Financing My second Deal

12 Replies

Hello,

I have some questions about how to get bank financing for my second home purchase.

I am currently house hacking in a 5 BR house. I purchased the property with an FHA loan. I would like to now move to a new home that I purchase with home owners financing and house hack again while managing the other home as purely a rental property. It is my understanding that I cannot have two FHA loans at the same time. However from speaking with my lender I have the ability to purchase a different home using a conventional personal residence loan product. He said that I can do this while still keeping my FHA loan. While I can utilize the rental income from the home that will purely be a rental to offset some of my debt for the debt to income ratio I am frustrated by the price limitations that the inability to count the entire signed leases as offsets against the mortgage. I have heard it said on the podcast many times that bank financing can be used typically on up to 10 properties and I am having trouble seeing how to use it for 2 let along10 so I feel that I may be thinking about this the wrong way.

are there certain loan products that I am missing that would allow more flexibility for income offsets? Does the 10 properties idea merely apply to extremely high income individuals? Are the rules different if I am buying outright as an investment property instead of as a house hack scenario? I have also considered going the route of a NACA loan since it is based on monthly cash flow instead of the rigorous 2 year figures that banks require which would let me utilize more of my income for the projections. Any insights from the community would be much appreciated.

for context the first house cost 340k , the monthly payment I can qualify for on the second home is ~1800 . My current income is around 98k however because I work in sales and they require a 2 year average I demonstrate an income closer to 76k.

Outside of what the issue is for this property I want to understand the mistake that I am making in general so that I can begin to plan for the 3rd property after this one and the ones that follow that.

Hello Aaron Murphy,

Carley M. is correct. You may not use the NACA piurchase program if you have an ownership interst in any other property.

Tim Trumble

Online Operations, NACA

@Aaron Murphy I am currently in a similar situation where I am trying to sort out financing for my second deal without going down the road of 20%. How did things end up going with your second deal?

Originally posted by @Darian Richardson :

@Aaron Murphy I am currently in a similar situation where I am trying to sort out financing for my second deal without going down the road of 20%. How did things end up going with your second deal?

Darian,

I did not end up solving the problem that I was trying to. I did end up moving forward with a second deal and then a third. I purchased the second deal using 20% financing by looking in a less expensive market that is around 1.5 hours driving from the first house. I purchased the 3rd deal using a Land Contract which seems to be a form of seller financing. This Land contract route seems like it will be the best avenue for me to get around the ways the lenders I have spoken to evaluate income but I from studying them I believe they carry more risk if the individual providing the land contract has a risky financial outlook.

I did not find another loan product that solved the issue but was able to purchase more deals by going outside the owner occupant financing structure that I originally intended to.

Hope this helps

@Darian Richardson , @Kenneth Gore

Kenneth responding to this post caused me to be reminded of it today. Which is cool because on 8/31/2021 I will be closing my 10th purchase taking me up to 9 rental properties and 1 personal residence. So it was really neat to be reminded of how much consternation I had around this issue at that time. 

One difference in my original question vs Kenneth's is I was concerned primarily about qualifying for the additional loans where you all may be more focused on saving the down payments. I was a single guy house hacking in a basement of a house so i felt like the down payments themselves was just a function of how long it would take me to save them. When I wrote the post I felt a bank wouldn't qualify me for a second loan etc based on income. 

My biggest point of feedback to the question based on my Journey is the two things below. 

1. just to figure out how to get "the next deal" and keep learning. if you do that incrementally at each step you will know more so the next one will become easier. As an example of this i got my second deal by going to a less expensive market an hour from my first property. There i was able to put 25% down and that wasn't that much more than the cost to house hack in the market where my first deal was. Then my 3rd deal was in that same small market but by talking to folks i ended up connected with as guy who finances properties to folks up there using land contracts and so the 3rd deal didn't require qualifying based on income at all. Each of those learnings was a big improvement on my original concept. 

2. Understand that things will change dramatically from what you currently see as the parameters of this decision. I cant say how much they will change for you but i was 23 when i wrote the original post and I was about 2 years into a career as a software sales person. Here are some things that changed: 

a)interest rate on my second deal was 4.75% the deal i am buying end of month is 3.125% so the interest rate climate changed.  

b) after buying the 3rd property i stopped buying real estate and committed to paying of 90k in student debt. I expected that to be a 2 or 3 year process. but in the process of doing that something inside of me changed and I saw my income from sales increase 2X over the years 2019 and even 2020, i expect this year to push it even higher. This allowed me pay off the debt in 9 months but then it has also fueled incredible portfolio growth AND its made income qualification a non issue for me in getting to the 10 loans. 

c) I am now married so even after we close end of the month and get to 10 mortgages I will still be able to buy 10 more in my wifes name so now I can do 20 rather than even being limited to 10. 

My goal in explaining those things isn't to brag but to just explain how in my life the path has been super non linear and full of unexpected things. The whole time I just kept reading and learning and trying to plan the "next best thing" and that has compounded from the time I wrote this post. So don't worry about figuring "it all out" at deal 2. just figure out deal 2. then figure out deal 3. and then if you cant do deal 4 save some more money and look for another way. 

Good Luck. 

@Aaron Murphy

That's impressive .

I'm really struggling to pull the trigger on this duplex cuz there's no equity ( purchase price and appraisal is the same) and no solid plan for future financing. Maybe I should just go for it.

@Aaron Murphy

That's impressive .

I'm really struggling to pull the trigger on this duplex cuz there's no equity ( purchase price and appraisal is the same) and no solid plan for future financing. Maybe I should just go for it.

@Kenneth Gore yeah this is a pretty crazy market. for me the goal was always cash flow focused so if your looking at an equity spread as the main focus you may be right to hold off. 

I have purchased almost all of my properties basically very close to the appraised amount. I do plan in the future to work with wholesalers and find off market deals etc . but if a property meets my criteria from a cash flow and Cash on cash return perspective i don't even mind being right at the appraisal. In the case of my land contract I think I technically over payed. But they basically gave me a 30 year seller financing at 5% wich worked really well from a cash flow perspective so I just did it. I think at the time(2018)  it was worth about 120, I paid 130 and got the seller financing and today its worth 195. 

maybe you could look for a fixer upper if you want to have an equity spread? 

@Aaron Murphy

Yes My goal is cash flow as well and this place has the ok numbers . knowing that you paid at or close to equity for most of your properties makes me feel a lot better.

314k

1300 rents

2.5%

Great location.

Zero down.

I'll be paying for 440 out-of-pocket a month with one tenant and pocketing 370 after accounting for 5% vacancies and 8% management with both rented. ( I don't plan on using management but I've run the numbers for it anyway) cap is 5.98%

I've been debating all day if I want to make them pay me another two grand at sign to fix the bathroom. A terrible DYI job. Hot and cold water is backwards, big hole in the wall under the sink , sink not mounted, counter not mounted ect 😐 other than that the house is nearly turnkey