Want to purchase first rental this year. Looking for advice.

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Want to purchase first rental this year. Looking for advice.

Eric M.
Miami, FL · Member since 2008 · 7 posts · 0 votes

Hey everyone,
Ive been a member here since about 2008 and am just now finally getting around to making my first post. I'm a police officer in South Florida and things have gone from bad to worse for us financially. Therefore, I would like to dive into real estate in order to supplement my income.

My plan:
According to my conservative calculations, I would need around 15 rental properties in order to retire from police work.

I vest (with the minimum) in a little under 6 years and would like to have a steady stream of rental income by then.

I would like to purchase my first rental before the end of 2012.

My situation:
I am very good with my keeping my debt and living expenses to a minimum.
I have about 36k debt which consists of a motorcycle and car loan and a 150k mortgage - credit cards are paid in full monthly.

I currently have 20k saved up and on track for 35k by the end of the year. Originally, I was going to pay off the 36k remaining debt so that I would be debt free (except for the mortgage) and then save for my first rental property. However, I'm starting to think this might not be the best option as it would set me back another year in order to replenish my savings.

Therefore, based on my situation, what would you all advise me to do? I know there is a lot of experience here and I look forward to hearing your responses.

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    What are the interest rates on the 36k debt? Is it fixed?

    It's a fairly straight forward opportunity cost analysis... why would you pay off debt at 5% when you could (for example) make 15% on the money you would use to do it?

    Why do banks lend money? Because they can pay Customer A 1% return on that and lend it to Customer B for 6%... that difference is their income.

    When you have cash, you have the opportunity to generate the same sort of income. Now if you're deciding between paying off $36k in debt or spending the $36k on a trip to Vegas, financially you're better off paying off the debt. But if you're deciding between using that $36k in cash to pay off debt which will cost you $5,000 over the next 3 years or investing it in an endeavor that will give you $15,000 on top of your principle in that same time frame... intuitively you're better off investing it.

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Btw, I actually took on debt to start investing. I owned a car free and clear... found a credit union that would give me money at less than 3% interest for 6 years. I'm in no hurry to pay that back early ;)

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Eric, welcome! Guess the very first thing is to understand that the key to the door of RE will always be financing. IMO, your total debts including any mortgage payment should not be gretaer than 36%, that's not to say that lenders won't go higher, but if you stay there you'll be in good shape.

    Generally, your lender will not consider income from rentals until it appears on your tax returns and/or one year of experience. So keeping that in mind, you can set up your purchases along the way.
    15 in 6 years is aggressive buying in my opinion at your current situation, but can certainly be accomplished. You might study installment contracts, seller financing and consider some flips to build up the war chest.

    Read all you can here and educate yourself and watch out for the hype of the gurus. Study the laws and regullations related to what you do, I'm sure you will! Good to have you, good luck!

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  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Sell the motorcylce.

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  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    BTW, that fact that you're a cop is a sweet motivator to make tenants behave.

    If I was a cop, I'd not say anything about it. Then at two weeks in to their lease, I'd swing by in my squad car just to check in and make sure everything was alright. Bet they'd think twice and thrice before trying to screw you over.

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  • Eric M.
    OP
    Miami, FL · Member since 2008 · 7 posts · 0 votes
    14y

    Thanks for the welcome and quick replies!

    Nathan,

    The interest rates for both loans are 5 and 6% so you are absolutely correct when you say that I would achieve a better return from investing my money rather than paying off the loans. My worry was that the debt might hinder me from seeking out financing from a bank or credit union for my first property. That said, my credit score is in the mid to high 700s.

    Bill,

    You nailed my main concern. I was worried that I might not be able to seek out financing for my first deal even though I have a good credit score. I will have to do the math and see what % my wife and I are currently at.

    Also, I am not opposed to doing a few flips in order to raise my capital. In fact, my wife prefers flips to rentals but I believe rentals will give us the steady cash flow that we want.

    Are hard money loans advisable in my position or should I stick to traditional financing for my first deal?

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  • J Salter
    Multi-family Investor · Shreveport, LA · Member since 2010 · 67 posts · 9 votes
    14y

    You haven't given us enough info to advise personally but if it is just off the numbers you gave, I would advise Owner/Seller financing as Bill G. said. This option is more flexible and is a win win for buyer / seller if seller doesn't mind waiting for the maturity of the loan.

