*NEWBIE* Want to purchase more properties minimizing down payments

12 Replies

First post...just learning the game. Please spell out acronyms!! THANKS!!

I've purchased two four plexes in the last 9 months, the first was an FHA loan that I put 3.5% down, the second was a short sale that required a conventional loan with 25% down. Both are cash positive. I have a safety net of money (never want to have less then $20,000 in case of emergencies), great credit, and a good job to help qualify for loans.

How can I get money for down payments without draining my bank account? I'm currently interested in a 5 plex (would be a commercial loan, bad idea?) and an owner carry 6 plex that won't budge on 20% down terms.

Thanks for everybody's advice in advance!!

Anything more than four units is going to be commercial and require a 25% or more down payment.   With the right lender you might get something like a 70% loan with 15% down and 15% owner carried, but that will likely have a higher interest rate.  Otherwise, some sort of owner carried deal is your only real option.

This is a cash on cash return game.   When you're overleveraged, and, IMHO, anything less than 20% down is overleveraged, you're cutting into your returns.  The only cash that counts in the cash on cash return is your cash.

Hopefully cash flow positive isn't based on "rent - PITI". Even banks only use (75%*rent) - PITI and I think that's on the optimistic side.

Thank you for the response!!

My first 4plex is ~$800/month cash positive, my second is ~$1400/month positive (partially because I put down 25%), this is after paying my property manager.

I have the cash to make additional purchases but want to keep my own money for fix up's or emergencies. I'm comfortable being over leveraged and cutting into my returns as long as my tenants are making the payments. I am comfortable with this because my personnel income is capable of paying all of the mortgages at the same time in the event that I lost tenants in ALL of my units (Very unlikely) 

Any advice in a creative way or a loan I could apply for to collect money for additional purchases?

Find a Partner.  You supply the great deals and management of the property and the partner brings the downpayment or more to the table. 

I would much rather not have a partner to deal with in my investment life. I am definitely able to purchase properties on my own...over time. 

Have you worked with partners in the past? 

Additionally I am not yet in a position where I could manage my own properties so it would be a very one sided partnership at this point. 

No loans or bank options you could suggest?

@Scott S.  

We are in the same boat so I totally understand where you are coming from. My husband is active duty navy so he has a very transient career. Therefore we invest in alot of "personals" that become rentals when we leave. We also invest out of state and self manage to retain control and savings. We truly just to be as efficient as possible in both the cost and financing method.

Thanks for your message. Do you have a hard time managing out of state properties?

The properties I own are in a low income neighborhood....that has a lot of potential for improving. To date I have spent a lot of time and money maintaining them (mostly time). If I wasn't able to do the work myself I'd be digging into my own personal bank account for repairs.

Hi, Scott.  Not sure I can add much to this conversation, but wanted to introduce myself as another investor in low income neighborhoods.  We invested as much as we could hustle in the beginning, but never took the leap to find more financing.  At this point we are in a "wait and see" mode.  If you don't want to partner, maybe you could try raising capital with friends and family loans.  This has worked well for us; they feel like they are participating in our little adventure in a low risk way, we get a lower interest rate and longer terms than hard money lenders.

Thank you for the response and for introducing yourself! How do friend/family loans work? Do you simply take gifts of 10,000 so it wont be heavily taxed? Or do you have them buy the property out right and pay them back? Could I ask your typical terms as well? 

Thanks for the suggestion and good luck with your properties!

We set the loan up as a loan, draft up an agreement, an amortization schedule, and report interest each year.  They show interest income on their taxes, we show interest paid.  It is not tied to a certain property, so we can allocate it how we want each year when we do taxes.  We use an interest rate slightly above what we can get for non-owner occupied from the bank, over 15 years.  The relative is at the age where they need to draw from their retirement fund, don't need the cash, are leery of having all their investments in the stock market, and like the steady flow of funds back.  The main point is to find a rate and terms that are win-win for both parties, and making sure that making the payments is top priority.

Here's some additional information from our procedure manual, where I like to document research and learnings:

Family Loan

Without a formal loan document (source: Nolo's Promissory Note for Personal Loan (Installment Payments With Interest), the IRS could argue that there was no loan at all - that the money you gave was really a gift.

If you want to secure the loan with real estate, you need a mortgage or deed of trust. Consult a real estate lawyer to assist you.

The IRS, eager to raise revenue, has decided that for a loan to be a loan, interest must be paid, and if interest is being paid, someone is making taxable income.

That means that a loan will still be included in the value of your estate for inheritance tax purposes, should you die.In order to clarify that the loan is not a gift, the lender should write a memo establishing that you, the borrower, were solvent at the time of the loan. This proves the lender has a reasonable expectation of repayment and is not actually making a gift.

Failure to abide by the rules of the agreement could cause the IRS to conclude that it is not a true loan agreement.

Many families choose to make no or below-market interest loans to family members. According to the Internal Revenue Code, a below-market loan has an interest rate lower than the applicable federal rates (AFR) established by the IRS as the minimum for loans between family members. AFR rates are based on the type and term of the loan and are set monthly by the federal government. They can be found in the first Internal Revenue Bulletin published for each month and are located under "Tax Information for You" on the IRS Web site at www.irs.gov.

If rates are too low, the IRS assumes that the borrower paid interest to the lender and the lender may be required to pay income taxes on the amount he or she should have received. For gift tax purposes, the lender is treated as if he gave the borrower an annual taxable gift of the imputed interest amount. 

banks are going to want 25% or more down for non owner occupied properties.

Getting over the 25% down hurdle is an uphill battle.

we've had success getting small amounts of owner carry but had other free & clear properties to cross collaterize.

It sounds like one of the few solutions is in taking equity (HELOC) out of investment properties to use as down payment for the next property? Are banks willing to give equity on investment properties or is that an uphill battle as well?

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