Looking for advice for FIRST purchase.

7 Replies

Thank you for reading.

A friend that uses the BRRRR method often recommended this site/podcast/book when I asked him for advice on learning real estate investing. This was about 3 months or so ago. I knew I wanted to get into real estate but didn't know where to turn. Since then, I've learned SO much.

So here's where I am. I make about $50k a year as a server in downtown Orlando. Over the past 3-4 months I've spent about $4,000 paying off all of my debts (just finalized the payout on my car today). I have zero debt whatsoever, but also ZERO savings, as I chose to pay off debt instead. My credit score is currently 761, I've never owned my own home, and I'm single so the loan would be entirely in my name (unless I could find a partner, I haven't really looked into this option yet).

What I would like to do, essentially, is find a duplex, triplex or quadplex that I can rent out, and hopefully free up some of my own money that I'm currently spending on rent, as well as being cash flow positive. 

Here's the challenges I'm having. Putting 20% down to avoid the PMI. A lot of these homes are in the mid 200k-400k range, and it would take me forever to save up that kind of deposit. This would also take away any money I could use for rehab. Also, I'm not sure I would be able to get approved for a loan that large on my own.

I've thought about looking into duplexes. It's a fairly affordable monthly mortgage, I could rent one side out, plus rent rooms on my side out. It would free up funds to renovate or repair if I needed to. But I hear a lot of older, more experienced investors say that they wouldn't even waste time on these types of deals and they only look for 4, 8, 12, 16 unit buildings. 

I guess my question is, if you were in my position. 50k/year. Zero debt. Zero savings. Great credit score. Looking into properties and running them through the calculator while you save up... where would you start and what type of deals would you look for? 

Thank you guys for any input you offer.

Hello. If you can't afford the 20% down to avoid the PMI I would look for a 4plex and get a FHA loan on it. Sure - there will be mortgage insurance but you won't have to save up that 20%.

Also, a 4plex is typically going to get you more cashflow than a duplex (75% rent money VS 50% in a duplex). Of course, you could always be super disciplined and pay rent to yourself as well, whether you purchase a duplex or 4plex. 

Just make certain the numbers are good and you're getting positive cashflow to keep you out of unexpected expenses. Of course, the main expenses will be the mortgage, mortgage insurance (if you FHA it), property insurance, taxes and whatever utilities you include.

Scour good cashflowing deals and be aware of any rehabs that need done (and pay a good inspector as well to document what needs repaired or upgraded). 

Thank you, I really appreciate the input. This is something I was considering as well. My train of thought is that if I did an FHA loan, as long as the numbers are good, and it cash flows positive more than the PMI, then the PMI doesn't bother me much, and I could utilize my money to reinvest into the property instead of making a large down payment. Which is obviously easier to secure with a quadplex as opposed to a duplex.

The concern that I still have, is that I'm not sure a lender would approve me for a loan that large. I've never done this before. So let's say I were to find a 4plex that I like, and I'm willing to live on the property for the 12-24 months. Would the lender take the 3 units potential rental income into consideration when deciding how large of a loan I can qualify for?

You shouldn't have an issue securing a loan. Your credit score is good and you make 50K yearly. You'll get approved for a higher amount than you think. 

I got preapproved for a 2-4 unit and we have similar credit scores and the loan amount ceiling was for an amount higher than any 4-unit in the market I will be investing in.

Definitely ask them if you can use potential rent income - though at 50K a year I think you'll be good to go on a FHA loan in your buying range.

You will need to save up the 3.5% and closing costs though. 

Thank you so much for the input. I've been doing some research on the side, and I see that 'roughly' a lender will take 50% of rental income potential and apply that to your monthly/yearly income to help you qualify for a higher loan. So after reading that, along with what you replied... I feel pretty confident that I can secure a significant loan amount.

I guess the next step is to just keep scouring deals and using the calculator while I secure the funds for down payment and closing. My market seems to not have very much inventory tho to be honest. So I'll search for duplexes as a last resort, and 4plexes as my ultimate goal. By the time I'm actually ready to buy, I should know the calculator pretty well, as well as my market, and if a good deal pops up I'll know it.

Thank you so much for letting me pick your brain. As I'm sure you know, I can't talk to most of my friends about stuff like this. It's nice to have a place to turn where people know what you're talking about lol. Thank you.

@Jerry Padilla

I appreciate your input and experience. I have one more follow up question. So I'm in the process of verifying my employment to be pre-qualified right now. If I understand correctly, and please please correct me if I'm wrong, pre-qualified is a general idea of what I qualify for. Pre-approval is once I find a property that I'm interested in and want to make a offer. So the pre-qualified number that they give me will only be for my income, with no rental income calculated. So it's safe to assume that if I'm looking at a property with rental potential, I could calculate 75% of that towards my pre-approval when I send them the offer. Is that correct?

And thank you again for your time. It's very much appreciated and I promise I'm using it wisely.

@Christopher Maynard

A pre-qual is approval through the system. A true pre-approval is after the underwriter approves the file. 

You can still use an estimated rental income for a pre-qualification or pre-approval. 

No problem. Reach out anytime!