35K and ready to jump in!

35 Replies

Hey BP community, I need some advise!

I moved home two years ago and was able to save 35K cash and am feeling like I'm approaching the point of investing in my first multi. I want to buy and hold for long term wealth building. I have been working with a broker who is an investor himself and is more like a mentor to me, teaching me things to look out for and property analysis. I'm in a super hot market in Portland ME and as we fast approach winter I'm looking for some advise. Should I pack it in for the winter and continue burying paychecks or should I look to invest now. I realize action is key in this game but have been looking through MLS on a FHA loan and the numbers are just ok.

Any and all ideas/advise would be great as I continue to formulate my plan for my first transaction.

Any locals to the Southern Maine area would be very helpful too!!

Thanks so much guys! Hearing all your stories and advise is helping to keep me motivated to get out of my parents basement!

-NB

winters the best time, the people selling usually are selling because they have to. This COULD give you a better chance of making a deal... because it'll limit their ability to attract buyers. You have the time, wait for the deal.

Yeah I've heard that same thing about winter providing some sort of advantage to the investor. My biggest concerns are using FHA and how that hurts my cash flow, using MLS and not finding GREAT deals in my hot market and how quickly I can get out of the home to start making money on my occupied unit (I understand with FHA the 1 year minimum).

Under any circumstance can you use FHA again?

@Nick Burkhardt , I'm a bit surprised that your mentor has only been directing you to the MLS. You probably need to get on some Wholesalers' email lists (if you're not prepared to do the work that they do in order to find under-market / off-market properties). ie. By the time it's on the MLS, it's not likely to be a bargain.

The "we-buy-ugly-houses" crowd could be a good start. [I'm not a sponsor, but I do get emails from them, and because their contracted homes have been sourced from motivated sellers, and are often still in a distressed state, the prices are cheaper than you'd expect. Isn't that what you're looking for?]

Perhaps winter is the best time to be sourcing cheaper-than-usual properties! You see that sense, right?

You've got the right idea to house-hack, and sufficient deposit. My point is, why would you need to decide to wait? You need to be always on the lookout for that one-off, super-deal! All the best...

Of course FHA kills cash flow, but you have almost no cash in it. Anything will cashflow with enough money down, but that doesn't tell you if it's a "good or bad" deal.

Originally posted by @Nick Burkhardt :

Yeah I've heard that same thing about winter providing some sort of advantage to the investor. My biggest concerns are using FHA and how that hurts my cash flow, using MLS and not finding GREAT deals in my hot market and how quickly I can get out of the home to start making money on my occupied unit (I understand with FHA the 1 year minimum).

Under any circumstance can you use FHA again?

Maybe you're expecting too much out of your primary residence? House-hacking (in a hot market) isn't exclusively about living for free and getting a cash-on-cash return too. Maybe the best you can expect (initially) is for it to be costing you less per month to live there than if you were renting there instead. [Many people expect mortgage and expenses to cost more than renting, because otherwise, they'd be buying also!] 

And if your $35k is significantly more than your required 3.5% deposit, no-one's stopping you from putting the rest of it down too, right? (Unless you're required to still keep that balance as reserves, of course). 

Don't over-think it too much. [But, only buy super-bargains!] And yes, once you refi out of your FHA Loan (requiring you to have at least 20% equity first), you can re-apply for another one elsewhere, without selling your first one. Cheers...

Congrats! You have already made such a smart decision as a first time investor by moving in! The benefits of this strategy are multi-fold. First, this will allow you to put down less money as an owner occupied Buyer. Secondly, it may help you down the road for investment #2 with the established rental income from the other units that will most likely offset any mortgage debt that could affect your Income to Debt ratio. Without knowing any of the details of your finances or LTV ratios, my only question for you to ponder would be why are you considering FHA as opposed to conventional financing? Sure, the low down payment offering is great, but you will most likely pay a higher PMI/MIP fee. Many conventional loans offer a 5% down program, which is still low, and the PMI is usually lower than FHA. I would suggest checking with your lender to give you a side by side comparison of the payments, and also when the PMI will drop off. You mentioned this being a long term investment. FHA MIP/PMI runs with the life of the loan (never drops off), where most conventional loans with PMI drop off after 5 or 10 years, or at the earliest appraisal showing 78% LTV with a request from the Borrower. Either way, I commend you on your strategy. Very smart. Best of luck to you!

