Hi everyone. I have been reading Biggerpockets for a long time and find it to be a valuable resource. Thanks to everyone who contributes. I was wondering if anyone could give me some advice on the best course of action. I have about 100k saved. I work bringing in $1000 a month net but have very low expenses, no car payment. My dad is interested in real estate too, he makes around 75,000 a year. He has about 200k in savings. I don't think my dad has perfect credit but I am sure it is fairly good.
Here are my questions,
1) Is there any way for us to get a combined total of 20 mortgage loans based on our combined 300k savings, good credit and job income? I heard you are allowed up to ten mortgages in one persons name. If we went to a place like Phoenix how hard would it be for him to purchase ten properties that are roughly 100k each and rent for about 1k a month, using a 20% down payment given our resources?
2) If my dad could qualify to get ten mortgage loans for investment properties could he later cosign some additional loans with me? I have good credit, and could provide the down payment etc.
3) If my dad is able to get the first five mortgages (which I heard are easier to qualify for) but meets a lot of resistance when trying to qualify for mortgages 6-10 would it be easier for him to qualify for the second five if we put the houses in my name and use my credit? We don't really care whose name is on the title we are more interested at getting the maximum number or mortgage loans.
Thanks in advance for your guidance.
100k house with 20% down is 80k per house financed = ~400/mo in PI if you get a good deal. Then factor property taxes, insurance, and maintenance and conservatively you're at 450 but just to be 'safer' let's say $500/mo (which I think is still aggressively low). With 10 of those, you'll need $5k/mo if you have no renters. It will be difficult to convince a lender to do even this much, considering you have no successful rental history and not enough income to cover them.
Going for 20 loans is nice; put a plan in place and execute to it. If you have the rent roll coming in and have good tenants you can expand but don't expect that to happen all at once.
Welcome to BP! I'm not an expert on matters like this, but I can share what I know. My understanding is that you can do this, but that it will take time. The biggest obstacle to going faster is debt-to-income ratio (DTI). DTI is calculated by dividing housing payment (PITI) by gross income. This is called the front-end DTI. The back-end DTI is the housing payment plus all other recurring debt payments divided by gross income. Lenders like to see ratios of 28 and 33% or less, front-end and back-end. Other factors are considered such as the size of your reserves and how good your credit is, so that can be used to push the numbers up a bit.
Here's the kicker: rental income can't usually be used in the DTI calculation until you have 2 tax returns showing that income. I have heard of cases where a bank would accept copies of leases, rent rolls, and such, to waive the two year requirement, so there might be wiggle room here if you can find the right bank.
So, taking Ryan's estimate of 500/month for PITI (might be a bit low) on a 100k property w/ 80% financing, and your Dad's monthly gross of 6250, his DTI goes up by about 8% for each property you purchase, until around property 3 or 4, it gets too high to borrow any more. Then you have to wait until the 2 year mark, when you can start using the rental income in the DTI calculation.
Some other things to allow for in making your plan:
1) The lenders require you to have 2 months PITI as reserve for mortgages 1-4, but for properties 5-10, it jumps to 6 months. Obviously this won't affect you at the beginning, but something to factor in for further down the line.
2) Your minimum down payment for a SFH for mortgages 5-10 is 25% as opposed 20% for mortgages 1-4.
You could possibly work around some of this by looking for properties with seller financing. It's unlikely you'd get the cheap rate and 30 yr term that you would with a conventional mortgage though.
Going slower does have some major benefits. You're going to learn a ton from the process of getting the first rolling, so you'll be going into the subsequent deals with all that added experience.
Hope this helps some. Best of luck with your plans!
Welcome aboard Jared. Be sure to read K Marie Poe’s posts on BP. She is also in Santa Barbara.
As you have heard, not all lenders participate in FNMA's 5-10 mortgage program. Try shopping around with the larger lenders. They will have more experience with all the paperwork that is required for this financing package.
To purchase and finance a home through Fannie Mae with more than 4 existing financed properties, investors must meet all of the following criteria:
* Make a 25 percent down payment on the property; 30 percent for 2-4 unit
* Minimum credit score of 720
* No mortgage lates within the last 12 months on any mortgage
* No bankruptcies or foreclosures in the last 7 years
* 2 years of tax returns showing rental income from all rental properties
* 6 months of PITI reserves on each of the financed properties
and to reduce fraud,
*you must sign a 4506-T -- a form giving lenders permission to verify your submitted-with-the-loan tax returns against the official, IRS-filed version of the same.
