Investor · Glendale, AZ · Member since 2015 · 113 posts · 47 votes
I got inspired the other day when I read an article on a guy who bought 44 units in about 5 years, started at 20.
I found a neighborhood were the houses are selling around 35k and the rents are $700! I got so excited I wanted to stop paying off debt and save up 20% for down payment, but then I found out loans under 50k are almost unheard of...I got a couple of problems
1) No money - doing the Dave Ramsey method with my wife and paying off all student loan debt aggressively before investing. Every penny above my expenses each month is going to paying off debt. Would take me a year or two to save up 35k (opportunity gone).
2) my friends with money are making 10% or more in stock and think they are going to double money...they won't cash out.
3) lenders usually want a loan to be at least 50k to make a loan.
Does anyone have a solution? I listened to a podcast on portfolio lenders and I think that will be great once I get a couple more houses.
Currently, I have two homes with about 100k equity, but I don't want to use my primary residence as collateral (learned that lesson in the crash). So I would have about 60k equity in a house. I have about 24k credit limit on all credit cards and some are at 0% interest and I can save about 5k in next couple of months instead of paying off debt.
Will a lender do 20% down on two homes? 70k vs one at 35k?
Currently, I have two homes with about 100k equity, but I don't want to use my primary residence as collateral (learned that lesson in the crash).
How does limiting your lending options with logic like this help you accomplish your goals?
You have equity in some real estate...some of which is your primary residence and you want to buy some income producing real estate. But you think it is bad to dip into your equity because you might be upside down if the market crashes again? Just want to confirm my understanding.
My first thought is that you should sell and capture that equity and put it under your mattress. That way you can keep it nice and safe.
But....should rational thought processes invade your brain....perhaps they would convince you that applying that equity to purchase an income producing property will leave you with the same amount of equity, some cash flow and some diversified real estate holdings.
Let's walk through your fear real quick. If the market collapses...you might be upside down. So the equity will be gone and then some. Just so we are clear....if this happens, it happens no matter whether you used that equity to buy an income producing property or if you just sit there with your fingers crossed hoping it does not happen. So option 1 in your fear based logic is equity wiped out, likely underwater and no income producing real estate. Option two has you using equity from one property, converting that to equity in a paid off, no debt rental property so that when the market collapses, you are more underwater with your primary but you still have some of the equity of your rental along with the cash flow. How is option 2 worse?
Unless you are telling me that you hate your primary residence and otherwise intend to sell it in the next few years and can't possibly wait until the market improves.....still under your fear based assumption that the market collapses again and you lose all your equity of course.....then I don't see the issue with this.
Is money not money? Is $35,000 paper equity in your home worth more than $35,000 cash in the bank? Or worth more than the equity that will be created when you buy that rental with the cash from your home equity loan?
At the end of the day, you have two houses and want to go to 3. You don't have the cash to pay for #3, so you need to raise the capital or take on debt. You already know that #3 is a good deal and you want to buy it, so it is just a matter of getting a loan to buy it, which you have found out is not easy due to the small loan amount. Let's say you have $200,000 in debt on your current two properties that together are worth around $300,000. That accounts for the $100,000 in equity you mention. If you borrow $30,000 to buy #3, your debt goes from $200,000 to $230,000 and your real estate portfolio grows from $300,000 to $330,000. Why does it matter if the debt is tied to one property or the other? Your net worth is the same.
If you want to invest, then do it. If you are scared and think the market is about to crash....why are you not selling?
I currently have 1 home at a 32k purchase price with 20% down on a 30 year mortgage. Really just got it because I had to have proof of concept before I could convince other people to follow me with my crazy ideas. Talk to local credit unions and regional banks.
Currently, I have two homes with about 100k equity, but I don't want to use my primary residence as collateral (learned that lesson in the crash).
How does limiting your lending options with logic like this help you accomplish your goals?
You have equity in some real estate...some of which is your primary residence and you want to buy some income producing real estate. But you think it is bad to dip into your equity because you might be upside down if the market crashes again? Just want to confirm my understanding.
My first thought is that you should sell and capture that equity and put it under your mattress. That way you can keep it nice and safe.
But....should rational thought processes invade your brain....perhaps they would convince you that applying that equity to purchase an income producing property will leave you with the same amount of equity, some cash flow and some diversified real estate holdings.
