Financing My First Deal and More After

Starting Out
5yFollow

Financing My First Deal and More After

Anthony Catoni
Germany · Member since 2020 · 46 posts · 21 votes

Hi Everyone,

I am a new investor looking to make my first two purchases within the next year. I have 15k saved up now and I also have access to the VA loan. My wife and I are looking to invest in the Columbia, SC area as that's where we are stationed. We will be moving in October of 2021 on military orders (possibly overseas). I have spent the past 9 months or so educating myself on real estate and learning the rope and am now ready to take action. One of the properties will be purchased using the VA loan (hoping to land a multi-family). The other property is where I need some advice/help from those that have done it before.

I made a list of potential financing options for the second home (please add more if I'm missing something). We will be debt-free next month and have great credit scores. 

Here's the list:

  • HELOC (not eligible, do not have a home with equity)
  • Conventional Loan (would be tough to hit 20% down with 15k saved, still could do with PMI)
  • VA Loan (ineligible if used with home 1, could refi out to conventional to make available)
  • FHA Loan and 203k (3.5% down with PMI, occupancy requirement)
  • Personal Line of Credit (credit unions I've called will lend up to $30k, but interest 12-18% depending on credit)
  • Hard Money (short-term, down payment needed and interest will be high)
  • Private funding (family and friends)
  • Partnership

My options (in order of preference):

  1. BRRRR SFH or multi-family
  2. Buy a SFH or multi-family needing little to no work
  3. Wait to build up more cash

I'd like to BRRRR the second property if possible, but I am finding interest rates to get short-term cash with no experience is killer, not to mention needing a significant down payment. In the refi stage, I'd like to cash-out refinance to get my money out and be able to do it again, possibly before we leave for our next location, but the seasoning period could be fatal with interest. How do you use short-term cash to fund these deals and factor in the holding costs? I'm guessing I haven't found the right lender(s) yet?

I can see how just getting started will you give you momentum, even with financing deals (cash-flow can be saved, HELOC will become available, experience, etc.).

Any and all advice on navigating through this would be great. It's not that I can't make this work, just need to figure out how.

Thanks,

1Reply
69 views

Most Popular Reply

David Pere
Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
5y

@Anthony Catoni My plan would be use the VA loan to house hack, put every penny of the money you're saving on living expenses and stash it in your investment fund, plus what you were already saving there. Six months down the road you should have a solid chunk of cash set aside, which will make all of your investment options easier!

3Reply
See this reply in the discussion

27 Replies

Jump to latestLatest
  • Trevor Andersen
    Flipper/Rehabber · Jacksonville, FL · Member since 2017 · 8 posts · 10 votes
    5y

    @Anthony Catoni

    Awesome to see you've really thought through your options and have done the research. I'm was in a very similar situation a few months ago (Military, PCS orders dropped in July to report in October, Real Estate bug, wanted to house hack a triplex or quad, and about $20k in cash reserves). So I'll share some of my thoughts and experiences for what they are worth.

    1. It was hard to find a home that both had potential sweat equity but also would qualify for a VA loan. I learned that most "as-is" properties wouldn't work.

    2. Multifamily properties were either overpriced duplexes in nice neighborhoods (Rosewood or Cottontown) or dumpy properties in bad neighborhoods or college areas (Olympia).

    3. Ultimately I ended up separating the house I wanted to live in from the real estate investment properties I wanted to do.

    4. This led me to a new strategy. I bought a moderately priced home that had a lower mortgage than my rent would have been anyways. Expect to use 3-5K of your reserves just for closing costs. After a few months I found someone (military Buddy) to rent out the extra room with its own private bathroom which covers the mortgage (not taxes and insurance). And I will either rent it out or Airbnb it once I PCS as my long term strategy.

    5. During the home search process I made good connections with investor friendly real estate agents and I told my family and friends back home (I'm from out of state) who invest in real estate about the great opportunities here and then connected them with the right agents. I was able to be a 10% partner in a deal with my out of State older brother in a flip he decided to do. Basically my 10% was a finders fee/project manager, he had a contractor do the work, I just ensured the work stayed on track with what he wanted. I won't make a ton from this deal but the experience just being a part of it has been monumental.

    6. I've kept my eye on the MLS for underpriced properties and I've tried to get on Wholesalers lists or facebook pages. I figured if I found a good deal, I could find a partner that wanted it. After a few months of that I recently found something and I'm working on a 50/50 deal with my brother for a flip. He has the cash reserves to do his half and I'm using a hard money loan for mine. Terms aren't great but the deal has enough profit to justify the interest payments.

