First Deal!!! LLC, Commercial Loan and 401(k) Loan?!?!?!?

19 Replies

Hello everyone!It is time for me to finally be able to post my first success story.I just finished rehabbing my first investment property, and I’m currently going through the process of placing my first tenant.I believe that my process was a bit unconventional, and may help other first-timers (Either by giving them some ideas on what to do, or if everyone hates my process, what not to do!)This may be a long post, but I thought it would be good to walk through everything step-by-step, and explain my thinking along the way.If you want to stick with me through it all, here we go:

I was not going to be getting a conventional mortgage for my first property for a number of reasons.First, I am still annoyed at the hoops I had to jump through to get a mortgage for my primary residence.Second, my liquid cash was on the lower end.Third, the properties that I would need to start out with would not be financeable anyway.Fourth, my DTI is on the high side, due to the decision that we made to take out a HELOC to complete interior improvements on my primary house.So, I decided that my path was going to be to form a single member LLC, and take a loan from my 401(k) at work to finance the down payment.Since I do not view the 401(k) loan as a long-term solution, I am treating like hard money, and pay it off ASAP.So, my first deal would be a flip, or a rental that was such a good deal, that I could re-fi out and pull all my cash out.I decided to reach out to the commercial lending department of the local credit union, which I am a member.The person I talked to (who became my lender) is fantastic.I told him what types of properties I was looking for, and that I'd look to turn them into rentals, or to flip them.I will never forget his response, which reminded me why I love this credit union.He said:"Typically, the deals you are talking about are much smaller than the deals we like to do.However, we also realize that you can not get to that level unless someone helps you get there.So, if the numbers make sense, we will see if any of our products fit."Awesome!

I began scouring foreclosures, REO's, and craigslist.Eventually, I came across an SFH REO that had been on the market for 15-16 months.It was initially listed at $89,900, and was down to $39,900 by the time I looked at it.It clearly had plumbing and a kitchen for an un-permitted 2nd unit upstairs.The conversion from SFH to duplex would be easy.It basically needed everything.I decided to put an offer in.I felt like I could make the numbers work at $25,000

For those still reading, here was the process:

  • My initial offer was $10,000 w/ $500 EMD all cash.They countered at $35,000
  • I went up to $15,000 and they stayed put (oops, over-played it)
  • So, I counter at $17,500—best and final offer.They counter down to $25,000 w/ $2500 EMD
  • I email my lender, and let him know that I am at $25,000 (he knows that was the target was), and told him that I wasn’t done and wanted to bring him down further.He says “Let me get this straight.You got them down from $40,000 to $25,000 which is 37.5% off asking price, and you want to get them down further???”I say “Yep”.
  • When the bank came back with the increase in EMD from $500 to $2500, I asked my agent if that was because they wanted to increase the likelihood that I would not walk.She said that she believed that was the case.So, I believe at this point, ensuring I close is more important than the sales price.Plus I already stated that $17,500 was best and final.
  • So, I countered back at $17,500 with $2500 EMD.It was accepted.My lender couldn't believe it.

After closing, the bank and I discussed financing options.Since it ended up being all my cash for the purchase, we decided on a construction to permanent loan.We got an appraisal value for its as-is condition and it's ARV.When analyzing the property, I tried to be conservative and used a $120,000 ARV.As-is condition came back at $60,000, and ARV came back at $145,000.Comps were had to come by, as this is a small, rural town and there hadn't been many homes sold recently.The bank would ultimately lend me up to 75% of the ARV, or $101,000 in 4 draws.The loan would be interest only during the renovation, and convert to a mortgage when completed.The loan is 10 year fixed at 6.25% with a 25 year amortization.Projected costs:

  • Electrical work--$5,300
  • Renovations--$64,000
  • Zoning Hearing for approval for conversion--$1,500
  • Insurance, permits, property taxes, and other holding costs--$2000
  • Total Budget--$73,800

Renovation took just under 3 months, with virtually no surprises.The electrician came in at budget, and the renovations had $4,000 in overages.With the purchase price, loan costs, and renovations, I am right at $101,000.I also believe that if I chose to get a new appraisal, it would come in much higher, as since the first one, a few houses in the area have sold and would support a higher value.So here’s a quick run-down on the numbers:

All-in price:$101,000

Value:$145,000

Income:$850/month x 2=$1700

Monthly Expenses:

  • Maintenance 10%:$170
  • Capex 10%:$170
  • Vacancy 5%:85
  • Electric:$20
  • Trash:$55
  • Insurance:$100
  • Property Taxes:$185.33
  • Mortgage:$666.27
  • Total:$1451.60

Monthly Cashflow--$248.40

Money in the deal—ZERO DOLLARS

Yes, I know that I did not account for property management in my numbers.The reason is that there is industry moving into the area, and higher paying jobs as well.I believe that rents will increase and support property management down the road, if I choose.If that doesn’t happen, well then I’m stuck managing forever or selling it at some point, but it is a risk I am willing to take at this point.

