Hello everybody this is my first post so I hope this is in the right spot, just looking for some advice or suggestions on my situations. So here's my story I am currently looking to purchase my first of hopefully several investment property's I purchased my first home that I occupy almost a year ago I bought this house with a conventional loan and 35% down, I have a decent paying job and my credit was spot on when I bought this house, so a year has passed and I'm ready to try an buy an investment property when I find out that my credit has tanked due to a few medical bills that have went into collections and no bank will approve me. I have enough cash to make a cash deal (roughly 70k) however I'm looking to spread this out over several properties. So my question is what kind of options do I have I am getting my credit resolved however this could take a while before any major changes are made.
Maybe owner financed deals. Maybe partner with someone who has credit. ??
My advice would be to worry less about "spreading it around" and more about putting it to work. With that amount of cash, you can get qualified for a mortgage...I promise.
Here's an example of what I would do. (The numbers may be off, because I don't know your market, but just adjust the numbers.)
I find a property for $75k, the current appraisal is $85k and it has an ARV of $150k. It needs about $20k in rehab to be a solid rental. The market rent is about $1200/mo.
I go to a small local bank with the deal and put $30k down on the property and use cash for the rehab. That leaves me with $20k in reserves.
Now I have a LTV 53%, which any bank will be happy with, plus I can show them $20k in cash reserves. Done
Now, you complete your rehab and put a tenant in the property. You're cash flowing every month and paying your mortgage on time. At the end of a year, you have a nicely seasoned mortgage that you can refi on a new appraisal, hopefully at or above $150k and pull probably $38k in equity out for your next deal(s). The gravy on top of all of it is that you've done great things for your credit score and you have established your ability and willingness to service your loan with the bank. After that, your credit score will mean a lot less to that bank.
Here is my advice, and congrats on having $70k cash!
- Write down your goals.
- Continue saving money.
- Repair your credit as much as possible.
- Read every book you can on real estate investing.
- Join a local landlord and/or RE investing group.
- Study your desired market.
- Be patient.
You will need to determine how far $70k will go in Central, Ohio for cash deals. One strategy is to use that money for rehabs and cash the property out once you can show rental income (and typically after 6-12 months of ownership).
Alot depends on what you mean by "tanked". I'm assuming you have paid your current mortgage on time. That should have helped. If I were you, I'd pay the medical bills. Once they're paid your credit score will start to improve. Then, I'm with Hattie. I'd take my cash and head down to a smaller local type bank that portfolios some loans. That said, I'm betting that you can buy a house cheap in central Ohio, maybe for cash. So I would educate myself, learn what I need to learn. A big rehab is not the place to start in my opinion. But if you could find something that just needed some cosmetic type work, a little painting etc., maybe you could pick that up and turn into a rental. Even if you used all your cash, if you pay those medical bills off, your credit score will start to improve and then you could refi your rental, and pull your cash back out.
To bad you missed out on the opportunity to use a FHA loan to acquire a 4-plex. In retrospect its what I wish I had done with mine. Hind sight and all that. If the medical bills are modest. I would pay them off. Maybe look into some low interest loans to take care of them. Once they are paid off your credit will start recovering immediately. I wouldn't start out with a flip. It seems like everyone who joins lately thinks that is what they need to be doing. I guess I should blame the shows that sell the idea. It is a much safer bet to start with a rehab and rent. If you go over you can still rent it & it will help you understand rehab costs when you are ready to flip.
For investment homes used as rentals, the rule of thumb is to charge around 1 percent of the purchase price as the monthly rent.
Dylan, I would dissent from the group and say get your credit sorted out. I understand the desire to invest, but resolving your credit is paramount if you are going to have a successful career investing. Use a portion of the cash to negotiate with the creditors and settle for the least amount possible. Or, enter into a minimal payment plan with them...it will start reflecting positively on your credit. Your bills will not go away, promise. Set a goal to buy that property in the next 6-8 mos.
In the meantime, you will have better luck working with a portfolio lender on an investment. If you are in central Ohio, Union Savings has good portfolio loan options. There are a ton of other options for investing with bad credit, but they carry a lot of risk if you are not experienced. (wholesaling/ wholetailing/ seller-financing/ sub-to).
The issue is having judgments, a judgment can take priority over a lender's lien which is why the banks won't touch a deal, it's not about poor credit so much. Lenders almost ignore medical bills if that is the only credit issue, everyone knows medical issues are beyond your control and that medical costs are pretty much a license to take everything one has with outrageous charges.
I suggest you get with an attorney and clear up the judgments, not some credit repair type, but one to lift judgments and develop a payment plan. If the bills are such you really can't pay, bankruptcy is not such a disaster over medical bills as simply mismanaging your money.
I have had medical judgments released by hospitals when they learned the judgment was keeping the individual from buying a home, if you are making an attempt to pay their intent is not to ruin your life.
Consider lease-options too, you can sub let (as much as I dislike new folks getting into sandwich lease arrangements, sometimes a little suffering is in order to achieve the goal).
Partner with someone as mentioned above. Circumventing some collection agency isn't that hard in RE, you can move into an LLC as a member and never be discovered as a member so long as you don't register it initially. I doubt some collection type is astute enough to find you as a lender with another investor, partner on a rehab. Lending inside an LLC through the Operating Agreement might only be discovered with a court order.
It's not the end of the world, but you need to get those judgments taken care of! :)
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