Investing With Low Money Down

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Joe Villeneuve Thank you for your insight. In terms of my location, I currently reside in Orlando and the market has been very strong for buy & hold investor's in recent years due to the high rents in comparison with property prices (very often times satisfying the 1% rule). Also, around the UCF area, I have been recommended by several experienced investors because it is growing/developing very fast. In terms of my criteria, I am looking for a SFR because along with large apartment complex's, they are what is most available for deals in my market. Smaller, non-commercial multi-family properties are not common in Orlando, making them very very competitive and hard to strike a worthwhile deal. I want 3-4 beds due to the fact that it is easier to rent given the type of tenants that I am looking for. Also, as an alternative exit strategy, it is easier to sell a house with 3-4 rooms than 2. In terms of my pricing strategy, it is based on the 70% rule in hand with the market values of properties in the neighborhoods that I am looking to buy in, with comparable aspects to my searching criteria (the comps tend to hover around $350,000 ARV). In terms of my overall strategy, I have researched various asset classes such as large commercial multifamily investing, MHP investing, self-storage investing, AirBnb rentals, etc. as well as a few different financing strategies including syndication (which interested me a bit, but I'd prefer to own my properties outright), private money (which unfortunately I don't have any connections in this area yet), etc. but I landed on BRRRR investing in SFR's because it allows me own properties outright while still utilizing OPM (which is so essential for growing your portfolio at a decent rate). Also, it brings to the table a level of scalability when you bring in acquisition managers, property managers, project managers, VA's, various paid market techniques, etc., that can allow you to take on more projects as you grow with your business. Lastly, while I definitely agree with your points on having more capital up front to handle various costs in regards to the HML and unforeseen circumstances, I disagree with the fact that you shouldn't learn on the go (especially being young and taking on only one project). I have spent the last 6 months educating myself for hours on end, networking, reading books, learning market analysis, deal analysis, etc., so I understand the risk involved, and I have learned so much of what I need to know, but I do feel that I could have provided more information about my real estate education on my post than I did.

Overall, I really appreciate you taking the time to give your insight on my post. In the end of the day, I do need to take my personal cash reserves into account more before taking on a project. It might be a few months before I am actually able to hop into the industry but I am a strong believer that action always speaks louder than words, and if I don’t make a point to get started, it will never happen.

Again, thank you so much for your advice, it really helps a lot!

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Isaac Agbolosoo That’s awesome Isaac! Thanks so much for your insight. If you don’t mind me asking, when and how were you able to land your first deal?

Isaac A.

Grosse ile, MI · Member since 2014 · 117 posts · 46 votes

6y

Originally posted by @Ben Morand:

@Isaac Agbolosoo That’s awesome Isaac! Thanks so much for your insight. If you don’t mind me asking, when and how were you able to land your first deal?

House hack in Thornwood, NY (2007)

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Isaac Agbolosoo Nice! How did you finance the deal? Was it a fixer-upper?

Brett McManus

Minneapolis, MN · Member since 2020 · 94 posts · 161 votes

6y

Hey Ben,

Appreciate the enthusiasm as you are in a very similar situation that I was just a few months back. I too was ready for my first deal with inspiration to BRRRR from posts on these forums as well as BP Podcasts. The reality was that as I began taking action I realized a few things:

1) BRRRR has some risks associated to it that can be easily overlooked by new investors (calculating ARV, managing rehabs, etc.)

2) Hard money is freakin expensive (not the low money down I needed)

3) Lack of experience makes it very difficult for HML's, Contractors, and Property suppliers (wholesalers) to take you seriously.

Instead of this I took the advice that many offer to beginners on these forums and hunt down a Duplex to house hack. In doing this I was able to purchase a great starter property within 3 months of this mindset change by doing the following:

1) Connecting with a local agent/investor who was able to set me up with an MLS search that could fuel properties to be analyze with BP calculators.

2) Working with local mortgage brokers to understand FHA owner occupant loans which combined with a state funded new-buyer assistance program (and negotiated seller paid closing costs) allowed me to close with only $2,000 out of pocket.

3) Ultimately close on a base-hit property with virtually no money out of pocket, source my first tenants, do some basic cosmetic work to boost rents, and gain a TON of relatively low risk knowledge that will better set my up for future BRRRR investing.

Although BRRRR is an amazing strategy, I highly recommend exploring house hacking in order to hit the ground running and get some experience under your belt.

13 Reply

Shawn G.

