My wife and I are looking into purchasing our first home. We have recently been introduced to BiggerPockets. We are eager to try the principles taught in this community. It seems we can't find a property that fits the 70% ARV rule for flipping, 1% rental rule for buy and hold etc. When we do find these they get snatched up by cash investors.
As a result, we are revising our strategy to search for duplexes/quadplexes in Louisville, KY or Southern Indiana that we could house hack. Our realtor has told us a few times that as owner-occupants (not cash investors or putting 20% down) we just won't find the pricing metrics we are looking for.
Does anyone have any ideas/tips for finding our first, and hopefully, profitable investment as an owner-occupant? We can do a lot of updates ourselves and have some savings for other repairs, but otherwise are trying a lot of little money down strategies.
@Matthew Richardson I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." If you are looking to owner occupy, you may want to consider starting out, with buying a Duplex, TriPlex, or a Four Plex. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a FHA 203k Loan. A FHA 203k Loan is where the purchase price and rehab costs are rolled into a single loan.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA, Conventional, FHA 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
I would say get a new realtor. Try Rob bergeron, he is a investor friendly realtor here in Louisville.
Yes, I have seriously considered that. I’m concerned at his pessimism towards finding deals especially when he’s an investor himself. I am brand new to it so I can’t tell if he’s a pessimist or just being realistic.
The market's been hot over the last few months, especially for small multi-family. If you are able to do an FHA loan, you can still find some incredible cash on cash returns even now.
Keep hunting and running your numbers. Set up automatic searches for your criteria if you haven’t already. Also, don’t be afraid to make offers that work for you. The worst they can say is, no!
The market's been hot over the last few months, especially for small multi-family. If you are able to do an FHA loan, you can still find some incredible cash on cash returns even now.
Keep hunting and running your numbers. Set up automatic searches for your criteria if you haven’t already. Also, don’t be afraid to make offers that work for you. The worst they can say is, no!
Message me is there is anything I can do to help. Thank you very much, William! I have some automatic offers set up. I need to be more aggressive with making offers—we’ve been really far apart in the numbers on properties we’ve found.
Out of curiosity, we have been looking at using a conventional loan because of the really low interest rate. I haven't considered the FHA as a result. How does it help with COC return? Is it the no money down?
We will keep searching and hunting. Thanks for the offer to reach out to you.
I went with a 3.5% down with the most recent property. Talking with my lender, with a multi-fam they were requiring 10% down right now for a conventional duplex. Since this is a live in flip/house hack I wanted to put as little down as possible at this point. This gives me more reserves for this uncertain year.
Next year once my updates are complete, I will reevaluate the market and decide to go after the next house as conventional or to refinance the FHA first.
Run a house hack two ways, while you are living there and post. As long as it cash flows post and saves you money in the short term it’s a win and will get you started on the path to FI!
@Matthew Richardson I am not a fan of purchasing a Residential Multifamily Property known as "House Hacking." If you are looking to owner occupy, you may want to consider starting out, with buying a Duplex, TriPlex, or a Four Plex. Many Realtors will suggest purchasing a property using a FHA Loan, to reduce your out of pocket money. If the property requires rehab, the Realtor and/ or Mortgage Broker will suggest applying, for a FHA 203k Loan. A FHA 203k Loan is where the purchase price and rehab costs are rolled into a single loan.
Assuming you have a respectable FICO you can buy, with a FHA Loan (3-5% down, a 30 year amortization schedule, and a residential loan rate). You live in one unit and let your tenants pay the mortgage and other property expenses. This will give you experience as both a Landlord and Property Manager. The downside is you will need to live there, for a minimum of one year (to satisfy FHA Requirements); AND because you closed personally, you will not have Asset Protection, in the form of closing in the name of a LLC. What happens if one of your tenants has a slip and fall, on your property, or something else happens to them? You are on the hook and can be personally sued, for everything you own. Some people will say, "Take out a quality Insurance Policy and you will be protected." Ambulance chasing attorneys know their way around and can legally navigate around Insurance Policies. Another downside is you loose on the advantages, of the Federal Tax Code, by not closing in the name of a LLC.
If you want to close in the name of a LLC, Mortgage Lenders will offer you Commercial Loan Terms (25-30% down, a 15-25 year amortization, and a ballon due in 5-7 years). This is what I am encountering, in the current Mortgage Industry.
