So, after much thought and debate, I would like to start investing for the long term with buy and holds. Here is my situation: I currently have my duplex for 7 years now, so I have had some experience in managing that. Ups and downs of course, but overall I have enjoyed it. I am not too handy, but have learned along the way. I originally thought I wanted to buy a 4-plex or a triplex, however, after reading into things on BP, I think I may start with single family homes, as they have lower start up costs, and more exit strategies, I mean if I like it, I can always look into adding more to my plate, right? I will be looking into investing close to me, on the lower end of town (single families are going for 25-40K). I already spoke to a handful of banks and asked the question to my local REIA about financing the first deal. I do not think I will have a problem receiving bank financing, (since I spoke to one specifically about my situation) since I have a stable, decent paying job, (for 10 years) excellent credit, (little over 800) liquid reserves, a 20-25% down payment, 2K on a credit card, (which I could pay off, but have a deal with no interest, so why bother) and a decent amount in my 401K and Roth IRA (as the banks informed me I can use up to 60 % of that value for 6/12 months of reserves ). Since I am looking in the lower end, and the prices are not drastic, is it smart to receive bank financing for such a small loan, probably 20-30K? I have also heard people talk about "portfolio lenders" and maybe looking into something like that. I hear though, if you are able to receive bank financing, do it, since the payments are so low (but how will this affect things in the future, when I plan to buy another one down the road). Does anyone have any thoughts or suggestions on this, as I am reading and reading, and tired of not doing, as I am ready to call my bank to start up the paperwork this week. Thanks in advance for any suggestions. This site has been so helpful to me already, since I have already searched the forums and all with these topics! That is why I am stuck, every time I think I know what to do, someone else speaks up to give me more thoughts on something else! Which is awesome!
@Amy Oltendorf I'm glad to hear your taking action.
My personal answer is '' yes " with paying off ASAP.
Reason : Leverage other people money and build yourself
creditability for future projects.
( mixture of lender loans / private funds / etc )
If it is going to be a mortgage loan and will be sold to Freddie Mac or Fannie Mae, there is a minimum loan amount of $50k. Lesser amounts will have to be a personal loan or a home equity loan or line of credit off another property.
As to leverage, for investment properties I always recommend using the bank's money. Here is why:
You have a property worth $100,000 which you paid cash for it and it rents for $1,000 per month. We will set aside 50% for vacancy and all expenses. This gives you a net profit of $6,000 a year or 6% cash on cash ($6,000 / $100,000).
Now, take that property and refinance it at 20% equity. You now have a $100K property which you paid $20k (not including loan fees which for the sake of simplicity we will leave out). Let us create a 30 year mortgage at 3.6%. Your monthly payment is $363.72. Your cash in pocket at the end of the year is $1,635. You now have a cash on cash return of 8.2% ($1,635 / $20,000).
Take the $80,000 you pulled out of Property #1 and invest it in 4 more $100,000 homes under the same cash flow scenario. Now you own 5 properties with the same $100,000 investment. Your annual cash before tax now totals $8,175 ($1,635 x 5 properties) and you are getting a 8.2% cash on cash AND now have 5 properties appreciating.
You have to love leverage!
Hi Amy, I'm just saying 'hi' since we met a few times at Milwaukee REIA meetings over the summer. I'm looking at purchasing our first rental homes too, more in the 'burbs. Nice to see you here on Bigger Pockets, it is a wonderful place!!
Hi! That is really good to hear! It really is an awesome source of information, do you listen to the podcasts as well? Where are you at in the process currently? Have you been to any recent REIA meetings? My work schedule changed, and now I am unable to attend most REIA meetings, and bummed about that, as I was just starting to meet people over the summer. Good luck in your search and keep in touch!
@Amy Oltendorf " cash flow "
Only thing I can truly say weigh your options :
5, 10, 15, 20, 25, 30 lending financing ( terms )
Think how transaction will affect your business
today and in the future.
Regardless, absolutely " no " negative cashflow.
@Amy Oltendorf , the podcasts ROCK!!! You will love them!
I am honestly trying to get my financial life organized after having 3 kids and kind of ignoring it while I was in diaper-changing mode. I need to get loan pre-qualified, learn about rents and also about all the paperwork, such as tenant applications and leases, etc. I'm just starting out but hope to dig in and get a first rental going in the next 6 months or so.
Oh, and I went to the September meeting. I think I like the strategy sessions more than the main meetings (but the main meetings have food). Tough call. I try to go when I can. Bigger Pockets is here 24/7 and that is nice!
Originally posted by Karen M.:
I think I like the strategy sessions more than the main meetings (but the main meetings have food). Tough call. I try to go when I can. Bigger Pockets is here 24/7 and that is nice!
But Karen, Bigger Pockets has food for thought and that is more important!
I focus on the $25k-$40k market here in St. Louis. I started off with buying, fixing and renting 3 of them and then I got lines of credit on those from a local bank that I can draw on to purchase more properties. Using the LOC I can save more on fees than doing a 'regular' loan-a $400 appraisal and other bank fees are a bigger % cost at this price level than at higher prices. Since the LOC is based on already rehabbed properties, I can use those funds to purchase a property that needs work, which regular financing may not. I also like that I can use more of the rents received to pay down the line down to cut interest costs and then take cash back out if I have a maintenance issue (vs. setting cash aside earning 0% or paying extra on a mortgage and having that cash be gone). Also, I have put 'regular' mortgages on 2 of the properties I rehabbed this way at better rates and LTV by using the new loan to pay off the LOC as the bank didn't view it as a cash out refi.
I would suggest using mortgages to get your first few properties and then switching to the LOC method once they are paid off. It will take 3 or more paid off properties in this price range but I think it is very worthwhile.
@Bob Hines is the line of credit a business line of credit or a HELOC?
@Karen M. Yes, the podcasts are awesome, I have listened to a few of them twice and cannot wait for them to come out every week! Especially when @Dawn A. rocked it with her peer to peer lending, and have tried investing a bit on the side as well.
@Bob Hines Thank you, that sounds very interesting, and I will be keeping that in mind in the future.
@Dawn A. It's a HELOC but it is on the investment properties, not my own home.
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