Norwalk, CA · Member since 2020 · 9 posts · 2 votes
Decent credit (about 688 FICO), about $13K in cash reserve savings, current employment status is furlough but want to get out of that job to invest full time. I plan on using hard money loans to fund my future deals but I am anxious about using that type of loan for my first time. Should I wait to build enough experience with a partner before going out on my own with these loans?
@Tony Cruz - glad to hear your making your first moves. A big part of every lenders decision is the borrowers experience. However, first timers aren’t a 100% deal breaker to many of them. Building a relationship early would be a good reason to get going with some lenders, at least discuss your options. Depending on the deal, you may need more than $13k down, so that maybe another reason to have a partner, as things always take longer than expected and you want to have plenty of reserves for the payments. In general, I think it’s a smart idea for most people to partner up for their first few deals. Especially if that partner has experience you can learn from!
Hi @Tony Cruz, a few comments and questions for you consider.
Have you identified your target geographic area? $13K is a nice reserve but it's not much for the California market and when considering down payments, potential rehab costs and the actual amount you need to have on reserve for your investments and your personal funds that won't go very far. Hard money loans are generally not going to fund you 100% of the deal and they aren't cheap so you still need some capital (usually 10% or so) to get a hard money loan AND the deal needs to be substantially attractive in terms of ROI for the lender.
What types of investments do you want to make? Single family, multi-family, commercial, long term, short term, buy & hold, fix & flip, BRRRR, etc.
What level of experience and comfort do you have in the your preferred type of investments? That could help inform your choice of whether or not to seek a partner. For example, if you have the experience but not enough capital, you could seek a partner who has the capital; if you have the capital but no experience, you could seek a partner who has the experience. Having a partner certainly helps allocate risk but if you feel comfortable with your experience and have sufficient capital, you may not want a partner for the next deal.
Do you currently own a home? If not, you could possibly look to house hack your first property to get lower down payments but they'll want you to have secured income and stability as a basic requirement.
If you haven't already, I would recommend you spend your furloughed time getting really specific about what type of investments you want to make, your investment strategy, identify the cost of entry for your target market and then determine how you can build or acquire more capital to start investing.
Unless you already have a stream of passive income to fund your lifestyle, I don't think starting real estate investing with $13K and a 688 FICO score is going to be a ticket to financial freedom (although I'm sure it has been done). The exception is that hard money lenders may not care as much about your FICO score as they do about the validity of the deal you have identified or the opportunity to generate a return on their money.
@Bridgette Delva Thank you for your thoughtful response. Those are some good questions that you've brought up. The target market i'm thinking of is in a rural area about 70 miles north of Los Angeles where 3 bed 2 bed single family homes are typically priced about 250-300k. I figured this market might be a cheaper barrier of entry for me to start in. I've been trying to find ways I can try to get a deal done with 13k but I think it might be a better idea to save up some more. I hear 25-30k is ideal cash reserve to start with?
@Tony Cruz okay good to know you have a market. I definitely think you need to save up more but it still goes back to what type of rehab your property will require and your monthly operating expenses.
Reserves are more of a personal assessment of the level of risk you can afford to take. Some people are okay with only having a one month reserve saved while others may prefer 6 months. You may decide to be right in the middle at 3 months. But to calculate that number you need to understand total monthly costs (mortgage, taxes, insurance, PM fees, anticipated repairs, and other operating costs) then decide how many months you want to have.
Just remember that reserves are just that, reserves and they would need to sit in an account, probably an interest bearing account, and remain untouched. This is not to be confused with how much money you need to save for a down payment or for rehab costs for your property.
Thanks for sharing your journey and reaching out! I love the BP community!
Agree with others that it is best to have more reserves.
Also, you mentioned you are going to BRRRR. Please speak to lenders first as your borrowing capacity to refinance may have changed due to your furlough status.