Buying with only 5% down

30 Replies

So I've been running into obstacles with funding an investment property. I am looking at a rental property, but all the lenders I talk to are requiring 20% down, which would totally drain all my capital. How are BPers buying investment properties with only 5% down?

As I have read, there are new loan products for first time owner occupied SFRs at 5% down, but have never seen that kind of offer for rentals regardless of unit count(s).

So how do people do it? Sorry for such dumb questions, but I'm just so confused when I read about this. I just put in an offer for a rental and the bank accepted my offer. My agent just sent me the estimated cc and it's crazy! I understand that once I get this, I will have about 80-90k in equity, which gives me money to play (especially in my area). But how do people get such low down payments?

Originally posted by @Dawn Curry :

So how do people do it? Sorry for such dumb questions, but I'm just so confused when I read about this. I just put in an offer for a rental and the bank accepted my offer. My agent just sent me the estimated cc and it's crazy! I understand that once I get this, I will have about 80-90k in equity, which gives me money to play (especially in my area). But how do people get such low down payments?

 They are telling their loan originators that they intend to owner occupy.

In some cases, they are even telling the truth!

The overwhelming bulk of mortgage fraud going on in 2016 is exactly this, btw.

Here's how it looks from my POV:

Someone calls me a year or two after buying their home with 3.5% or 5% down. 

"Chris, I want to refinance to drop mortgage insurance!" 

"OK, Borrower, please send me xyz paperwork."

They send me all their paperwork. All bills, paystubs, bank statements, etc, still go to the apartment they were living in 2 years ago.

"Hey borrower, you purchased this place using owner occupied financing. You haven't moved in. It's been 2 years. You promised us that you would move in within 60 days. What's up?"

"Oh, I'm moving in next month. Ya know, funny thing, I just haven't gotten around to it."

"Ya, so, um.... that trick doesn't work on a refi, buddy boy. So let's chat about your investment property interest rate on this refinance, and how you're either taking that, or stuck paying mortgage insurance for the next zillion months."

(I don't actually report them, that would be a dick move, which is why I leave that "next 28 years" option on the table.... others would report them and FORCE refinance them.)

okay so in reality, there is no such thing as 5% down for an investment property. The only way you can buy a property with 5% down is if you were going to live in it, in which you would still be paying PMI, correct?

investment loans start @ 20 percent, industry wide conventional lenders.

i'm not sure where you heard any different. i think you confused first time home owner deals @ under 5% when you declare you plan on living there, however, a lot of people are actually saying they plan on living there just to lock in the extremely low down payment, and then renting it out. this is mortgage fraud but it's hard to prove and banks don't care as long as they get paid. so it's kind of like a win win for each side. you could say, "i planned on moving in but x and y happened, or i just changed my mind, but i did INTEND on moving there when i bought it", ect...look into it if you want to get a home...it's a lot of peoples only option to secure loans. 

i dont think it's right or wrong, it's a fact though. 

Hi Dawn, if you don't have the cash to offer 20%, and you think this property will be a really good investment, you might want to think about partnering with someone. Otherwise, More generally, you might want to seek out landlords in the area who might be willing to sell on a Contract for Deed and negotiate with them on the down payment. I am currently negotiating a deal for a mult-family property at less than 10% down.

@Dawn Curry

Have you been pre-qualified for a mortgage? You should hsvebeen pre-qualified and have your financing ready prior to making an offer. I just don't want to see you loose your deposit. You can get a SFR for as low as 15% down, requiring PMI, and a MFR for as little as 25% down. You can cash out refinance 6 months from closing if you have that much equity, with 75% LTV for a SFR and 70% LTV for a MFR.

@Dawn Curry

There is such a thing as 5% down, if you can secure owner financing or possibly take on a partner.

It may be difficult to achieve on your first deal, but it is possible.

Investment loans do not all start at 20%.  I am closing on a deal this Tuesday with the bank requiring 15% down on 156 unit property.  The bank is local, they like the property, we have a great relationship with the bank, and they will be receiving the monthly deposits from the property.  

Real estate, like life, is all about negotiating. You just have to ask enough people and wait for one to say yes.

Gino

I am young; however I already moved out of my parents house and have a house of my own so I cannot use it as owner occupied. I do have the money but it will totally wipe out my savings.. What happens if something goes wrong with the rental? Or with my own residence? Or I cannot get a renter in? And I have no money for any wiggle room.. That is my concern. 

this investment does not have enough cash flow for a "great" investment. I was going to invest in it mainly for the appreciation and obviously to use the equity to purchase more properties in the future. Since this property is waterfront.. It's more in demand, but obviously more costs that come with it

@Dawn Curry , your concerns are spot on. No one knows what could happen, if anything, but I wouldn't empty everything you have to get this property. Or at the least I would set up a backup plan. Can you take cash out of your current house? Or could you get an LOC, even it is just sits there and you don't use any of it? Would your folks borrow you funds for an emergency account at least until you can build up your reserves.