    It cuts out heartless bankers and fosters independence. you would just have to come up with a conservative financial strategy to have much of your old debt and the new mortgage paid off by the end of the term of the newly acquired mortgage.

    Its important to factor in all costs (taxes- local property city/parish/state/federal) , maintenance and manager fees.

    Bottom line is you should do it! Nothing like being in real estate just do your homework and don't rush... not in this economy...

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Stick to semi-traditional. Find a local credit union or small scale bank... they are far more flexible with requirements on mortgages. You're looking for a portfolio lender. They will likely have a 5 or 10 year balloon on a 30 year amortized note. With your high credit score and a 20 - 25% down payment, you shouldn't have any issues. In a year or two you'll be able to refinance to fully conventional, fixed for 30 years, at the better rates (you'll pay 1/2 to a full point extra on a portfolio loan usually).

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  • Eric M.
    OP
    Miami, FL · Member since 2008 · 7 posts · 0 votes
    14y
    Originally posted by Brian Hoyt:
    Sell the motorcylce.

    As much as it hurts, I have thought about selling the Harley. I owe about 10k and, conservatively, it is worth anywhere from 16k to 17k so that would give me some additional capital.
    Originally posted by Brian Hoyt:
    BTW, that fact that you're a cop is a sweet motivator to make tenants behave.

    If I was a cop, I'd not say anything about it. Then at two weeks in to their lease, I'd swing by in my squad car just to check in and make sure everything was alright. Bet they'd think twice and thrice before trying to screw you over.


    Although it is might be tempting, you'd be opening yourself up for a whole world of hurt by doing this. Trust me, its been done before and it didn't end too well.
    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    A HML can certainly be used for flips, banks won't be wild about flips for someone starting off. I'd not go there for a buy and hold as hard money is usually short term and if you can't finance conventionally in the first place you may have trouble with a refi as well.

    I'd suggest you consider doing some deals to build that war chest, you have a great start, you'll need 25% down for rentals conventionally. That's why I suggested seller financed transactions as well, just make sure they are truly a deal and cash flow!

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  • J Salter
    Multi-family Investor · Shreveport, LA · Member since 2010 · 67 posts · 9 votes
    14y

    BTW, that fact that you're a cop is a sweet motivator to make tenants behave.

    If I was a cop, I'd not say anything about it. Then at two weeks in to their lease, I'd swing by in my squad car just to check in and make sure everything was alright. Bet they'd think twice and thrice before trying to screw you over.
    - Brian H
    _______________________________

    Brian is right! I overlooked that. You have no idea how sweet your revenue stream could be! I wouldn't play on it too hard to frighten but I would let them know that the law will be abided by!

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  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    I knew "sell the motorcycle" wouldn't be a favorite, haha! You can always buy another one later on, though.

    I supposed you could get into some problems by letting your tenants know you are an officer of the law. Sigh...

    In regards to financing, I would max out my options for traditional financing before going rogue. You can get up to 4 traditional mortgages before it becomes VERY difficult to qualify for another. Then, I understand Fannie Mae has options of up to 10.

    I don't know if you can do this, but I have heard if you get the properties in just one person's name, your wife can get up to 4 in her name as well - provided she shows enough income for hers and you for yours.

    Regardless, maxing out your traditional options before seekingg out portfolio or owner finance is the best long term strategy IMO.

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  • Eric M.
    OP
    Miami, FL · Member since 2008 · 7 posts · 0 votes
    14y

    J Salter,

    What other information would you need to give better advice? I would be more than happy to provide it. And thanks for the suggestion. I will look into seller financing.

    Nathan Emmert,

    Thanks for that tip. I am going to speak to my police credit union today and ask a few questions. Upon completing the refinance to conventional, Am I correct in assuming that's when I would withdraw the equity and purchase the second property?

    Originally posted by J Salter:
    Brian is right! I overlooked that. You have no idea how sweet your revenue stream could be! I wouldn't play on it too hard to frighten but I would let them know that the law will be abided by!

    Haha you guys are too much!