    7. I'm halfway through the BRRRR Book from Bigger Pockets and it emphasizes repeatedly that the BRRRR strategy is best done with enough cash reserves to cover your purchase price and rehab so you can cash out refinance and keep that money going (velocity if money). The exception to this would be partner with someone, private lenders, or hard money loans.

    I hope some of this helps, if not sorry for the ramblings. Feel free to reach out and ask follow up questions either on this post or in a PM.

    2Reply
  • Tanner Sherman
    Real Estate Broker · Omaha, NE · Member since 2020 · 329 posts · 203 votes
    5y

    Anthony,

    I would say the best option would be getting into a multifamily property that does not need too much work. Network with a realtor, (Or realtors) to get them to set you up on email alerts for the criteria you are looking for. To get a residential loan you will have to find one that is 2-4 units. 3 units can be tricky if they are what is called a conversion triplex. This basically means that a SFH was converted into a 3 unit and most banks will now do a residential loan for them. If it was intended to be a triplex at construction you should be alright, but the next difficulty is finding comps to get an accurate appraisal. This makes it especially difficult when utilizing your VA loan. Househacking a 4 plex and getting some equity over the next year is a good play, and if you can successfully rent out the other units for a year then you can use a good portion of that income to offset your debt to income ratio. After a year you can use your VA loan again to move, and keep the 4 plex as a rental.

    From a strictly numbers standpoint, if you could save up the money needed to put 20% down on a property, then a conventional mortgage makes more sense for you. 0% down VA sounds appealing, but the issue with this is the VA funding fee. I got my house with 0% down, $1,000 in earnest deposit, and $200 at closing. Bought the house for $270,000. The VA funding fee was roughly $8,000. So then I owe $278,000 on a house that only appraised for $270,000. I won't have a penny of equity until owning it for a year. It was a great option because I didn't have 20% to put down, but I don't get that funding fee back in equity. If you can come up with the money to put a down payment you are much better owning 20% of your house at closing rather than waiting over a year of payments to own <1% of it.

    I would say that your best bet is a combination of #2 and #3. Save up some more money, find a multifamily needing little to no work, and get some equity in it from renting out 3 other units. Once you have some equity you could absolutely look to a HELOC for your next deal.

    Hope this helps,

    Best of luck,

    Tanner Sherman 

    2Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Anthony Catoni My plan would be use the VA loan to house hack, put every penny of the money you're saving on living expenses and stash it in your investment fund, plus what you were already saving there. Six months down the road you should have a solid chunk of cash set aside, which will make all of your investment options easier!

    3Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @Trevor Anderson 

    I appreciate all the insight. Everything you said is exactly where I'm at. Are you currently in Columbia?

    0Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @Tanner Sherman

    Thank you for the info. Currently, I am trying to network with realtors to get on email lists. Would you recommend contacting wholesalers for multi-family or is that hard to come by? As for the loan, that's the part I've been struggling with. I will definitely be upside down for the first year with the VA fees, but long-term the ROI is high. It's just getting to that point. Ideally, BRRRR is where I'm trying to get to so I can increase the speed at which I can do deals. Also, the HELOC will be a nice tool to have.

    0Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @David Pere

    I'm assuming you would suggest multi-family house hacking? 

    I also meant to ask all of you if you've done long-distance investing? I just read Long-Distance Real Estate Investing by David Green. Because I will be moving overseas, that is going to be how I do things for the next 3 years or so. 

    @Trevor Andersen @Tanner Sherman

    0Reply
  • Brandon W.
    Rental Property Investor · Columbia, SC · Member since 2018 · 83 posts · 33 votes
    5y

    @Anthony Catoni. I would use the VA loan or FHA and buy a tri or quad in a decent area. Be careful, if this isn't your first time using the VA loan your fee is higher. It can be a good chunk of change so weigh your options with an FHA.

    Get in touch with @Christopher Bunge. Inventory is scarce right now but this is the guy you want for MFH in Columbia hands down.

    1Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Anthony Catoni I love multifamily house hacking, but there are definitely other ways to make it work as well. 

    I have indeed! When I left Missouri in 2016 my wife and I owned 3 units. Now we have 20 in that town alone, and several of those have been purchased sight unseen. 