Let's walk through your fear real quick. If the market collapses...you might be upside down. So the equity will be gone and then some. Just so we are clear....if this happens, it happens no matter whether you used that equity to buy an income producing property or if you just sit there with your fingers crossed hoping it does not happen. So option 1 in your fear based logic is equity wiped out, likely underwater and no income producing real estate. Option two has you using equity from one property, converting that to equity in a paid off, no debt rental property so that when the market collapses, you are more underwater with your primary but you still have some of the equity of your rental along with the cash flow. How is option 2 worse?
Unless you are telling me that you hate your primary residence and otherwise intend to sell it in the next few years and can't possibly wait until the market improves.....still under your fear based assumption that the market collapses again and you lose all your equity of course.....then I don't see the issue with this.
Is money not money? Is $35,000 paper equity in your home worth more than $35,000 cash in the bank? Or worth more than the equity that will be created when you buy that rental with the cash from your home equity loan?
At the end of the day, you have two houses and want to go to 3. You don't have the cash to pay for #3, so you need to raise the capital or take on debt. You already know that #3 is a good deal and you want to buy it, so it is just a matter of getting a loan to buy it, which you have found out is not easy due to the small loan amount. Let's say you have $200,000 in debt on your current two properties that together are worth around $300,000. That accounts for the $100,000 in equity you mention. If you borrow $30,000 to buy #3, your debt goes from $200,000 to $230,000 and your real estate portfolio grows from $300,000 to $330,000. Why does it matter if the debt is tied to one property or the other? Your net worth is the same.
If you want to invest, then do it. If you are scared and think the market is about to crash....why are you not selling?
There are some banks that will do it, but they are almost all local banks. The first loan we got from one bank was for $39,000. It would help if you have an established relationship with them, but isn't critical. I would say to call around to local banks, especially if you can get referrals for them from other RE investors say at your local REIA.
How about getting UNSECURED credit lines and buying for cash, fixing, then refinancing based on the higher value?
I offer those, typically $100k+, which will allow you to do several. Just contact me.
You still have to find a portfolio lender to help out. Interim, you should find hard money relatively available to do this. When you have a small portfolio of these and need maybe $300,000, I can refer you to a source that will finance you on an ongoing basis. You will need a portfolio and a track record to get in with them.
Use this psychology on local banks: They regularly make auto loans in this amount. At some interest rate and points they can make financial sense of it, On the other hand, many/most bankers are just order takers, repeating policy like parrots. Keep looking. The credit union suggestion is good. They can be more open to a repeat borrowing relationship with you. Ostensibly they are member-oriented.
Another thought: Study and apply the art of raising private money from every IRA owner in your world. They are all around you and can be infinitely more flexible than banks. There are a number of private money courses available.
Credit unions will lend smaller amounts. Check your debt to income ratio including the new mortgage payment. If it's less than 49% and your credit score is above 650 you should be able to get a loan.
How about getting UNSECURED credit lines and buying for cash, fixing, then refinancing based on the higher value?
I offer those, typically $100k+, which will allow you to do several. Just contact me.
You still have to find a portfolio lender to help out. Interim, you should find hard money relatively available to do this. When you have a small portfolio of these and need maybe $300,000, I can refer you to a source that will finance you on an ongoing basis. You will need a portfolio and a track record to get in with them.
Use this psychology on local banks: They regularly make auto loans in this amount. At some interest rate and points they can make financial sense of it, On the other hand, many/most bankers are just order takers, repeating policy like parrots. Keep looking. The credit union suggestion is good. They can be more open to a repeat borrowing relationship with you. Ostensibly they are member-oriented.
Another thought: Study and apply the art of raising private money from every IRA owner in your world. They are all around you and can be infinitely more flexible than banks. There are a number of private money courses available.
Let me know if I can help.
Thank you John I will be in touch later today! Lots of great info!
Check out this introductory post on Real Estate Crowdfunding - http://www.biggerpockets.com/forums/520/topics/182363-crowdfunding - another option for loans sub $50k
I get offers all the time from Discover Loans and similar places for $25k-35K for 7-8 year personal unsecured loans. The interest isn't great at 7.99-9.99% but it is an option if the house is a very good deal.
ETA: And those rates are only high compared to current mortgages. My first home loan many years ago was 7.5% or so for a 30 year fixed with very good credit. My parents had one in the 12% range in the early 80s.
@Peter Prawel your best bet will be smaller local community banks. One thing to try is bundling more than one property to get over the min loan amount.
@Ned Carey thanks. We all see a few of these rural Properties that actually are pretty nice. If a person then runs a rental analysis, there is actually more potential on keeping a long term rental. There is less available rentals in 20 miles.
Interesting niche.
I did get some messages from lenders who do less than 50k and also was advised that I could also combine properties in areas under $50k to make a larger loan.