on my cellular phone, I'll try from my desktop later. What are lease options and how do they work?

    Think of lease options as like a rent-to-own strategy. You set up a lease contract with an option to buy after a specified length of time. You can specify the amount you will purchase for and the length of time, and you have first right to purchase then. Your lease payments will go toward the purchase if you decide to exercise the option. If you do not exercise the buy option after the specified amount of time, the owner can then sell the property to anyone or just keep it, but you were renting it out the whole time, so it is a win-win for everyone.

    1Reply
  • Jared Bouzek
    Lender · Denver, CO · Member since 2015 · 404 posts · 227 votes
    10y

    @Michelle Melchione I wanted to make a few notes to address some of the financing questions that have been brought up throughout this thread.

    #1 When it comes to down payment amounts, you must put down at least 15% to purchase a single family home as an investment as was stated previously. It should also be noted that only putting 15% down will carry a pretty hefty interest rate compared to 20% or 25% down. If you choose to go the multifamily route, Fannie/Freddie will require a minimum of 25% down assuming you don't intend to occupy.

    #2 Another thing to keep in mind is reserve requirements. Conventional lenders will require 6 months of PITIA in reserves for the subject property and additional reserves for each non-subject property once you acquire more. Reserves do not necessarily need to be cash in the bank. Acceptable forms of reserves include cash in checking/savings; investments in stocks, bonds, or mutual funds; a CD; money market account; cash-value in life insurance; and a percentage of vested retirement accounts.

    #3 As far as DTI, Fannie/Freddie will typically allow up to 45%. A loan officer worth their salt should be able to help you run investment numbers and understand the impact of those numbers on your DTI both immediately and down the road. If you're making wise investment decisions, your DTI should remain stable and ideally go down as you acquire more properties because you're generating cash flow over and above the liability of the financing.

    #4 Lastly, when you initially acquire an investment property, the lender will take 75% of the gross monthly rental income less your monthly PITIA. The remaining income or loss will be reflected in your DTI. Once you've owned the property for over a year and it begins appearing on your tax return, income or loss reported in the Schedule E of your tax returns will be used for future mortgage qualification.

    I hope that answers any lingering finance questions that were out there. Happy investing. :)

    1Reply
  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    All these answers just lead me to more questions. So another possibility was waiting to pay off the car loans after financing and using that for the reserves. And then just rebuilding reserves for like 6 months.Which is where the refi on cars could work, 20000 for reserves and 11000 to refi would help the interest and lower the payments. We could get to around 26% DTI with a car refinance, and still have 20000 cash reserves. I keep forgeting to add in his VA disability, so with the car loans our total DTI is 30%. Im not sure what cash value on life insurances means, we have like $150000 policy combined. He has 500 vested stock, which I have no idea what its worth, and I think a portion of the rest (10000 shares) will be vested soon. Weve got about $12000 in 401k.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    I need to investigate the life insurance and 401k as I dont really know how they're working or what were paying for them. But that's a whole different issue.

    I'm not trying to rush for financing, but if an ana6zing deal comes up in the next couple months or so I'm trying to figure out the smartest thing to do. After we get back from Hogwarts I'll be following up with Grandma about the house she might have so sale, and everything else. She probably has some tricks and tips that haven't  been brought up yet as well.

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  • Sam LLoyd
    Investor · Wasilla, AK · Member since 2016 · 277 posts · 139 votes
    10y

    Like most people on here, I could probably talk for hours on the topic, but I wanted to point out two quick things.  In all your calculations, make sure you put money away for maintenance and vacancy.  I have a couple units that have 0 vacancy if everything is perfect... but even they are going to be empty for a week if I need to put new carpet in.

    So, using your first example, I would put away at least 10% for these two things... $150.. so 1 house would be 250 cashflow, and 2 houses would be 300... in my opinion, it's hard to justify another house just for $50/month

    Also, My opinion as far as the refinance, which I've done for several properties now: For me, the cash I pull out has to go into an investment... if I pay off cc or vacations, that's just me spending money. If I put the money into another rental... then that's reinvesting. I've seen someone get a HELOC with the intention of buying a rental, then end up with paid off cars, big toys, and their house under water... which is being rented out at a heavy loss since they had to move TRAP. Also, remember to include the cost of the refinanced money in the investment. If your house payment goes up because of the cash-out, you have to add that extra cost to the rental expense... if your mortgage goes up $250/month to buy that one SFR... then there is no cash-flow at all.

    Hope this gets decreases instead of increases the confusion... we've all been there.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    Thanks everyone for taking the time to post. That was just a basic scenario, I would definitely do all the correct calculations when analyzing a real deal, including vacancies and expenses. I would make sure it cash flows with my grandmas guidence. 

    Everyone has given me lots of advice and things to think about that I wouldnt have thought of on my own, so thanks again everyone.

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    At 26 and 29 with two kids, in your own opinions, should we be more focused on clearing our debt in the short term, and worry about investing a couple years from now? And what would you personally do with the equity we've built, if you were me? A lot of people have kind of touched on it, but I'm curious.

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  • Kevin Coleman
    Investor · Chicago, IL · Member since 2014 · 143 posts · 37 votes
    10y

     I personally like MF.  However, every market is different. If you are in a market with primarily SF then I would go that route.   

    If I were you, I would get real close to grandma and duplicate what she has already done if she has been successful. 

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Michelle Melchione,

    A lease  option is pretty much what its sounds like: a lease on a property and an option to buy it at a preset price at some future date.

    To avoid issues, you treat the lease and the option separately.

    Rent is not construed as being applied toward the down payment - that would constitute an equitable interest and cause complications.

    The purchase option is old separately from the lease. Once the option date expires it can be renewed (unusual, but it does happen) by he prospective buyer paying another option fee like the first one.

    Clear as mud, right? Sorry ... I just finished the 2nd day of a three-day intensive workshop put on by a local REIA (not my Renatus group) and I'm kinda burned out.

    David J Dachtera

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  • Michelle Melchione
    OP
    Pueblo, CO · Member since 2016 · 42 posts · 7 votes
    10y

    I definitely have a clearer understanding on lease options now. I'm just going to process everything for a while and focus on getting out of debt first, then I'll see where everythings at and how were feeling. I spoke with my grandma and she thinks there could be a collapse coming and now is the time to prepare for it. But she also doesnt think its a bad idea to purchase in Pueblo, as its prices don't fluctuate much, in good times and bad.

    0Reply
  • David Dachtera
    Rental Property Investor · Rockford, IL · Member since 2014 · 4k+ posts · 2k+ votes
    10y

    @Michelle Melchione,

    Real Estate will always be a safer shelter than Wall Street!

    ...especially now that we're so deep in a housing shortage.

    0Reply
  • Loletha Green
    Real Estate Investor · Asheville, NC · Member since 2016 · 4 posts · 0 votes
    10y

    I have received my first investment opportunity. It's a 3/2 Norris home manufactured built in 2005 There's a small balance left from to secure deed and property sits on lot with a fee of $350, how should I proceed? I'm thinking of assigning and not using as a rental. Any suggestions?

    0Reply
  • Stephen Hundley
    Realtor · Lafayette, LA · Member since 2011 · 296 posts · 175 votes
    10y

    @Michelle Melchione 2 is better than 1 in your scenario. You sound like you are in a good spot financially and could withstand a few bumps in the road. Now it's time to find the properties! Good luck!

    1Reply
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