Hey, another newbie starting out in Utah! I've read a bunch and listened to countless podcasts, but I'm stuck in the analysis paralysis mode. I want to pull the trigger on a SF, but only have enough for 5-3.5% down which makes monthly payments just out of my budget. Is there something I'm missing? How do investors afford low to no money down, but can somehow make the high monthly payment work? Is there a financing option that requires no monthly payments? Or do I just need to wait to get a bigger down payment? Thanks!!
You buy properties with better numbers. When you analyze you start with the rent, then subtract your minimum CF (always pay yourself first), then the rest of the expenses (except the loan pmt). This equals your maximum loan pmt. DON'T GO OVER IT FOR ANY REASON.
Now calculate what your max offer is based on the terms you get from the lending source you're working with. Remember, you can't go over that monthly pmt, so that will impact your max. offer.
Typically, the low or no money down option is when there is Owner financing or you have other investors so that "you" have no money down, but there is money actually put down on the property.
You buy properties with better numbers. When you analyze you start with the rent, then subtract your minimum CF (always pay yourself first), then the rest of the expenses (except the loan pmt). This equals your maximum loan pmt. DON'T GO OVER IT FOR ANY REASON.
Now calculate what your max offer is based on the terms you get from the lending source you're working with. Remember, you can't go over that monthly pmt, so that will impact your max. offer.
@Amber Martin, based on the info you provided, your analysis is incorrect. Is this SF going to be a rental?
@Joe Villeneuve gives a good basis to start with. In those "expenses" make sure you hold back on reserves as well. There will be unit turnover costs, and capital items (water heaters, roofs, etc) that may need repaired during your ownership, so make sure you are saving for those with these reserves.
To be honest, there are deals out there that make sense, but in today's market finding SF rentals where the numbers work is very challenging.
@Amber Martin, based on the info you provided, your analysis is incorrect. Is this SF going to be a rental?
@Joe Villeneuve gives a good basis to start with. In those "expenses" make sure you hold back on reserves as well. There will be unit turnover costs, and capital items (water heaters, roofs, etc) that may need repaired during your ownership, so make sure you are saving for those with these reserves.
To be honest, there are deals out there that make sense, but in today's market finding SF rentals where the numbers work is very challenging.
There are always SF that work somewhere...kind of like "happy hour". You just have to find the market(s).
Hey, another newbie starting out in Utah! I've read a bunch and listened to countless podcasts, but I'm stuck in the analysis paralysis mode. I want to pull the trigger on a SF, but only have enough for 5-3.5% down which makes monthly payments just out of my budget. Is there something I'm missing? How do investors afford low to no money down, but can somehow make the high monthly payment work? Is there a financing option that requires no monthly payments? Or do I just need to wait to get a bigger down payment? Thanks!!
Amber, some deals can cash flow with no money down and some require 20% for them to cash flow. It appears you found one that is the latter. Me personally, it's all about the cash on cash return. Would this deal still make sense if you put down 20%; what would the cash on cash return be for it? For me, if it's not at least in the double digits, then it's a no-go.
Keep in mind that although you may be able to get 0% down (i.e. VA loan or seller financing), you will still need money for closing costs, and I strongly recommend having enough reserves set aside. My suggestion is to continue saving money.
Sorry, yes this would be a rental or possible house hack. My main concern being the vacancy times when I would be forced to cover the monthly mortgage payment. For example, I found a SF (mls 1650944 if your curious) for $284,000, 3.5% down, monthly according to Zillow would be $1,878. I think we could rent bottom out for about $1000, leaving us to cover the $800ish which works. What we can't do is, what if it doesn't rent for 6 months and we're stuck covering that high payment for an extended amount of time? Also those number don't include utilities and CapEx, pushing us further into the danger zone. I guess your main suggestion would be to find a much better deal, thus lowering all costs and maximizing potential return.
It sounds like you just need more in reserves or a bigger down payment.
Don't' try and fight with your back against a wall. You're right, one hiccup and you'll be scared of doing any more deals.
Have you analyzed vacancy rates though? 6 months is a long time to be vacant. Not unheard of, but if that is the norm in that area then you need to find a new area.
I definitely recommend checking out Brandon Turner's book on real estate investing with low or no money down. It gives several methods for how to partner or get money from others without having to put much of your own down.
With any property you'll want to budget for at least 5% vacancy. If your concern is that there could be 6 months where the other part of the house isn't rented then maybe it would be worth it for you to budget in 8-10% for property management too. You'll lose that part of the cash flow but then won't have to worry as much about vacancy, handling repairs yourself, etc. Another idea to look into would be to buy a multi-family (potentially using the BRRRR) method and staying in one unit while renting out the other. It may be easier to rent a whole unit instead of a partial house.
@Collin Corrinton not really, just trying to think of absolute worst case scenario. Where would be a good source to find the vacancy rates? Or is it best to just do a standard 5%?
@Derek Harris great idea, I had not thought about changing the down payments to check different cash flows!
Love all the feedback! It is greatly appreciated. Sounds like I don't know as much as I thought. I think saving up some more and practicing analyzing deals might be my best next course of action.
Sorry, yes this would be a rental or possible house hack. My main concern being the vacancy times when I would be forced to cover the monthly mortgage payment. For example, I found a SF (mls 1650944 if your curious) for $284,000, 3.5% down, monthly according to Zillow would be $1,878. I think we could rent bottom out for about $1000, leaving us to cover the $800ish which works. What we can't do is, what if it doesn't rent for 6 months and we're stuck covering that high payment for an extended amount of time? Also those number don't include utilities and CapEx, pushing us further into the danger zone. I guess your main suggestion would be to find a much better deal, thus lowering all costs and maximizing potential return.
What you just described is a mistake many REI make when the Hack. To do it right, you can't rationalize negative cash flow (yes, if you are covering any of the other tenant's rent, then it is a negative CF) by saying you are living upstairs for less (or free). The correct way to HH is to have the other tenant(s) cover your would be rent. If you don't, then you're just inviting trouble. HH not done this way, means you are just a vacancy away from having to cover two rents, and living only in one.
Low / No down payment or 100% financing sounds sexy! I've done it! It's excellent for getting into a new deal or stepping up. It's advantage is you are into a new project way faster than saving up for traditional 80% financing.
The downside is that you are now borrowing 20% more so your payment is 20% higher and cashflow will decrease because of it. It wont perform like an 80% leverage property because it isn't. If you are expecting to cashflow improvements or other major expenses it has to be taken into account.
Yes there are owner carrybacks and balloons, but even with the expectation of a refi down the road you still have to increase the equity to 20% just to break even and get out of it. Banks know their exposure and generally lend according to it. That's why they lend at 70-80%. Just be careful of the risk that you may not be able to renew if it cant appraise and you owe a balloon.
The more you put down the better your cashflow will be.
You're not missing anything. There's inherent risk all investment and there's an inverse relationship between cash flow and CoC. You can't have it all, you have to decide where you can live with an acceptable level of risk and either jump in or not. You can do it! Your future self will be forever grateful.