First deal, best financing option?

Question

I've got an opportunity to buy a sfh for $30,000. Property will cash flow $300 a month on a cash deal. My options are traditional lender @ 6%, take a 401k loan(5 year payoff @ 3.25%), or wait another 1-2 years to save the cash. I'm 28 and have been researching rei for 5 years. I want to get my first property in the worst way but need advice on my best course of action...

Alan Mackenthun · Answer

I'd consider the 401k loan, but only if you plan on staying at the job a while.  If you leave before it's repaid, you'll have to pay it in full when leaving.  Otherwise, you could refinance it later.  On the other hand, it seems like you should be able to get a better rate on a 15 year or even an ARM mortgage.  Of course there are a lot of other variables.  Are you looking for cash flow now or building wealth.

Craig Knobel · Answer

Thanks  Dmitriy.  I'll have to look into conventional a bit more to make sure it's an option on this property.

Craig Knobel · Answer

ok friends, I've attempted to put together some numbers on this property, feel free to pick them apart and let me know what you think of the deal..

Purchase price: $30000.      Rent:$750.       NOI: $3900.     Cash flow:$1356

Cap rate: 0.3

These numbers are based on $10,000 down payment, and a mortgage for the other $20,000 @ 6%.

This makes the mortgage (with taxes/insurance) $412

In addition to the $412 I've added a 10% management fee($75) and a 20% vacancy/repairs allowance ($150)

The total is $637, leaving me $113 a month positive cash flow

$113 is not much, but I don't NEED the income now, just don't want to get myself in trouble. What is an acceptable monthly cash flow to you?

THANKS

Craig Knobel · Answer

Alan, I do plan on staying at this job. I am not necessarily looking for cash flow now, mostly just acquiring properties to build wealth. As things progress and I'm able to take advantage of these cash purchase deals I'll look to create some cash flow. Hopefully sooner than later!

Michael Wentzel · Answer

@Craig Knobel I'm trying to acquire properties at about the same price point. After fighting with a big national bank on a couple mortgages, I stumbled across a local/ regional bank that has been great to work with. They had no problem doing conventional mortgages on on properties under $50,000. Now they moved me to portfolio loans which they hold, but have much lower loan origination fees than conventional mortgages. Portfolio loans are also are easier on the underwriting and can close on a shorter schedule. An extra bonus is they will let me refinance as soon as the rehab is done to get my cash back out of properties and go to the next deal.

So I would encourage you to find a local/ regional bank that will do the conventional mortgages to start with and then possibly switch you to portfolio loans. If there are plenty of properties at the price point in your neighborhood, you'll want a good lender you can work with long-term.

Mike

Dmitriy Fomichenko · Answer

On the other hand, if you are getting good return on your money in your 401k (more than you would pay back to your self on the loan), you can also explore doing a conventional financing.  But with such low price it might be challenging to find the lender.

Dmitriy Fomichenko · Answer

@Craig Knobel

if you have the money in your 401k and can get this deal the yields over 10% cash on cash - go for it!

First deal, best financing option?

Most Popular Reply