Single Family Home Investment Plan

16 Replies

I am looking to start in real estate by buying my first rental property. I am hoping to receive some guidance on the following plan:

Currently saving approximately $3,500/month and will be at a total of $22,000 in savings by the end of the year. I am looking to purchase a home with a mortgage in the price range of $55,000-$75,000 with $25,000-$30,000 in repair budget. The home will be renting in the range of $1,100 - $1,300. 

My question is, I am trying to decide if I should consider waiting to save enough so that I can buy the home and pay for the repair in cash, or if I should go the route with the mortgage. 

The future goal would be to refinance on the home and use the refinance loan to purchase a second and so on. 

If anyone has any experience in the above, it would be great to connect.

@Miljan Vukovic the issue I see is that the property you are describing will not qualify for conventional financing. Purchase price $75,000 with a $30,000 rehab is in very rough shape, and most likely not habitable. 

Banks will not typically let you put a 20% down payment and purchase with a mortgage unless it only needs cosmetic repairs. The property you are targeting would need to be purchased with cash, or a hard money loan. 

There is something called a 203K loan, but it‘s only for buyers that are purchasing the house to live in. You could move in, rehab, and then rent the property after one year. I don’t know much about these loans, but I think that’s the basic principle. 

@Jonathan Hulen , you're first statement about a $75,000 house not being habitable is untrue. That is HIGHLY market dependent. I'm closing on a small single family house in the next week for $31k that is fully functional, but dated.

@Miljan Vukovic , one issue I see with your plan is that the rental prices may not justify doing a cash-out refi even if the value of the property has increased. Try using the BRRRR calculator on the bigger pockets site here to analyze some prospective deals.

Originally posted by @Kevin Sobilo :

@Jonathan Hulen, you're first statement about a $75,000 house not being habitable is untrue. That is HIGHLY market dependent. I'm closing on a small single family house in the next week for $31k that is fully functional, but dated.

@Miljan Vukovic , one issue I see with your plan is that the rental prices may not justify doing a cash-out refi even if the value of the property has increased. Try using the BRRRR calculator on the bigger pockets site here to analyze some prospective deals.

$75,000 that ALSO needs $30,000 in rehab. Any property that has a rehab budget almost half it’s purchase price and rents for what the OP stated is his target is going to need a massive amount of work. 


@Jonathan Hulen , again not true. The house I'm buying for $31k will probably have about $15-18k of work done to it.

I'm also currently rehabbing another home that I bought in functional but dated condition for $27k and will end up spending about $15k to rehab.

I do understand that markets are different. So, these types of scenarios may not be what you find where you are, but they do exist. 

@Jonathan Hulen Thanks for the feedback! The $30K repair is a max budget for when I am looking for a property. So if it has less that's great for me, I am more so planning for a max of $30k repairs. It may not necessarily be that much.

@Kevin Sobilo Thanks for the feedback! Can you elaborate on what you said here: "one issue I see with your plan is that the rental prices may not justify doing a cash-out refi even if the value of the property has increased." Why would this be important? My understanding is that the bank will give you a loan for the amount that the property is appraised for. How do the monthly rents come in to play there?

@Miljan Vukovic , my response may have made an assumption. Many people choose to, for a variety of reasons, buy their properties from within an entity such as an LLC. If you do that and are using commercial mortgages or private mortgages, they would be looking for a certain debt service coverage from the property's rental income.

If you are going to use conventional fannie mae/freddie mac type loans, then those loans would be in your own name, on your credit, and they would be looking at your ability to pay those loans as an individual. So, the metrics would be different.

Even if a conventional loan would be possible. Would you want to refinance out and have a property that had negative cash flow? I think a good BRRRR deal, is one that ends up with a property that when refinanced is near fully leveraged, recoups ALL of your investment or MORE AND still cash flows reasonably well.

@Kevin Sobilo The plan would be to have the first property cash flowing, and use the appraised amount of the property to purchase a second property that also cash flows after rehab. I think we're on the same page, but it's not coming through correctly (at least from my end) via text :) 

@Miljan Vukovic I'll go back to your original post and answer your questions. 1. Should you purchase in cash? The answer is "it depends". If your intent is to leverage it, why not use hard or private money to purchase the property and fund the rehab? You could use cash to close quickly, however, lenders have seasoning requirements (some up to 13 months) and you could be sitting in cash that entire time to refinance out. OR you use hard / private money and refinance out what is on the HUD up to 75% LTV (some commercial lenders will go up to 80% LTV). 2. With the numbers you gave, you won't get all of your money back out most likely, but could get a good chunk to move onto the next project (I talk about this on BP RE episode 340...yeah BRRRR!)... and don't consider it a failure either.

