Down payment challenges

8 Replies

Happy Friday pocket people.

I live south of Boston, earn a good salary and am looking to buy an investment property but am struggling on how to come up with a down payment. I've owned my home for a little over a year and have added substantial value, did 90% of the work myself to keep down cost, but still depleted my savings substantially. I looked into taking value from my home but was told between the VA only cashing out up to 90% and the VA charging 3.3 it would be fairly expensive for a small return. Quick summary if I added 55k in value to my home I'd put 14k in my pocket just to be charged 10k (added to my loan). If I were to try and save for a 300k down payment Id have to put $1154 aside every week just to be ready to buy in a year. All numbers rounded with 0 savings for simplicity.

Is the first investment home the hardest?  What are people doing to get past this substantial obstacle?  Besides a 10% down payment on a vacation property what else is there?  I could be wrong but hard money seems like a no go on anything but a flip.  I dont have wealthy friends or family.  Somebody throw me a life line.

It ain't easy or else everyone would do it! If you're looking to use traditional financing on an investment property you might look at investing out of state where you can get more bank for your buck. If I were you I'd definitely check out David Greene's book on long distance investing for a different perspective on investing in real estate.

From your question, it seems like you're not interested in moving.  However, house hacking would require a smaller downpayment.  If not, as you suggest, vacations properties used as short-term rentals are a viable option.

@Duncan Banks   I went with cheaper properties in the VT area, vs in Burlington VT where they're about $400k.  I came across a few around $100k and was able to do 10% down on a owner finance purchase, fix them up some, and then refi out and use the greater amount of money for the next place.  And repeat.

Also other options like 401k loans to help contribute too.

Finally, smaller local banks that would provide purchase + rehab financing on places that would need a lot of work.  Due to the amount of work required, they didn't qualify for conventional lenders and I didn't have much competition.  So was able to make some really low offers that got accepted.

Hope that helps and good luck!

- Tom

I appreciate the input. With 2 young kids I have some self inflicted limitations in the interest of my families stability but i'll keep digging and see what I can find. Where there's a will there's a way, and I always find a way.

@Duncan Banks for my first investment property my lender helped me do both a cash out refinance and a HELOC in order to get my hands on the funds. It sounds like a HELOC would be a much better way for you to access the equity you have built up in your primary residence as it wouldn't mess up that sweet VA loan you already have in place. I have used the HELOC strategy twice now, and it has worked out great.

As others have mentioned, you can often times borrow money from a 401k as well. Another strategy a lot of people over look is borrowing from life insurance policies. There are lots of ways to get the cash! Stay patient as real estate investing is a long play.

@Duncan Banks

First thing you should do is define your strategy/ model for investing. Are you flipping or is it long term cash flow, what is the exit strategy (fix and flip, Refi, long term cash flow etc) this will help you to form a strategy for finance. If it's short term, you can borrow from retirement, friends family etc. if it's long term. Pursue the seller for help with financing ( owner financing is incredible, subject to are awesome as well, lease options etc.

Remember that you can ask the owner for concession. I asked a seller for 10k and got it ( recently) if the deal is strong enough you can pull cash at closing. I started in this game money challenged, really my problem wasn’t money, it was finding the deal; funding was the easy part.

I hate to point out the obvious, but there are other sources to borrow money from. You can find money from Hard Money Lenders, Private Lenders, Hedge Funds, etc. All of these sources with have different rules, but many don't require a down payment if the deal is good enough. And, if you use one of these alternative sources and the interest rate is higher, don't worry about it. The property should be able to support the cost or it isn't a good deal. Plus, it's likely that this will be a short term situation and that you'll either be flipping it for cash or refinancing it to hold long term. To figure out the right solution you need to do a cost analysis on the cost of money. For example, a 12% and 1 point loan could be cheaper than a 10% and 2 point loan. It all depends on how long you'll have the property. Just like every other loan, run the amortization schedule and see where you break even is between the costs. You should do this for every property. What works great on this one may not be the best for your next property.

Good luck!

@Duncan Banks

You have a number of different options. Saving cash to put into a full down payment on every property is certainly an option but will limit your ability to scale as you’ve said. So you can do a few things:

1. House hack a primary, moving into a small multifamily (2-4 units) and renting out the other units

2. Use other people's money/line of credit/loan to fund the down payment. This will require a non-conforming loan and will be very Bank dependent as many wont allow it, but it's possible. The terms will be different, typically it'll be a commercial type loan with a higher down payment and shorter amortization term. But it's an option.

3. Partner. Find someone else who can bring some cash and get on the loan with you, and split the deal with them. 50% of a great deal is better than 100% of no deal.

4. Seller financing. Find a deal where the seller is willing to carry the note for you and requires less down, and you don't necessarily need to use your money for that. Add value and then refinance into a conventional mortgage

5. Hard money. Going to be an expensive short term solution, so make sure you factor that into your numbers and have a plan to refi quickly

The key to all of them is finding a great deal. If you buy below market, buy value add and force appreciation, and make sure it cash flows well you have all of the pithiness at your disposal. If it's a so so deal, not so much

Good luck, and feel free to reach out if you have questions!