Is this deal a home run?For me it is.Sure, if I went conventional and put 20% down at 4.5%, it would look amazing.But that wasn’t an option for me at the current time.I will have more deals in the future where I can go that route.For now, this gets me in the game, builds a relationship with a commercial lender, gives me experience, and puts a few hundred dollars a month in my pocket, while having none of my own money in the deal.I’m damn proud of myself, because I passed on other deals that I knew would work, but not in the way that I wanted in the present.I needed to pull all of my money out, and I succeeded.Looking forward to placing tenants and get the place producing.

Hey Jason!

We were introduced through bigger pockets a few months back. We found out we both live around Berks County area and were looking to get started.

Congratulations! I'm glad to here about your success story ! Way to get creative on your first deal!

I just bought my first property too about a month ago. It was an off market deal in the Spring Township area.

If you don't mind me asking, I'm just curious... what credit union did you go through and what did that process look like? After you described what you wanted to do, did they present you with individual properties to look at or give you a list to sift through?

Also, where about is the rental? It took me what seemed like an eternity to find a property in the area with low enough property taxes to make the deal work.

If you even need anything or want to meet up sometime, let me know.

Congrats again!

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@Cowan Bucks

Hey! I actually live in Spring Township. Thanks and congrats on your purchase! I have the bank all the info on the properties I was looking at, I had my contractor walk the property with me twice before I got it under contract and give me an estimate. Also did the same with the electrician. I have him some analysis with low estimates on rent and ARV, and high estimates on expenses to make sure it worked. He ran whatever process they have, and we ran with it. The last hurdle is tenants, which I'm in the process of doing right now.

I will PM you a bit later with the details on area and contact info.

Hey, newbie here. When people say "no money down" would that mean that after all is said and done,  you got your initial purchase money back?

Because you did have the initial 17,500 plus ish for the cash purchase, right?

@Samantha N.

 In my particular case, it wasn't "No money down".  I had to spend $25,000 before the bank would finance the first renovation draw.  Because I bought it so low, and added so much value, there was $25,000 left over from the amount the bank would loan on it.  So, I paid myself back.  This leaves me with $0 out of pocket on the property when it was all done.

@David Groff

Welcome to BP!  It's a great site.  Get active.  Also, I read your Bio.  I'm not good at fixing stuff either.  I mean, I literally can not do any work with my hands.  That doesn't mean that you have to buy nice properties at full retail.  I don't need to know how to do everything.  I just need to know someone who is the expert.

Good luck as you go down the path!  Let me know if you need anything.

Inspiring story, Jason! Congratulations on your persistence and creativity. Sounds like you presented things very clearly to the credit union, also. I'm particularly impressed with how close your actual costs were to your budget. How did you find a good contractor? I find that carpenters are harder to find than plumbers or electricians, and much harder to get accurate estimates from.

@Wendy Forbes

He was referred to me by an investor I admire and trust.  Part of me thinks it's easier to estimate when basically everything is being renovated.  Also, His estimate was done like my analysis--worst-case scenario.  If something took longer than expected, the price remained.  I'd also get a text asking me to choose something, one which would save money.  For instance, he texted me and said "Do you want single or double-hung Windows?  The estimate calls for double, but you can save $xxx by going with single.  Your choice."  Also, this house had a huge metal roof.  He told me"It's your metal.  You can pay me for my time and I will haul it to the recycling center.  Anything over my pay will be credited."  

We did have some unexpected items.  The water heater which looked good was shot.  And one section of plumbing sounded like a golf course sprinkler.  Code inspector wanted more fire-rated materials then we thought we needed. But, the credits offset most of it. 

One thing I will say is that my good fortune and luck at hiring him is not lost on me.  I'm extremely appreciative.  I'm sure that I'm spoiled now.  Hopefully, he's available for my next one, as he's already booked into next year.

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@Jason Krick Congratulations! Great summary. I'm hoping to purchase my first true investment property in the next 12 months and your post encouraged me quite a bit. (I say true because I'm currently house hacking.) Good luck in the future, and keep the posts coming!

@David Groff

Thanks for asking!  It took some time, which I expected (small, rural town), but both units are leased up.  With it being later in the year, I didn't have as many applicants as I liked, and ended up dropping the rent to $825, but increased the length so that they end in springtime.   So, if I have turnover, I can look to fill the units at a more opportune time.  

Still a win in my book, and I'm off to search for #2 in the near future!

Congratulations Jason and thanks for sharing!!!
I love it when people share there thinking behind there strategy. Yours was very similar to mine in that I had to do some creative things financially in order to get into the game too:)
My boyfriend is managing the rehab so I too feel blessed to have someone I can trust looking out for me.
Best to you in your journey towards financial freedom

So Grateful for BP!!!

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