Starting out with no money....rental or rehab?

El Cajon, CA · Member since 2017 · 8 posts · 0 votes

Hello Bigger Pockets people! I am new to real estate investment and I am having trouble figuring out where to start. My goals are to create passive income and invest more in rental properties; however, I do not have the money to do so. I cannot get enough private money for a down payment through a regular bank, and my debt ratio is too high for an FHA loan. Therefore I was thinking perhaps it would be better to get into rehabs using hard money loans to start. Is this a good idea? Or are there alternate ways to invest in passive income properties that I do not know about? Thanks in advance!

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Mindy JensenPro Member

BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes

@Mj Mckinley , Hard Money costs are high - think 12-14% interest PLUS 3-6 points. A point is 1% of the loan. (6 points on a $100,000 loan is $6,000)

If you don't have the money to buy the property, how are you going to pay for the rehab on a flip? How are you going to pay for repairs in a rental? If the furnace goes out in the middle of winter, that's $2000-$4000. Water issues? Plumbers charge $99 just to knock on your door.

I agree with @Account Closed . Live like a pauper. Increase your income by taking on a second job, side hustle - anything you can do to bring in cash. Save it up like crazy.

Another idea is to connect with a local investor and help them with anything they need - anything. Grunt work sucks, but you learn so much by doing it.

[email protected]Podcast Guest on Show #261

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Arpan Patel
Investor · Chicago, IL · Member since 2010 · 504 posts · 191 votes
9y
I would say no. Maybe find a partner where they have resources and you find and manage the investment (I would say rental as opposed to a flip) and have some sort of split. HM will eat you up if you are not careful plus they usually like working with people who have some experience. I hope that helped.
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Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
That did help Arpan, Thanks! Can you please elaborate on why HM would eat me up if I'm not careful? What precautions should I be aware of? If you have a link to something that can help educate me that would be appreciated!
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Deborah Russell
Pueblo, CO · Member since 2017 · 3 posts · 3 votes
9y
@Mj Mckinley I'm in the same boat as you! Damn student loans have my DTI ratio too high. There's an off chance you could do something with p2p loans (like lending club). I have been listening to all the podcasts and I guess my plan is to get together a business plan for flipping and a business plan for buy and hold properties in my local area and hit up any/all banks/lending clubs in my local area. Why two business plans? Like you, I'm not sure what avenue to go through first. I don't really have any other advice except to get a business plan together but I wanted to say good luck!
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Account Closed
Lender · Hot Springs Village, AR · Member since 2014 · 274 posts · 92 votes
9y
At the risk of sounding cruel I would suggest you live like a pauper, save, pay down debt and learn. Give yourself whatever time limit you feel comfortable with to see where these actions put you after this time period. Then re consider your situation. Your may find the real estate excitement was a passing phase or that with some cash and knowledge you have a clear understanding of what to do. Good luck.
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Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Mj Mckinley , Hard Money costs are high - think 12-14% interest PLUS 3-6 points. A point is 1% of the loan. (6 points on a $100,000 loan is $6,000)
If you don't have the money to buy the property, how are you going to pay for the rehab on a flip? How are you going to pay for repairs in a rental? If the furnace goes out in the middle of winter, that's $2000-$4000. Water issues? Plumbers charge $99 just to knock on your door.
I agree with @Account Closed . Live like a pauper. Increase your income by taking on a second job, side hustle - anything you can do to bring in cash. Save it up like crazy.
Another idea is to connect with a local investor and help them with anything they need - anything. Grunt work sucks, but you learn so much by doing it.
[email protected]Podcast Guest on Show #261
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Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
@Mindy Jensen, From my understanding HM lenders will finance up to 100% of the purchase price plus some of the repairs. I would use private lenders to finance the rest of the repairs for the flip.
Repairs on a rental is another expense I don't have the money for. In a flip I can find HM and private lenders to cover my costs, but with rentals, I cannot. That is the issue I am having. I can save up and live like a pauper, yes, but I was hoping there was another way...
Thanks for the input!
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Shawn AckermanPro Member
Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
9y
Mj Mckinley I'd suggest learning what constitutes a "deal" and how to structure a deal first. You may want to learn about wholesaling in your market as you will have to learn how to put a deal together to get them to the closing table. Best of luck to you!!
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Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
@Shawn Ackerman Thanks for the advice Shawn. Are there any specific articles or blogs you know of that you can direct me to regarding this?
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
There is no easy path or free ride to investing in income properties. If you are not able to make the time and effort to pay off your bad debts there is no way you have what it takes to succeed in investing. If you are not determined to eliminate your bad debt first you lack discipline to be a investor. Many investors fail, this is very high risk and as such you must be able to go in prepared to lose it all, if you have nothing to lose no one will want to invest in you.
This takes a great deal of discipline and very hard work. Work first at getting rid of all bad debt before you consider yourself even close to being ready to invest.
When you have cash to bring to the table and no debt you will be prepared to start.
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Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
@Thomas S. The only debt I have is student loans. The issue I am having is that if I try to get an FHA loan my debt ratio will be too high (after adding that mortgage) for the amount of money I currently make. Therefore, I would have to get a conventional loan, and I do not have access to the capital to put 20% down. I was looking to see if there was another way to invest in income properties with putting little money down that doesn't require as low of a debt ratio as FHA.
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Marc Jolicoeur
Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
9y
@Mj Mckinley I suggest you focus your efforts on getting good at finding hidden deals and become a bird dog. Drive for dollars and knock on doors. Skip trace and make calls. If you can find a good deal, you will find investors willing to cut you a check for bringing them a deal they can close, or may even give you a cut in the project.
With experience as a bird dog you can eventually expand into wholesaling which is a bit tougher because you are signing contracts and you need some capital to do marketing and cut earnest money checks.
Your effort and hustle makes up for lack of capital.
1 Reply
Hugh Ayles
Cedar Park, TX · Member since 2015 · 377 posts · 200 votes
9y
Keep in mind that even if you get 100% financing, most lenders are expecting interest payments each month.
I have a hunch when you hear the radio ads talking about getting into real estate investing with no money, they are talking about wholesaling.
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Jerry Ellis
Rantoul, IL · Member since 2017 · 45 posts · 15 votes
9y
It's frustrating I know and while it may not be as fast as you'd like, you can in fact get there. Since you need the cash and the experience, maybe you can find another investor to work for. Offer to do their grunt work or whatever they need and use this as a vehicle to make extra money, make connections, and learn.
Read some books like Rich Dad Poor Dad, Dave Ramsey's Total Money Makeover, and The Millionaire Next Door.
1 Reply
Mindy JensenPro Member
BiggerPockets Money Podcast Host · Longmont, CO · Member since 2014 · 7k+ posts · 10k+ votes
9y
@Mj Mckinley , there are some HML that will finance 100% of the deal plus repairs, but they don't typically do that for first-time investors. That's more for the super-experienced investors with a killer deal.
Look at it from their point of view. They put up all the money to purchase, they put up all the money for repairs, and if you find some massive issue or you just decide you don't want to do it, you can walk away and they're left holding the bag.
You will find some "lenders" who say they will do this, and go through some paperwork and then at the end you discover they want "payment insurance" or a ridiculous "application fee" of a couple thousand dollars. Upfront money is a red flag for a scam . They take that money, and all of a sudden, you never hear from them again.
[email protected]Podcast Guest on Show #261
1 Reply
Drew Bonner
Lynchburg, VA · Member since 2017 · 61 posts · 41 votes
9y
Greg S. If you buy a property and are thinking in the back of your mind that it is very high risk and you could lose it all then I don't think you analyzed the property very well before you purchased. Real Estate is not like other investments. It isn't simply throwing a couple dollars into a bag and then reaching in to find a gold bar. Yes there is a little bit of luck in everything in life, but RE Investing is a path and if you follow the path you will succeed.
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Jeremy Elcox
Newport News, VA · Member since 2016 · 28 posts · 12 votes
9y
@Mj Mckinley, Sir, I totally get your aggressive attitude as my Granddad has had apartments my whole life. I have also wanted to get into real estate and have FINALLY saved up 50k in cash. I, like you have been reading and watching everything for 6 months now. Due to the fact that I do not actually have any real deals YET; I would only impart this: "Provide value", if not cold hard cash, then like others say, get out and bust your *** for someone who is in the play. I am deployed right now so I know my only value is a little bit of real cash to drop. Otherwise I am just someone with my hand out wanting help for nothing. I wish you the best, but for now; Pay off bills, improve job, and learn. Grant Cardone pushes this hard. Respect...J

