Financing scenarios (Piggyback, conventional fixed, refi)

5 Replies

My husband and I are looking for our first house hack multifamily in Pasadena, California. Pasadena is a City suburb directly adjacent to the City of Los Angeles. After discussing lending options with our broker, we would like your advice! Here is a list of financing
scenarios we like to get you take on.

For simplicity, the scenarios below will be based on a $600,000 duplex where we intend to renovate the two units while we live in one unit. After one of the units is renovated cosmetically, we intend to rent the second unit to a tenant while living and flipping the other unit. After we live there for the minimum time allotment required by an
owner-occupied loan (1 year?) we will vacate and rent out both units. We intend to cash flow the property for 3-10 years to allow for any cycle dips in property prices. Available funds for down payment & renovation are $80-100k. Both of our credit scores are above 760 and
we are preapproved with underwriting.

Financing Scenarios
1) Apply for two mortgages (piggyback loan). First loan is a conventional 30y-fixed rate at 80% LTV ($480,000) to avoid private mortgage insurance. Then take a second mortgage with a higher interest rate we can pay off with the tenant cash flow after one year. Either refi into one mortgage or pay off smaller, higher interest loan first.
Pros? Cons?

2)FHA loan at 85% LTV. (15% downpayment) Little money for renovations. Must refi to get out of PMI but since we’re First time home buyers it’s worth looking at. Pros? Cons?

3) Conventional loan at 90% LTV (10% downpayment). Must pay PMI. Use left over 40k funds to renovate units. After renovation (less than 6 months), apply for revaluation of appraisal. If property appreciates beyond 20% equity, then PMI is removed. Put extra cash flow from property into mortgage payments to meet 20% to make sure revaluation satisfies.

Any advice helps. Thanks!

Hey Julie, typically investment property will be financed via conventional loans.  Option 3 sounds interesting and risky but the one I would consider to reduce outlay of cash.  Assuming the your after repair value analysis is spot on.

The harder part may be in finding the property.   I just ran a search for duplex units in Pasadena and there is nothing active for sale under 800K.  There are two properties that were on sale for 534K and 600K but were pulled from the market (status K).  Listing agreement was cancelled for whatever reason.

Are you set on Pasadena and a duplex?  Open to any other areas?

If you want, I can set you up on an auto search for active and new duplex properties that come on the market in LA county.  Just message me your email address.


Boris

@Julie Coleman It's your plan to purchase another property after 1 year or rent? 

If you want to purchase another one in 1 year you will need some money for the down payment and that means the down payment amount it's more important than the PMI. The less the down payment the more money you will have left for the next property.

Did you try to run the numbers on an existing property? What rents do you expect to get on a 600k duplex in Pasadena?

What will be your payments in each scenario?

The cash flow from the first year might be negative.


Thanks for your feedback @Boris Gutierrez . We were thinking taking two mortgages out at the same time was riskier than the third option. If the third option does not work, then we just continue paying the conventional mortgage down as we normally would until the principal of the loan reaches 78% LTV.

In regard to your question about Pasadena, we are looking for a duplex in North Pasadena above Washington Ave or in Altadena. There are more SFHs in the area, yet are mostly out of our price range in the 700-800s. We are not tied to this area or school district yet are familiar with the area having rented in Old Town Pasadena for 4 years. We are willing to look into other areas such as Glendale, Burbank and Inglewood, yet want to avoid LA City due to rent control restrictions.

Any advice helps. Hoping to analyze some properties and tour a few places this weekend!

@Ciprian L. We are intending to rent or travel on a dime until we have enough cash flow (presuming 2-3 years) from renting out our first property to save enough for a 20% downpayment for a second property. I see in your profile you have experience buying properties in consecutive years. How did you formulate your strategy? What's your goal for cash flow?

We found a fixer upper duplex in North Pasadena for around 600k. We plan to put 5-10% down. Rehab for less than 6 months and then rent for 1500 - 2000/mo/unit. First property ever, so I hope it's not too aggressive. 

@Julie Coleman I started investing out of state and it wasn't that hard to buy in consecutive years considering the prices for out of state. 3 years ago I purchased a duplex in Burbank with FHA loan and refinanced to a conventional after 1 year. Similar with what you want to do, I put the minimum allowed for down payment and remodeled the place.

My current goal it's to buy 2-4 units locally that I can improve and make them cash flow and keep them forever, I prefer to have a 500-600 sf unit locally that I can rent for $1500-1700/month than a 2000 sf SFR out of state that rents for $1000-1150/month.

It sounds nice to buy in consecutive years but maybe, there are 2-3 years when you can not find a deal and in the year 4 you purchase 4 properties, the average is still 1 a year, I prefer quality over quantity.

For your purchase, it would be ideal if you could get a duplex for 5-10% down but the market right now it's very competitive and it has to be a property that you are the only one that can see some potential in it.

Last year I helped an investor to buy a duplex in that area, the rents for a 2/1 unit are somewhere around $1500-1750/month, to get $2,000/month, it has to be something special.

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