Rental Property Investor · Orlando, FL · Member since 2017 · 207 posts · 125 votes

6y

@Ben Morand Learning is one thing, doing is another. Get out and network with fellow investors actually doing deals, not just talking about it. There are a few good meetups here in Orlando. The local REIA (CFRI) is good and there are a couple other groups as well. If you haven't already connected with @Bernadeau C., his group is great.

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Brett McManus Thanks so much Brett! I have definitely considered house hacking with an FHA loan as well! I appreciate your insight. It's great seeing people succeed in this business!

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Shawn G. Shawn, thanks so much for the recommendation! I'll definitely connect with him right now. Also, I've heard awesome things about the Orlando REIA so I'll be sure to check that out as well!

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

6y

Originally posted by @Ben Morand:

@Joe Villeneuve Thank you for your insight. In terms of my location, I currently reside in Orlando and the market has been very strong for buy & hold investor’s in recent years due to the high rents in comparison with property prices

What exactly does that mean? How does that translate into a specific predictable cash flow?

ry often times satisfying the 1% rule).

Percentages lie.

Also, around the UCF area, I have been recommended by several experienced investors because it is growing/developing very fast. In terms of my criteria, I am looking for a SFR because along with large apartment complex's, they are what is most available for deals in my market.

Does "availability" qualify as a good reason to buy?

Smaller, non-commercial multi-family properties are not common in Orlando, making them very very competitive and hard to strike a worthwhile deal. I want 3-4 beds due to the fact that it is easier to rent given the type of tenants that I am looking for. Also, as an alternative exit strategy, it is easier to sell a house with 3-4 rooms than 2.

Is your criteria easier to execute in this market meeting your minimum requirements

terms of my pricing strategy, it is based on the 70% rule in hand with the market values of properties in the neighborhoods that I am looking to buy in, with comparable aspects to my searching criteria (the comps tend to hover around $350,000 ARV).

Again, %%% lie...or at best they really don't tell you anything of value.

In terms of my overall strategy, I have researched various asset classes such as large commercial multifamily investing, MHP investing, self-storage investing, AirBnb rentals, etc. as well as a few different financing strategies including syndication (which interested me a bit, but I'd prefer to own my properties outright), private money (which unfortunately I don't have any connections in this area yet), etc. but I landed on BRRRR investing in SFR's because it allows me own properties outright while still utilizing OPM (which is so essential for growing your portfolio at a decent rate). Also, it brings to the table a level of scalability when you bring in acquisition managers, property managers, project managers, VA's, various paid market techniques, etc., that can allow you to take on more projects as you grow with your business.

All of this makes perfect sense (dollars actually).

Lastly, while I definitely agree with your points on having more capital up front to handle various costs in regards to the HML and unforeseen circumstances, I disagree with the fact that you shouldn't learn on the go (especially being young and taking on only one project). I have spent the last 6 months educating myself for hours on end, networking, reading books, learning market analysis, deal analysis, etc., so I understand the risk involved, and I have learned so much of what I need to know, but I do feel that I could have provided more information about my real estate education on my post than I did.

Except, you don't know what you don't know. Let me show you what I mean. Answer the following questions if you would:

1 - Do you know what is the cost to enter, and the predicted cash flow (in $$$) for the entire area is that you want to invest in (not averages for the entire area...break it down into micro-markets)?

2 - Can you map it out based on a checkerboard of square miles?

3 - Can you calculate the cost to the REI for following 2 options to buy the same property
Given: Asking Price = $100k, loan interest rate = 3% over 30 years
Option A: All cash
Option B: 20% DP

Overall, I really appreciate you taking the time to give your insight on my post. In the end of the day, I do need to take my personal cash reserves into account more before taking on a project. It might be a few months before I am actually able to hop into the industry but I am a strong believer that action always speaks louder than words, and if I don’t make a point to get started, it will never happen.

Again, thank you so much for your advice, it really helps a lot!

See my comments underlined and in BOLD above after your comments.

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Joe Villeneuve Joe, I really appreciate your knowledge on the matter! You are definitely right about the whole percentages matter. I just like to use the 70% rule, as a BRRRR project is essentially a flip, so having a general idea as to profits/forced equity is a nice benchmark to have. To answer your questions, I'll start with an example of a property I was recently analyzing in my current neighborhood (about 3 miles from my house) for practice.