If cash flow isn't the best indicator of a good or bad deal, what is? I'm doing these calculations and trying to find out what is the most money I can make on a monthly basis while having decent tenants. That way I can replace my current savings and do it again.

@Brent Coombs maybe I am expecting too much from my first deal. What is the top indicator of a good deal in your opinion?

@caralonsdale thanks so much! Really excited to get going! I didn't know conventional offered a lower dp. I thought what made it conventional was the 20% down. I'll have to look into that!

Originally posted by @Nick Burkhardt :

If cash flow isn't the best indicator of a good or bad deal, what is? I'm doing these calculations and trying to find out what is the most money I can make on a monthly basis while having decent tenants. That way I can replace my current savings and do it again.

@Brent Coombs maybe I am expecting too much from my first deal. What is the top indicator of a good deal in your opinion?

My top indicator is: the "70% rule"! ie. ARV, x 70%, minus rehab cost. Equals: Maximum Allowable Offer!

If you don't shoot for such bargains - every time, you'll slow your RE journey down to a super-slow crawl. Work it!

Hopefully, your mentor also wants you to be on that same page. Do they?

@Brent Coombs woah woah. This is gold! Thanks for the rule! Are you assuming there will need to be a rehab cost in all your deals? Luckily I grew up as a carpenter's son so I can do all the work myself.

So my broker could provide my comps, or what specifics go into making a "comp"? Bedroom #, Squ Ft, Location? That will help me understand this 70% rule better and be able to run the calcs myself

You might want to wait a few weeks if you're buying in Portland. Depending on how Question 1 (rent control & other restrictions) goes on Nov. 7th, prices might fall over the winter. That said, even with a drop in prices the limitations placed on landlords might make Portland less attractive overall. You'd be exempt from the rent control aspect, but not the increased fees and tenant heavy rent board.

Good luck!

@Brent Coombs so you're talking about buying a multi that needs some work and doing some rehab on it, thus allowing you to buy lower and increasing value through sweat equity? My mentor wants to get me and my fiancé in a multi that doesn't turn us off to investing. He wants us to have good tenants and stable income, which as a new investor and as it is going to be my home for at least 1-4 years (while I save more capital for my next deal) I can't really argue.

Thoughts? What am I missing in all this? I feel as though I'm thinking like a Ford when I should be thinking like a Ferrari.

@Andrew Magoun great advise! What exactly are the increased fees? What is tenant heavy rent board? I am actually thinking about Westbrook and South Portland just because of purchase price.

Originally posted by @Nick Burkhardt :

@Brent Coombs woah woah. This is gold! Thanks for the rule! Are you assuming there will need to be a rehab cost in all your deals? Luckily I grew up as a carpenter's son so I can do all the work myself.

So my broker could provide my comps, or what specifics go into making a "comp"? Bedroom #, Squ Ft, Location? That will help me understand this 70% rule better and be able to run the calcs myself

Yep, your broker can show you sold comps (ARV). And yes, the bargains I'm referring to will invariably require rehabbing to some extent, maybe even a large extent. Basically, you need to look at every home the same way Flippers do.

ie. "How much will it cost me to bring to ARV standard, and will my total outlay then be no more than 70% ARV?"

(Of course, the "70%" figure is not actually set in stone, and there can be other variables, but, best to not stray too far).

@Brent Coombs ok ok. I understand that. Next question! Where does that rehab capital come from? Your mortgage loan? Savings month to month? Excess from my savings? What makes the most sense?

@Nick Burkhardt , you can use the FHA 203K construction loan, so the funds for purchase and rehab come from the same bank. Speak to your lender and make sure they do 203K construction loans. When you do work on your property, you increase the value immediately, usually, you rent for higher amounts and you end up with a property that won't need much capital investment for some good years...

You can refinance soon the loan into a conventional loan when you have 20% equity and then you'll be able to use the FHA loan again on a new purchase!

Nick, currently unit registration in Portland is $35 a unit. If this referendum passes it goes up to $60 a unit.

The referendum would create a 7 member volunteer board. The text of it states that the city should do its best to have 4 tenants, 2 at-large members, and 1 landlord. This board would be responsible for, among other things, dealing with tenant/landlord disputes, determining whether a landlord can recoup any capital improvements through increasing rent, and levying fines against landlords whit the board thinks evicted somebody improperly (even if the courts don't see a problem).

The referendum would also make the eviction process much harder and longer (upwards of 4 or 5 months).