    1Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Brandon W. the funding fee isn't even close to as expensive as paying private mortgage insurance (PMI) is on the FHA loan.

    1Reply
  • Tanner Sherman
    Real Estate Broker · Omaha, NE · Member since 2020 · 329 posts · 203 votes
    5y

    @Anthony Catoni if you're okay with being upside down for a year then yeah go with the VA. Work on your preapproval now so that when you come across a property you can just pull the trigger.

    Find a property that you can add some value to and you can combine the house hack with the brrrr with the live-in flip.

    1Reply
  • Brandon W.
    Rental Property Investor · Columbia, SC · Member since 2018 · 83 posts · 33 votes
    5y

    @David Pere

    Not necessarily true, that's why I told OP to weigh his options. VA fee for second home and after is 3.6%. Could equate to well over $10-$15k for triplex/quad in a decent area. You only pay PMI til you have roughly 20% mortgage balance. You could pay more on the mortgage from the rents, get to that point and goodbye PMI and you saved yourself $10-15+k

    Weigh your options.

    0Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
    5y

    BRRR is very viable. I'd recommend looking to refinance your primary via FHA (Cannot be a second home) and then using the VA for the 2nd if possible. Avoid everything below FHA - you are not at that point yet and those sources of money are expensive.

    1Reply
  • Brendon Brooks
    Rental Property Investor · Houston, TX · Member since 2017 · 50 posts · 39 votes
    5y

    @Anthony Catoni

    Hi Anthony, you could also purchase on seller financing, which can be a great strategy depending on the terms. Obviously you have to make sure that whatever strategy you're looking to implore on the deal that the numbers pencil out.

    1Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Brandon W. Okay, lets say you purchase a home for $416,667 which is the purchase price that would equal a $15k funding fee at 3.6%

    If you wrap the funding fee into the loan - which is the standard practice - at a 3% interest rate which is a little conservative given the rates at this moment, the funding fee will add an additional $63.24/month on to your mortgage payment. 

    Now, let's assume you pay 3.5% down to use an FHA loan on the exact same property ($416,667 purchase price). That comes out to a loan for $402,084.

    PMI ranges from 0.55% to 2.25% of the original loan amount annually.

    at 0.55% that is $2,211.46 annually, or $184.29/month added to your mortgage payment.

    at 2.25% that is $9,046.89 annually, or $753.91/month added to your mortgage payment.

    Now, if you put 3.5% down, and only pay the minimum amount of the mortgage amount, it will take you 8 years and 5.5 months to get to 80%LTV and request the PMI be removed. Obviously this doesn't account for appreciation...but it also doesn't account for a market downturn, so I think that is fair.

    at 0.25% PMI rate, you will have paid around $18,576.26 in total PMI.

    at 2% PMI rate, you will have paid around 75,993.88 in total PMI.

    Now, I don't know about you, but if the lowest amount you would pay in PMI is over $3k more than the highest funding fee rate the VA loan has...to me the funding fee seems like it isn't such a big deal.

    People freak out over the funding fee, and fail to realize that it is still MUCH better than the other options available. Also, the funding fee doesn't exist at all if you're 10% disabled, or have a purple heart. 

    1Reply
  • Brandon W.
    Rental Property Investor · Columbia, SC · Member since 2018 · 83 posts · 33 votes
    5y

    @David Pere As you stated, your scenario assumes zero appreciation and minimum mortgage payments. Anthony may have different assumptions.  Let's also not forgot what an additional $15k rolled into the loan looks like after 30yrs at 3% (roughly $38k).  Likewise, that $15k he put down could've also gone in the market making 7%/yr for 30years ($110k).

    I don't think Anthony intended for this to be a VA vs. FHA showdown but you did illustrate some fine points that can help him weigh his options. I would simply advise against blindly choosing the VA loan without weighing the options first.

    0Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Brandon W. you don't put the funding fee down? You put 0% down, and the funding fee gets rolled in. 

    Assuming the property appreciates, as you mentioned, over 30 years, the appreciation would most likely be higher than 3% averaged over time, and equal much more than $70k. 

    I'm not advocating for blindly choosing the VA loan, but rather stating that the VA loan is a much better product than the FHA loan. I didn't even mention that the VA loan generally gets better interest rates than the FHA loan, which extrapulates to make it better.