    0Reply
  • Eric M.
    OP
    Miami, FL · Member since 2008 · 7 posts · 0 votes
    14y
    Originally posted by Brian Hoyt:
    I knew "sell the motorcycle" wouldn't be a favorite, haha! You can always buy another one later on, though.

    I supposed you could get into some problems by letting your tenants know you are an officer of the law. Sigh...

    In regards to financing, I would max out my options for traditional financing before going rogue. You can get up to 4 traditional mortgages before it becomes VERY difficult to qualify for another. Then, I understand Fannie Mae has options of up to 10.

    I don't know if you can do this, but I have heard if you get the properties in just one person's name, your wife can get up to 4 in her name as well - provided she shows enough income for hers and you for yours.

    Regardless, maxing out your traditional options before seekingg out portfolio or owner finance is the best long term strategy IMO.

    Hehe you are correct Brian, it was my least favorite bit of advice so far! You are right though, and I had thought about it from a financial point of view... even if it hurts now it will be worth it later on.

    And thank you for that info, you made me a bit more at ease knowing that there is no immediate need for an HML. I am subscribed to two email newsletters, which I heard about from a friend, that sell homes to fix and flip or rent but they only accept cash or HML as these properties usually dont qualify for traditional financing. I feel much more comfortable dealing with a traditional mortgage than I do an HML.

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Eric, as a NOO you'll generally be required to have a 20% equity position in a Single family house, 25% in a Multi-family. On properties 5 - 10, those requirements go up 5% each. If you're trying to do a cash out refi, those requirements go up 5%.

    So lets say you buy a duplex today for $100k. You'll have to put 25% down, financing the remaining $75,000.

    In 2 years, you want to refinance. You now owe $71,000 (guesstimating some principle pay down in 2 years) and the property appraises at $105,000. You could in theory cash out $2,500 as a 70% LTV on $105,000 would be $73,500. You would not be able to refi fully at 75% LTV of $105,000.

    I've run into this problem with a few properties I bought with equity. Tapping that equity isn't easy!

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  • J Salter
    Multi-family Investor · Shreveport, LA · Member since 2010 · 67 posts · 9 votes
    14y

    @Eric Marti, I was referring mainly to personal liabilities and dependents. Obviously it is harder to invest, save, and pay down debt when you have other obligations. Also, if you plan on moving or make big changes, this could affect your future success.

    Maybe I am nitpicky and of course this info is too personal and I do not want you to provide it. I am just saying make sure you look at any large purchase from all perspectives and have a plan.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y
    Originally posted by Nathan Emmert:
    Eric, as a NOO you'll generally be required to have a 20% equity position in a Single family house, 25% in a Multi-family. On properties 5 - 10, those requirements go up 5% each. If you're trying to do a cash out refi, those requirements go up 5%.

    So lets say you buy a duplex today for $100k. You'll have to put 25% down, financing the remaining $75,000.

    In 2 years, you want to refinance. You now owe $71,000 (guesstimating some principle pay down in 2 years) and the property appraises at $105,000. You could in theory cash out $2,500 as a 70% LTV on $105,000 would be $73,500. You would not be able to refi fully at 75% LTV of $105,000.

    I've run into this problem with a few properties I bought with equity. Tapping that equity isn't easy!

    By extrapolation, I can see that Eric has the ability to set aside 30K per year. I would guess he might be able to do more. After he gets his first rental or two, he will be able to save even more quickly. I know he has a very agressive purchase schedule as his preliminary plan, but he could slow that process down a little and the snowball of property attainment would only slow by maybe a few years. Then he'd have lower LTV's (loan to value) on his properties (the first handful), which will make them cashflow a little better and be a little less risky AND have the best interest rates which will further hedge his investments.

    He has 20K now and will have 15K in 6 months. What if he finds properties in the 60K range? By the end of the year he'd be on track to put down payments on his third property. With his savings rate of 2500/month and an the additional cash flow from his rentals, he'd be on track to get his 4 th property in another 6 months. BUT, this is also contingent on his DTI ratio.

    Lets assume he needs a two year breather to get the rental credit to free up his DTI. Now he can save 60K+ when its time to head to the races again, mnaking the additional Fannie Mae DP requirements no problem at all.

    But to get 15 properties in 6 years, I can't really see a way around using private lending or increasing income/savings rate substantially.

    But still, at least go conventional for the first couple.

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