How do I finance this thing?

5 Replies

Hello BP members! I could use some advice, info, anything I can get my hands on...

Here's my situation:

I just closed on my second duplex in August and have been planning to work on systems and build capital before marketing to 4 units toward spring. I made it known that I will be looking for 4 units and got an off market lead through my network for just what I'm looking for and it could be a good deal. 

Problem is, I only have 30k in capital and would be looking at 25% down plus closing costs on a purchase price of between 130-150k. I haven't looked very closely at it yet but if I want it or I'm in this situation again, I need to figure out how I would finance the deal.

Here's what I'm thinking:

1) Ask for the seller to finance if possible. I don't know if that's an option especially since he bought it in 2008, but you never know and I'll definitely ask. This would be the best option with the right terms.

2) Borrow the difference needed to close from a private lender and refinance them out after seasoning. I'm not sure how I would do that with bank financing since the PML would have to be a second...not sure if anyone would be willing.

3) I had an idea today that I might be able to get a personal loan for the difference. Has anyone done or had experience doing this?

4) Bring in a partner. I'm not thrilled about that idea on this particular deal because I plan to hold long term and don't want to be tied up with another investor for a long time.

5) Get an FHA loan and move into the thing. I'm not sure if I would want to but might be willing if it's a great deal. I know I would have to pay PMI but would refinance into a conventional or commercial product after a year and pull equity at the same time. As long as the cash flow is still acceptable during the first year I could live with it.

I'm wary of over leveraging but I do have an unsecured LOC for 10k for emergency reserve and would want to keep that out of the deal for 2 reasons: Its high interest and without it I would be tapped out and in trouble if bad things happened. It's a bit of a safety net at least.

Any ideas, experience, suggestions? I would really appreciate any input

Hi @Jesse Aiken , you've got a great handle on your financing options so far, I think you've got most bases covered.  If you're comfortable enough further extending your leverage, could you refi any of your duplexes and take some cash out?  Would you be willing to sell one of your smaller, less-producing properties in order to go bigger?

Is this 4 plex that great of a deal that you absolutely can't pass on it?  You don't need to buy every good deal that comes across, maybe it's better if you bide your time, build up your equity, and wait for a Great deal instead of a Good deal.  Remember you're in it for the long haul, if the rental market goes south in the next 5 years, will that put you in a bad position at your current leverage?

You could always wholesale the deal and take the quick cash!

Hope this helps, sounds like you're having a great first year!

Agreed with @Andrew Beauchemin , I think you have a great handle on your options.

Based on how desperate the seller is there may be a couple additional options such as the seller holding a second position in lieu of your down payment OR the seller selling you the property Subject-to existing financing.

Thanks @Andrew Beauchemin

I do have some equity  in one of my duplexes but not enough to justify a heloc just yet. I would consider selling my single family but own that with a partner so I'm stuck there for now.

I honestly don't know if it's a great deal yet. I'm meeting with the seller for a walkthrough on Monday. I agree that if it isn't I should be patient and wait for the right one. Thanks for the reminder. I think I made a bit of a mistake with my last purchase because there really isn't any equity in the deal. I was getting frustrated with how difficult it is to find equity in my market (real estate sells cheap here) and enticed by the 250/door cash flow. ROI is around 20% so it wasnt a bad deal but I see now how no equity can really hinder growth. I need to learn from that and stick to my guns.

Wholesaling could be an option. Honestly though, it would be a last option for me because if the deal is good enough to wholesale, it's all the more motivation to find a way to buy it myself.

Thanks for the thoughts and the reminder to be patient!

Interesting  options that I hadn't considered @Jim Murray

I'm curious about the seller holding a second position in lieu of my down payment...how would that work?

 For example: 

Seller holds a second note for say 30k in effect lowering the purchase price on paper for the bank to 100k allowing me to afford closing the deal?

Or would the bank accept the second note with the seller as down payment in lieu of cash from me? That would be a great way to do it if possible but I know that the bank want's my skin in the deal, so I don't know if they would be agreeable to that. Do you know of this being done before?

Thank you for the great ideas! I'm going to stash those gems in my toolbox and look into it.

@Jesse Aiken More aggressive portfolio lenders would entertain this option. You would have to go to a bank that is comfortable working with Investors that would not sell your note. 

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