FYI: For refinances, loan-to-value is capped at 70% for all property types.
Here is the one key issue I see with your plan. Once your dad has 10 mortgages, there is no way you'll be able to get any more. Your income simply doesn't support it (1k/mo) and he will not be able to co-sign for you because he is already on 10 mortgages.
However, just because you can't get more than 10 conventional loans, doesn't mean that you can't get more than 10 loans. You'll just need to go with commercial loans at local banks to continue adding homes.
What I do see thats going to make it very easy for you though is the fact that your dad has good income, good credit and great reserves.
If you buy the houses right, you might be able to buy 4 or 5 houses a year with a combination of conventional and commercial loans.
I believe that the conventional loan req is that they won't count rental income unless you've been a landlord for 2 years. Thats going to hit his DTI pretty quick depending on the price point you'll be at.
But a local bank is going to be a lot more lenient and they will likely count that rental income so his DTI will qualify with them. And with 300k in the bank, they're going to be willing to lend up some money in an area like phoenix where the prices seem to be stabilizing (just from what I've read mine you) and/or even going up.
If you can take down 4 properties by putting down 20 to 25% and paying rehab costs out of pocket and your target properties are in the 100k range that you're getting all in for 80k, you'll likely be out of pocket about 30k per house or 120k total after buying the first four.
But after that, you should be able to start refinancing those homes at 75% LTV to get some of that money back out. Rinse and repeat.
As long as you can keep 100k cash in the bank, you're going to have
no problem getting more loans and continuing to add properties.
The only issue I see is that I don't think you'll be able to qualify for any loans so you're probably going to max out at 10 conventional loans and have to go with commercial loans for any more than that.
But, heck, I say go ahead and get to 10 as fast as you can. Real estate - if you buy right - is going to provide the best return you're going to find for any investment on the planet.
I think I mentioned this to a buddy the other day.
But try buying 100k in stock but only offering to pay 80k. And then tell them you want that 100k in stock that you're getting for 80k with only 20k down. Then try getting that stock to return a dividend of 6k per year (30% cash on cash return). And then see if you can write off a loss (i.e. depreciation) on that stock even though it goes up in value to 103k.
When you can find a stock like that, let me know. And I'd put everything I have into that stock. Until that time, I'm staying ALL In with real estate.
Loved your comparison to securities made me laugh! YOua re right though!
I will say I do and continue to put a fair amount of passive imcome made from RE into the stock market( I target high dividend paying securities) when it comes to picking only one it would be RE all day long!
I don't have much to add other than I think it's probably too ambitious to think you can just pick up 20 properties in any sort of short term time frame. The investor market is pretty hot around here (the Southwest) right now. Anything that sniffs of investor potential is getting picked up pretty quickly - often with cash.
If you're serious about this, I'd consider a move to Phoenix so you can get a feel for the place and be more hands on. Lord knows $300k won't go far in Santa Barbara so you may as well head out to where you stand a chance. (Love SB though - graduated from UCSB.) That way you can buy your first property as an owner occupant and go in with less money. Just a thought.
Agree with John Mireless. There has been little discussion of time. I am in the process of building my portfolio and unless you have another source to constitute the DTI ration requirements then you are going to have to get the rental income seasoned. The two years rental experience took me time to convince my lender it was tied to the experience of the landlord and not two years per property, however my experience is that even after you get that two years experience, its still a chore to get the bank to approve any loan. Just because you have $300k available doesn't mean you will qualify for the loans. It happened to me and I left each and every bank scratching my head until finally I found a bank that would work with me.
Hi everyone. Thank you for taking the time to answer my question. There was some really good info here. I just checked my fico score today and it is 794. However, I don't think my dad's is nearly that high. I heard that you need a minimum of 720 to qualify for a conventional loan. If he does not score that high would it be possible to use my credit score and his income so we can get started sooner? I imagine it could take a long time to raise a credit score.
Hi Jared it sounds like you need to sit down with an experienced loan officer in your area and speak to your financial goals. Credit score, cash and a willing partner are important, but to the degree you are perhaps looking to buy a multitude of properties, it is important to discuss this with a knowledgeable LO that can offer you guidance along the way to parallel your goals with instructions and insight. As well, I know investors that use private money with 30% down once they've exceeded their maximum holding allowances, so that might be an option if traditional finance is not.