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Vonetta Booker
Investor · Stamford, CT · Member since 2012 · 247 posts · 63 votes
9y
@Mj Mckinley, not sure what your job situation/income is like, but would it let you prequalify for a FHA/203 loan? If so, perhaps you could use that to purchase a house, live in it (or "house hack," as Brandon Turner would say) for about a year or so, fix it up during that time using the 203 rehab loan--then rent it out while doing the same thing w/ the next house. Also you can pull any equity out to use as skin in the game for the next project.
All the other suggestions are good, as well. In the meantime you can do what you can to work under a more seasoned investor, etc. There are many different paths to REI success. :-)
1 Reply
Anastasia Jordan
Investor · Birmingham, AL · Member since 2016 · 446 posts · 305 votes
9y
Tax lien/deed investing.
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Andrey Y.
Specialist · Honolulu, HI · Member since 2014 · 1k+ posts · 1k+ votes
9y
Originally posted by @Mj Mckinley:

That did help Arpan, Thanks! Can you please elaborate on why HM would eat me up if I'm not careful? What precautions should I be aware of? If you have a link to something that can help educate me that would be appreciated!
You sounds like you are about 2 years from even considering investing. I would focus on reading as many books as you can and investing in yourself. Best of luck!
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Tavaris Little
Greenville, SC · Member since 2016 · 105 posts · 16 votes
9y
Mj Mckinley I'm in the same situation as far as student loans. I was approved for an FHA loan so my plan is to purchase a property and live in it for a year or 2 while fixing it before renting it out. If I decided to wait til I paid all my student debt off then I'll be waiting forever but that's me. I'm not experienced as the others so this is just the chance I'm taking
1 Reply
Clint E.
Investor · Saint Charles, MO · Member since 2016 · 118 posts · 91 votes
9y
Since it seems like you need more money and less debt, I think the best way you can get to the "real estate gambling table" is to first get more money. Apply for new jobs, expand your skills in your current field, get a second job, Teach USA program or the military (pays back student loans) are a few ideas for improving your bottom line in the near future. Good luck to you.
1 Reply
Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
@Tavaris Little that's awesome you were approved for an fha loan man! Congrats. It's hard for me living in San Diego because properties are more expensive which makes my debt ratio too high after adding in the mortgage. I am trying to find an investor that will mentor me and help me secure a loan so I can get a deal done.
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Shawn AckermanPro Member
Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
9y
@Mj Mckinley here you go my friend!
https://www.biggerpockets.com/search?utf8=%E2%9C%9...
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Mj Mckinley
OP
El Cajon, CA · Member since 2017 · 8 posts · 0 votes
9y
@Shawn Ackerman Awesome man thanks!
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Shawn AckermanPro Member
Real Estate Entrepreneur · Mid West, East Coast · Member since 2015 · 3k+ posts · 1k+ votes
9y
@Mj Mckinley You got it!
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