    Also, if we are talking about down payments that could be invested at 7% returns, that down payment on that property at just 3.5% is $14,583.35 and if invested it would earn $1,020.83 in the first year, and then compound from there. Assuming the original scenario for how much the funding fee costs monthly, you would net $21.76/month over the amount of the funding fee, by simply investing what would have been the FHA down payment, and paying 0% down to use the VA loan.

    This doesn't account for how much more you would come out on top if you invested the money you'd be spending in PMI every month as well at this 7% return.

    Look, I'm all for using the FHA loan - I did for my first purchase - but the numbers don't lie, the VA loan is the better product. The funding fee is almost nothing compared to any other lending product, especially when you consider the opportunity cost of paying a down payment that you shouldn't have to pay.

    0Reply
  • Brandon W.
    Rental Property Investor · Columbia, SC · Member since 2018 · 83 posts · 33 votes
    5y

    I was referencing the $15k you would've put down into an FHA (3.5% of your $416k purchase price).

    I'll state again, I don't think Anthony intended this to be a VA vs FHA showdown, so let's move on.

    0Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    @Brandon W. I didn't realize a detailed breakdown of loan payments could be perceived as a showdown, or somehow offend anyone. Just trying to help stop the "funding fee fear" that people spread.

    0Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @Alexander Szikla If you refinance your primary into FHA, how do you go about purchasing the second home using the VA and get around the occupancy requirement? If that could be figured out I can see it working out pretty nice.

    0Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @David Pere @Brandon W.

    I actually like the debate. I can see the pros and cons of both. I do think based on the payment schedule you'll end up paying more with the FHA versus the VA. If the numbers still work with the FHA and I didn't have access to the VA I'd definitely use it. Have either of you used the FHA 203k? How does that work with a refinance? Just thinking but, if you bought a fixer upper, under valued, with that loan, fixed it up and re-appraised, would you still need PMI if it appraised higher (getting you to the 20% mark)? Or do you always have to have PMI on an FHA? If the answer is yes, I'd look at refinancing out.

    1Reply
  • David Pere
    Rental Property Investor · Springfield, MO · Member since 2016 · 1k+ posts · 890 votes
    5y

    I haven't used the 203k yet, but if you have more than 20% equity you shouldn't be paying PMI. However, at that point you might as well refinance into a conventional mortgage anyway because you would have enough equity to do so.

    0Reply
  • Clarence Stevens
    Member since 2020 · 18 posts · 13 votes
    5y

    @Anthony Catoni

    I have never used the FHA 203k, but at i understand it is better to refinance to a conventional. On a FHA the PMI doesn't go away for the life of the mortgage, but it will automatic fall off at 20 percent with the conventional. So after your seasoning period after repair with the 203k, assuming the appreciation is more than 20 percent, you will not have PMI to deal with.

    1Reply
  • Antonio CuccinielloPro Member
    Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes
    5y

    @Anthony Catoni 

    With 15K it is going to be hard to get two properties. Are you planning on buying the VA property with seller paying closing costs? Otherwise (I may be wrong but) you need money from the 15K for closing costs.

    Now, one way you might be able to think about this is to apply separately for a loan with you and your wife. She applies using an FHA and you apply using VA. (I am not sure if there is a bank that will allow this, but I tried to get creative for you.)

    Otherwise, once you buy the first one and buy it right (meaning you have bought one with good cash flow), you can talk to family and friends and see if they are interested in investing. Chances are if you are young, there are people looking to get you money for your next property.

    732-402-6988
    1Reply
  • Alexander Knowles
    Real Estate Agent · North Myrtle Beach, SC · Member since 2018 · 110 posts · 99 votes
    5y

    @Anthony Catoni - although contrary to the investor mindset, have you thought about new construction using your VA loan as your primary residence? Plus the new builders likely have great closing cost credits and you can usually get a below-asking price for spec homes/model homes. The home will certainly qualify for the stringent rules of a VA, plus you can get it near-100% financed and keep your dry powder for the fixer-upper you are looking to acquire. There are downsides of course, but just bringing an idea to the forum.

    1Reply
  • Anthony Catoni
    OP
    Germany · Member since 2020 · 46 posts · 21 votes
    5y

    @Antonio Cucciniello

    15k will mostly likely not get us 2 properties. The plan is to BRRRR a property with short-term money/some of my cash for 1 property and then purchase a new or newer home with the VA and we will live in that for the time being. If I can BRRRR the first property, then I will be able to recycle funds. I'm looking to network with hard money lenders and potential partners. The FHA is also in play, but the VA is a better deal.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free