All of the above would impact you if you bought in Portland, the only thing that wouldn't is the rent control aspect (it applies to owners of 6 units or more). There's more information at www.saynotorentcontrol.com

Good luck!

Originally posted by @Nick Burkhardt :

@caralonsdale thanks so much! Really excited to get going! I didn't know conventional offered a lower dp. I thought what made it conventional was the 20% down. I'll have to look into that!

 Yes!  For owner occupied loans, you have a flood of options, starting as low as 5% down.  Keep in mind, the more you put down not only lessens the interest rate, but also increases your cash flow potential (because the principal loan amount and payment are lower).  HOWEVER, if you want to maximize your funds in hand, and get you closer to the next deal, a lower down payment is something to consider.

Also, getting back to the FHA option for a minute as it relates to some of the other posts here about rehab expenses..... FHA has a program that allows owner occupied Borrowers to finance the rehab expenses! It is called a 203K (or also 203B) rehab loan through FHA. You may want to ask your lender about it, or go on the FHA site and find an approved FHA 203K lender. NOT every lender offers these. They have to be certified with FHA to offer them. But basically, you get a contractor quote for the rehab work, you submit it to the lender, they approve it, then they do an escrow hold back with the funds. So, that as the items are completed, you can have escrow release the funds to pay the contractor. There is a way to be the GC yourself and just hire subs. If you are handy, this may be the better option for you. It is a great tool!

Since you are going to be an owner occupied Buyer for your first one, there is absolutely NO reason why you shouldn't take advantage of anything and everything you can to put you ahead for the next one.  Good Luck!!

@Andrew Magoun Thanks so much for the local advice! I know how I'm voting come this Nov.

@Cara Lonsdale I've read a little into the 203K loan program and it seems like a good route to build near instant equity and spread it out over the life of the loan. What other options should I look into that aren't FHA? Now my wheels are turning, and I'm thinking about how I can stretch to reach 20% conventional (looking for options on how I can pay less through a conventional program) down payment. Say I find a 2-unit that needs some work for 200K, how can I stretch to reach that 40K (20% down) mark and avoid the cashflow killing PMI. I need some in reserve so this plan would take longer, but I could avoid 30 years of PMI, and if there's a way I could pay less that 20% conventionally that would be even better.

Is there a program that can give me around 5%-10% down conventional (or that has a limited PMI) that can give me some cash for rehab at the same time?

Originally posted by @Nick Burkhardt :

@Andrew Magoun Thanks so much for the local advice! I know how I'm voting come this Nov.

@cara lonsdale I've read a little into the 203K loan program and it seems like a good route to build near instant equity and spread it out over the life of the loan. What other options should I look into that aren't FHA? Now my wheels are turning, and I'm thinking about how I can stretch to reach 20% conventional (looking for options on how I can pay less through a conventional program) down payment. Say I find a 2-unit that needs some work for 200K, how can I stretch to reach that 40K (20% down) mark and avoid the cashflow killing PMI. I need some in reserve so this plan would take longer, but I could avoid 30 years of PMI, and if there's a way I could pay less that 20% conventionally that would be even better.

Is there a program that can give me around 5%-10% down conventional (or that has a limited PMI) that can give me some cash for rehab at the same time?

You will have mortgage insurance for any loan with a down payment under 20% UNLESS you get a VA loan (Are you a vet?) However, the mortgage insurance payment on a conventional loan is usually considerably lower than FHA's.

Not to widen the net any more, but as another option to explore, there are usually first time homebuyer programs that could HELP you with down payment assistance, or closing costs.

My best recommendation is to sit down with a lender capable of doing these things so that they can properly educate and advise you, based on your specific situation.  For these type of deals, I work almost exclusively with a loan officer located here in Scottsdale, AZ.  However, I know that they also do loans in ME.  So, I would be happy to reach out to my loan officer here to get a COMPETENT loan officer referral for you in Portland, ME if you want.  Just let me know, and I will reach out to him to get you a contact.

@Lumi Ispas so you're saying you can just take out an FHA 203K do the rehab and create equity/pay down your mortgage to the 20% mark, you can then refi and utilize FHA 203K again??

Have you ever considered being a private investor? Greater return in a short amount of time as well as a way to come across great deals with minimum amount of money. Should discuss more. 

@cara lonsdale that would be GREAT! Currently I am going with my brokers lender which is under the same parent company, but it would be great to compare. Thanks so much!

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