Notably, most buyers here (in Phoenix) are not financing purchases under 100K. About 40% of the buying pool here is liquid and frantically attacking that low price point inventory. Perhaps another strategy to start would be to combine monies between you and your father and try to buy 1-2 rental properties, refinance, and buy more?
Screw 10 loans. Buy or create a mobile home park and get the same, if not more cash flow...Guaranteed bigger cash flow as you get more homes moved in.
Its not going to be a walk in the park, but after you get educated, you'll be amazed about how nice an investment they are. Nobody steals dirt.
im with Ivan on this why would you want to bother going to 10 closings when 300k down on a 3 million dollar apt building brings in some fantastic cashflow? Just my 2 cents I put down 35k in a 4 way partner ship 12 years ago and have been getting checks for 2k a month for teh entire 12 years. Buy a deal on a large apt building leverage what you can buy for the 300k. I would shop the market hard and try to get a 3 million dollar apt building for 1.5 mil. The key here is cashflow and monthly income after expenses. If you dont feel comfortable with management then maybe the houses is your best bet but it just seems like a lot of work. Some people work 10 years in this business to raise 300k to put into a big deal like I am talking about they would love the opportunity to sit back and get 5k a month in income.
Good luck, Wish you all the best. congrats on the 100k saved;)
re: Wm B
That was an absolutely fantastic deal. Amazing that it could cash flow 67% cash on cash right from the get go. But any reason why that hasn't gone up any in 12 years?
I would think since your loan payment has stayed the same and the rents, hopefully, have gone up considerably, you'd be making more money today than you were 12 years ago. Or are you paying your mortgage down faster now than you were back then? Still a great return. I'd be trying to find other deals with those partners if I were you. :-)
Not sure I agree on the mobile home park. Biggest reason is the question I have on depreciation. With a mobile home park, there's nothing really to depreciate so I'm guessing almost all your net income is taxable. That would really take a bite out of your profits, wouldn't it?
Part of our partnership agreement was not to take on more debt over time but pay off the 20 year loan we have unless it requires debt to take out a partner at death because heirs want to sell at a discount or are hard to work with. We also have cash build up on our property every year and spend on large improvements. We have installed a 100k fence with security building and installed basket ball courts and tennis courts since we toke control. we have 8 years remain on the loan and its a fixed rate interest so we arent touching it + all 4 partners are under 50 and are loving the income. My 35k has been returning me 24k a year now for 12 years and I figure why mess with a good thing. I plan to do another deal like this one in 20 months when I finish working on a few other projects I am doing.
William that is amazing that the partnership could stay strong for so long. I was in a 2 way partnership for about 2 years and by then I felt like I was doing more than 50% of the work and bought my partner out. On the topic of the op, a multifamily project seems like a better fit when worried about getting all those individual loans vs one larger one. Josh
In the current real estate economy, investing in SFR could create a higher short-term NOI. Right now SFR homes are still below market value. Their prices are rapidly increasing. In some markets, such as Florida, these homes are still selling at ridiculous prices. Buying up as many as possible before the prices increase will allow the investor to resell them 1 or 2 years down the road for an above average gain. The profits from the gain can then be invested in a long-term multi-family investment that is focused on cash flow.
Welcome to another Californian living in the great weather, and investing where it makes sense.
Personally I would look at the small MF where you can get professional management. Read some of the previous forums as to the arguments of MF vs SFH
I think the multifamily purchase may be the better way to go. The financing may be tough given only one of you has the income to qualify and his credit might not be as good as yours. There's no way to share credit from one and income from another.
What I would do is contact Mr. Bannister and see if he can help you guys find another deal like his. :-)
Thats actually amazing. I'm just wondering how it is that after the first 2 or 3 years of those returns, you and your partners weren't combing the lines for another deal just like it. One of you obviously picked an absolutely cash cow on the first one.
I would not have been able to stop pressing until I got him to find us a second one and talked everybody into saving their returns for a couple of years and kicking in a 50k apiece for deal #2.
Given that you'd already made your money back after 18 months, the rest was all gravy anyway. No temptation to want to set aside that gravy and try to make it even thicker with another deal? :-)
Again, thats just one of those generational wealth building deals that changes family's lives. 2k a month. How is that not a beautiful thing?
Multifamily can be a profitable investment opportunity. You could look into buying a 2 - 4 family property and living in one unit. The income from the additional units can be used to pay the loan and, in some cases, even assist in getting loan approval.
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