AND to those who say you can't put a conventional loan on it post rehab even with it being a $30K+ rehab... blanket untruth.  As long as you fix all of the majors and foundation, you could potentially qualify for conventional lending (matter fact I have 17 of those type of projects!). 

@Whitney Hutten Appreciate that! My only concern with buying cash was the time it would take me to save up enough (about another year) to buy the property and fund rehab all cash, but the advice I've been getting is to buy property and fund rehab using loan, with my down payment of $20K+. 

Hoping to have my first house bought by end of January 2020.

@Miljan Vukovic

There are also conventional renovation loans that are available for the first few houses you purchase. This will keep your costs down and allow you to purchase the property sooner. You don’t have to worry about the property not qualifying for traditional financing, as the repairs needed can be made with the renovation budget.

@Miljan Vukovic Get David Greene's BRRRR book. This sounds exactly what you're looking to do. In his book, it will explain all the steps you need to do in order to buy, rehab, rent, refinance and repeat successfully. I'd suggest reading that first to get down the basics while saving. You could also fast track this process instead of saving you could get a private money lender (someone in your circle) or a HML. Feel free to reach out.

@Miljan Vukovic what you are looking to do is a BRRRR. Best to purchase with cash, because it saves you closing costs on the loan and it makes for a stronger offer. It does not have to be your money, friends and family money is often best. Once the work is done, refi out at 75% LTV with a fixed rate mortage. Get David Greene's book.

The problem with your approach is your price point. You won't have enough spread in price below 100k to make a BRRRR work, the numbers are too small. Also your rehab budget is light; see J Scott's book on Cost of Rehab; lines up with my experience for the last ten years. We usually spend 40-60k on a full rehab. Partial does not really work, because once you have a new bathroom, it will make the old kitchen look even older.

Typically you need about 80k spread between purchase and ARV, 100 would be better. That will allow for rehab cost and equity. So you'd have to buy a SF for 80-100 and aim for ARV 160-180. What you will find is that in a 150k plus neighborhood even a distressed property will not sell for under 100k. I wish I could tell you different, I've been doing this for ten years and most of my BRRRRs end up making 10% in equity instead of 25% - but they are also completley rehabed and wont require any capex for the next 20+ years.

@Miljan Vukovic   Talk to your bank and find out your financing options up front.  You're doing great saving $3500/month.  Places typically sell more slowly in the winter, so you might be able to get a better deal then and get the renos done before the summer when it is easier to find tenants.

@Miljan Vukovic

I would use hard money to acquire and rehab.

Many of those same lenders are now rolling pretty competitive buy and hold programs. The advantage in this scenario is the power of leverage. I don’t like buying houses with my cash, I could probably buy a few few but would ultimately run of money quickly.

The other component to this equation: I don’t see a real need to buy deformed property when there are so many that need cosmetic touches. If you are just starting out, cash flow should be your target your strategy . Replace your income with rental income then you can take in larger projects.

If you can cash flow 400/ month on each property x 10 properties, that is 4K a month net.

Why stop at 10 right!

Point is, use hard money, soft money, private to acquire and rehab. Then refi, many banks and lenders do not require that long to season the property. Some do some don’t

Also consider owner financing ( seller carries mortgage) etc

Hi @Miljan Vukovic , I think the only thing that I would add is that I was a banker for 25 years prior to becoming the portfolio manager for Castle Rock, so I've been an "insider" for banks when they look at financing properties. Federal Regulators HATE real estate investors, particularly ones that are doing it for the first time. The investor default rate is very, very high. If you go into a bank and tell them that you are doing your first real estate deal, I would anticipate an icy response. Private Money/Hard Money can be quite expensive and the loan costs will rack up quickly if you don't move the property quickly. I just jumped in to say that getting a traditional loan through a bank or a FNMA-style lender may be more difficult that you anticipate, and that is no knock on you, if you go in and say "I'm going to become a real estate investor". Good luck on your new venture. I certainly wish you all the best. 

Wow--never would have expected to receive so many responses of advice (and so quickly!) Thank you all. 

@Daniel Brown Thanks! I've read David's BRRRR book :)

@Marcus Auerbach Thanks for the detailed explanation. Good context. 

@Theresa Harris Yup--that's the plan! 

@Glidden Rivera 1 to start--working towards 10. I need to learn more about how to structure hard money from friends & family. Does it make sense financially or more so just the hassle of not having to work with bank?

@Doug Smith Makes sense. I'll have to shop around if I go that route. Hopefully, my financial standing and credit score will help the cause. 

As is usually the case, lots of varying opinions and direction :) I guess you never truly learn until you do it on your own. Thanks all.