If you think you will go FHA, Conventional, FHA 203k, etc. and then Quit Claim the property, to a LLC, or a Land Trust you run the risk of the lender discovering a Title Transfer occurred and activating the "Acceleration Clause" or "Due on Sale Clause" that requires the loan to be paid in full, within 'x' number of days. These clauses are contained, in all Promissory Notes nowadays.
Many Realtors and/ or Mortgage Brokers will not tell you this information. Many, but not ALL are only focused on the commissions he/ she will earn and not focused, on your best interests. You may be asking yourself what can I do? Locate a Motivated Seller that will consider Seller Financing. You may have to put more money down (10-15%), but you can close, in a LLC, with no worries about banks. I have a lengthy Legal Opinion, from my seasoned Legal Team regarding this matter.
@Matthew Richardson you mentioned the 70% Rule, in your post. Many Investors that flip homes, or other properties use the 70% Rule that says 0.7 x ARV - Repairs = Your Maximum Allowable Offer (MAO). What hurts Investors that use this formula is it does not account for Holding Costs, Backend Selling Costs, etc.
I use the following formula to determine my Maximum Allowable Offer (MAO). This formula is the Profit Margin Formula that accounts, for 99.99%, of everything.
ARV - Desired Profit - Closing Costs to Buy - Repairs - 10% of Repairs - Holdings Costs - Concessions - Realtor Fees - Closing Costs to Sell = Your Offer (MAO or Maximum Allowable Offer).
ARV: After repaired value or what you think it will sell for once repaired.
Desired Profit: This should be taken off the top first. Most people run their numbers to determine what their profit should be. That is backwards, you should use your profit to determine what your offer should be. As a General Rule, my Desired Profit is $20,000 or 20% of ARV whichever is greater. To have an offer accepted, one may need to adjust their Desired Profit; however, it should not be below $20,000, or what one feels is acceptable.
Closing Costs to Buy: What is it going to cost you to buy the property? If you are using hard money you need to budget for the points and fees as well as traditional third party closing fees.
Repairs: The money it is going to take you to rehab the property plus an extra 10% of estimated repair costs to account for unexpected repairs.
Holdings Costs: Here is where a lot of investors get tripped up. Start by determining an amount of time that you will hold the property, probably 4-6 months. Then add ALL costs related to holding the property (utility costs, property insurance premiums, property taxes, loan payments, HOA Fees, etc.).
Concessions: Concessions are what you give back to the buyer at closing. It could be for closing costs, unfinished repairs or something else. I typically subtract 3%, of the ARV.
Realtor Fees: What is the commission you are willing to pay your listing agent (unless you are the listing agent) and the buyer's agent. Utilize 6% of ARV.
Closing Costs to Sell: Title fees and other closing costs. You can budget around 4% of the sale price to cover these.
This is a conservative formula. If you come out ahead without Buyer Concessions, on budget, etc., this puts more money in your pocket, when you close at selling.
@Matthew Richardson someone in this thread suggested that you find an Investor Friendly Realtor which I completely concur. I would suggest that you interview several Realtors and ask them the following questions, to ascertain if they are truly Investor Friendly, or if they are throwing you a sales pitch.
1. How many investors do you currently work with and how many investors have you worked with, in the past?
2. How many transactions have you closed, with investors?
3. Do you currently own any Investment Properties? If so, what type do you own?
@Thomas Franklin this is an extremely helpful and solid breakdown. It does indeed leave me wondering what the best course of action is. Seller financing is a preference but because of little money down it seems like it should be my second or third transaction so that I can build the capital.
My lender told me that the 203k loans have been on pause since Covid. I found a property that I wanted to do that with, but he didn’t give it as an option.
Again, these are a lot of helpful pros and cons to consider. Thank you very much for such a thorough explanation of my potential options.
@Thomas Franklin Yes! I never even considered holding costs in this calculation. I do know they have destroyed profits for some investors in many cases.
I don't know if this would be too far out of the way for you, but there are some 4-plexes available in Radcliff. There are also some new construction duplexes being built in Brandenburg, but there are pretty expensive, and you have to buy each side separately.
Shop on the HUD website. Hudhomestote.com. Investors cannot bid on thoses houses for the first like X amount of days. The only people that can bid on them are owner occupies. That's how I got my first one.