So the house is a bank-owned REO offered at $235,000. 4 beds/2.5 baths. 2608 sq ft. — 3 comps in the same neighborhood (granted, I did not adjust them for every factor, as it was a quick analysis) averaged at $372,000 market value. Rents in the zip code hover around $2,250 (again, you are 100% right about finding more specific numbers, but for this quick example, I am going to have to use an average)

1) If I were to have 25% down on a loan funding the price at $372,000, the monthly PITI payments would push $1750/month. In the example I'd also like to consider monthly costs regarding general maintenance and cap-ex. Because the house will have just undergone total rehab, I'll use 12% of the monthly rent as this cost (GM + capex). This now puts the monthly expenses at $2020/month. Next, I'd like to take property management into consideration. While I won't be using a PM at first, I will most likely have one later down the line, so it's important to consider that cost in the analysis. Though many can be found for less, finding a solid one is smart, so I'll push 10% of the monthly rent to this expense. This puts the monthly expenses at $2245, or essentially break-even. To me, although they are very conservative estimates, these numbers don't make for a positive cash flow so the deal would not be worth pursuing further.

2. I don’t think I could map out the details of the neighborhood on a checkerboard at this point. I definitely can improve in this aspect.

3. Option A: seeing that there would be no loan to pay down on an all cash investment, the monthly expenses would be based solely on general maintenance, cap-ex, utilities (unless they are paid by tenant), property management, taxes, HOA (sometimes), and insurance.

Option B: at a 3% rate, the PITI costs would be around $500/month. Not sure what the total returns would look like without additional info.

I really really appreciate your help, Joe. I see what you mean now in terms of strengthening my market analysis. If you’d be willing to chat further, I’d love to talk in the PM’s. Thanks again!

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Joe Villeneuve Also, please feel free to call me out if any of those analyses were wrong. I’m always looking to get better! Thanks again Joe!

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

6y

Originally posted by @Ben Morand:

@Joe Villeneuve Joe, I really appreciate your knowledge on the matter! You are definitely right about the whole percentages matter. I just like to use the 70% rule, as a BRRRR project is essentially a flip, so having a general idea as to profits/forced equity is a nice benchmark to have. To answer your questions, I'll start with an example of a property I was recently analyzing in my current neighborhood (about 3 miles from my house) for practice.

So the house is a bank-owned REO offered at $235,000. 4 beds/2.5 baths. 2608 sq ft. — 3 comps in the same neighborhood (granted, I did not adjust them for every factor,

What factors would those be?

...as it was a quick analysis) averaged at $372,000 market value. Rents in the zip code hover around $2,250 Too large an area to use. I bet that zipcode includes at least 5 - 10 different markets.

(again, you are 100% right about finding more specific numbers, but for this quick example, I am going to have to use an average)

Why do you feel it is OK to use an average?

1) If I were to have 25% down on a loan Why 25% and not 20%

...funding the price at $372,000, the monthly PITI payments would push $1750/month. In the example I'd also like to consider monthly costs regarding general maintenance and cap-ex. Because the house will have just undergone total rehab, I'll use 12% of the monthly rent as this cost (GM + capex). Why 12%, and what specifically do you hope to cover in the real world...and how much would those items cost? In other words, does this 12% cover anything...for sure?

This now puts the monthly expenses at $2020/month. Next, I’d like to take property management into consideration. While I won’t be using a PM at first, I will most likely have one later down the line, so it’s important to consider that cost in the analysis.

Excellent!!! Way too many don't realize what you just wrote here, and don't include the PM in their initial analysis because "they're not using one (now)"

Though many can be found for less, finding a solid one is smart, so I’ll push 10% of the monthly rent to this expense. This puts the monthly expenses at $2245, or essentially break-even. To me, although they are very conservative estimates, these numbers don’t make for a positive cash flow so the deal would not be worth pursuing further. Give that man a cookie...make it a box. LOL

2. I don’t think I could map out the details of the neighborhood on a checkerboard at this point. I definitely can improve in this aspect.

Well, before you buy, you really should be able to. It's not that hard.

3. Option A: seeing that there would be no loan to pay down on an all cash investment, the monthly expenses would be based solely on general maintenance, cap-ex, utilities (unless they are paid by tenant), property management, taxes, HOA (sometimes), and insurance.

Option B: at a 3% rate, the PITI costs would be around $500/month. Not sure what the total returns would look like without additional info.

I didn't ask for an analysis here. All I asked for was "what would each of these two options (same property so all expenses I didn't mention would be the same for both) cost the REI...you?

I really really appreciate your help, Joe. I see what you mean now in terms of strengthening my market analysis. If you’d be willing to chat further, I’d love to talk in the PM’s. Thanks again!

PM me any time.

See my comments above

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

6y

Originally posted by @Ben Morand:

@Joe Villeneuve Also, please feel free to call me out if any of those analyses were wrong. I’m always looking to get better! Thanks again Joe!