Would I be incorrect saying to rent out your current home and house hack a multifamily property using an FHA loan at 3.5% down? After living in it for a year, and fulfilling the one year legal obligation to live in the house you buy with an FHA loan, rent out the unit you were living in and move back into your house that you have now. That's what I did and it worked out beautifully. Yeah it's a bit of a sacrifice, but you'll have an investment property and a house within a year.

Although this may go against a lot of people's opinions... Before I decided to get into this, my gf and I do not want to tie in our primary residence with investment properties - whether that is with a HELOC or renting current home and house hacking. I know that we're slimming down our options, but I just don't like tying in our primary residence for such a "gamble."

The term creative financing gets peoples hopes up that anything can be done. Technically that may be true but in the real world there is cost benefit analysis. Buying a property for appreciation is speculation. Very intelligent people make a lot of money at speculation and very intelligent people lose a lot of money at speculation. Speculating is not being a savvy investor. Savvy investors "buy" right. All great deals are at the time of purchase not the sell. I would suggest not speculating. If it is not a "great" deal then why are you trying so hard to leverage it? There are always deals and there is always great deals. You just have to polish a few rocks before you find a diamond. The best thing you can do is save money. Know your market, if the average house is 100k then get hell bent on saving that 20k. Deliver pizza if you have to. This will help you budget and help you develop self discipline. After you buy your first investment then save 20k again. The brrrr method is fine in a perfect market, for every other market its SBR. Save Buy Repeat. Usually the hardest road is the best road, shortcuts, and trespassing is how people get in trouble.

@Dawn Curry

What's the numbers on the property? Purchase price? Rents? Etc?

Is it on the MLS? Is the seller in a position to negotiate? Why are the selling?

Is it really a good deal? Is it worth the risk?

I ask these things because you may be wasting your time worrying about this particular property. There are some brilliant investors on this site but some of the brain power will pass on your post because there isn't much for them to comment on. Give us some details so we can help you decide, first, if its even worth the effort. Second, be able to give better advice on how to lock this deal up.

I purchased a few investment properties with 5% down a few years ago. It was through the VA's vendee program. They would sell off their repos with actual VA type loans to non veterans, with 0% down for owner occupants, and 5% down to investors. It was great while it lasted. The foreclosure inventory died off after a while and I believe they discontinued the program.

These days, the best way to get 5% down on investment property is to buy subject-to, or FSBOs with owner financing. For listed properties the seller needs at least 8% for closing, so it's pretty tough to get less than 10% down.

Originally posted by @Dawn Curry :

Although this may go against a lot of people's opinions... Before I decided to get into this, my gf and I do not want to tie in our primary residence with investment properties - whether that is with a HELOC or renting current home and house hacking. I know that we're slimming down our options, but I just don't like tying in our primary residence for such a "gamble."

You asked: "how do people do it"? The answer is: they do what you WON'T do!

Not being prepared to take out a (small) HELOC as well as divesting (most of) your savings means you're scared of your waterfront property investment after all. Just sayin'...

@Brent Coombs No I'm not afraid of it.. It's just my first investment property and I don't know if I want to spend my entire savings and put a HELOC on my primary residence. I don't know if I want to get into that my first time. Yea, maybe down the road things will change and I will be more advanced, but for right now I don't feel comfortable doing that.

Thank you @Leland Barrow

@Greg B. - Foreclosure home that was listed for $126k a few months back. The bank kept dropping the prices and they got down to around $75k. They went down to $70k and that was what we agreed on. I haven't signed any contracts yet.

Purchase: $70k

Taxes: $5.7k

Rent: $1.1k

*Obviously this doesn't include homeowners and flood insurance.

dawn, 

it seems like you need have a few options

1. save up

2. heloc 

3. partner up with someone who has the income (over 2 years), that combined with yourself, will get you lending (50% debt to income ratio w. traditional lenders) 

4. hard money flip (some offer 90% towards purchase, so you would only need 10% plus closing) 

Hey Dawn!
Awesome that you're looking to make some moves. I think it's absolutely critical to know those numbers inside and out so those concerns that you have can be considered and prepared for. Will that property return enough to pay for CapEx, repairs, vacancy, updating, property management in the future, taxes, insurance, utilities if you're paying them, etc... Appreciation is the bonus. It's important to walk into a deal making money. But this is all relevant or irrelevant depending on your investing strategy. Do you want to flip it, buy and hold it to rent out etc..? How much education have you devoured about your investing strategy? This site is your guide so take advantage. Those calculators at the top are dynamite and I use them daily... Hope this helps!

Good luck!!
Cody

(Sorry, typed this on my iPhone and I might have made errors) lol