Not going to call you out...just going to play Devils Advocate, and test your knowledge based on questions you should have specific answers to before you start.

Reed Anderson

Rental Property Investor · Kansas City, KS · Member since 2020 · 1 post · 0 votes

6y

I’m enjoying this back-and-forth. @Joe Villeneuve, at what point can you tell a first time investor is ready? Are there any common preparation steps people before getting started?

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

6y

Originally posted by @Reed Anderson:

I’m enjoying this back-and-forth. @Joe Villeneuve, at what point can you tell a first time investor is ready? Are there any common preparation steps people before getting started?

When they have a plan, a market, and a series of strategies ready...and, the understanding of how all three must work simultaneously.

When they can analyze markets to find the micro-markets to the point where they can get an address and know where it is, how much it costs, how much potential profit and/or cash flow can be made on a property in that market.

When they can match a strategy to that property in order to execute that deal.

Although all of this may sound involved and way to complex, it isn't.

3 Reply

Isaac A.

Grosse ile, MI · Member since 2014 · 117 posts · 46 votes

6y

Originally posted by @Ben Morand:

@Isaac Agbolosoo Nice! How did you finance the deal? Was it a fixer-upper?

How did you finance the deal? - FHA 203K loan 3.5% DP, yes it had a PMI but I refinanced after 1yr to remove PMI

Was it a fixer-upper? No - house hack - 2units, Lived in one unit and rented the other to a college student. the property is close to Pace Univesity, NY

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Isaac Agbolosoo Nice! I've heard mixed feelings about the FHA 203k loan, but I think it could be a powerful tool, especially when getting started.

Chris K.

Greater Seattle · Member since 2020 · 6 posts · 4 votes

6y

As a first time home buyer, you may be qualified for special programs and personalized counseling. Start at https://www.hud.gov/states/florida/homeownership/buyingprgms. It may not be as glamorous as the big city, but FHA loans in more rural areas can cover 100% of your loan. Only 3% down for many other loans. With some loans part of the funds can be a gift.

You probably can't get a second to cover your down without risking your first. It may be safer for your parents to give you a couple K, even if they have to get a small loan, and give it as a gift, than to co-sign. No offense, but they're on the hook for the whole thing if something happens to you and that's risky.

See about a loan that will factor in your rental income, even if you need to get a small multiplex further out.

Keep your credit score clean: don't open any new accounts, and keep your credit card balances under 20% usage. Never close your oldest credit line, unless the fees are outrageous.

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

6y

It is probably a good idea to build some reserves as a realtor. Low cash puts the odds heavily against you in the survival pool.

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Chris Knight Thank you so much for your help! It is so cool to hear of the various methods of getting started!

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Ian Walsh That’s a really great idea, Ian. I think I do plan on trying to sell some houses as a Realtor before hopping into any deal for that very reason. I’ve heard from some experienced investors that $10,000 is a relatively safe amount of cash reserves to have saved before getting started. What’s your perspective on this?

Ryan Howell

Rental Property Investor · Hendersonville, NC · Member since 2016 · 446 posts · 412 votes

6y

@Ben Morand - If I were starting today, I would buy a duplex. You are correct on some of the advantages of SFR, but this is your first one. What's most important now is minimizing your expenses IMO. You can get one with 5% down and house hack. Live and learn the business for a year or two and then you can move out and go from there determining the best strategy going forward. Freeing up your budget will help tremendously starting out and help you build momentum. My $0.02. Good luck. Either way, for the first deal, I believe its better to get started, as you will learn 1000% more doing than reading. If you were about to buy an apartment complex or something where lack of understanding is going to undo you financially, it would be different, but anyone who is listening to the podcast and reading books, etc, is still better off with just about any strategy on their first deal than the average first time home buyer.

OP

Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

6y

@Ryan Howell Ryan, thank you so much for your insight! I am 100% on the same page in terms of getting started and learning inside the business! I’ve definitely considered house hacking, and quite frankly, if I would’ve considered it more seriously a few months ago, I’d probably be doing that now. Unfortunately, I have a lease signed for an apartment already so I wouldn’t be able to house hack. However, I am looking for a great deal that could mitigate risk of financial loss. There is an off-market duplex by my university that I have had my eye on for a while, as it was listed for sale at the very start of the pandemic, and sat for about 100 days in a very tough market until the listing expired. However, I think I may build up a few thousand more in reserves over the next few months before I hop into anything. Again, I love your advice and I really appreciate it!