Are these plausible ideas for a no money down strategy?
So, I have a problem. I'm a Realtor... Not that the field of work isn't great or anything but being a Realtor means I'm self-employed which also means I can't get a conventional loan from a bank or broker until I have at least 2 years of recorded income. I've been heavily involved in real estate for 2 or so years now and have what I would consider an above average knowledge of real estate investing thanks both to being an executive of a local investors group at 18 and also as a Realtor for close to a year now.
I've listened to if not hundreds, thousands of hours of podcasts revolved around real estate so am very familiar with "no money down" investing which is the route I am trying to go, however, it's off to a bumpy start so far. This is the strategy I came up with for funding a deal when I come across one...
Option 1) Hard Money + Vendor Take-Back
One of the Realtors in my office runs a MIC (Mortgage Investment Fund) and said they would do a max 75% LTV loan at a rate of about 6% for 7 or 8 points and they will most likely want the 1st mortgage due to the amount of risk involved as I have never done a deal and am 20 years old. If I got the 75% from them that leaves 25% remaining I am to come up with. I'm looking at buying a fixer-upper in Kamloops, BC with a cost of roughly $350,000 so the remaining $87,500 (25%) would be a second loan by way of a Vendor Take-Back. In order for this to work, I would have to find someone with substantial equity in there home.
"As I'm typing, option 1 to me sounds like the best option"
Option 2) Two separate Hard Money loans
This was my first strategy to go about buying a place for no money down. It would involve the same loan discussed in option 1 followed by a second loan to cover the 25%. The problem with this is the Realtor in my office running the MIC informed me that the rate on a second loan such as for me would be at an astronomically high rate due to the risk (upwards of 20%) which would almost make it impossible for the numbers to work. If that's the case then the remaining balance would have to come from either the bank of mom and dad (unlikely option) or someone with money who really knows and trusts me and is willing to loan the money at a reasonable rate (may be possible).
Problem: Refinancing
My plan was to buy the property, do some renovations and fix the place up then rent it out and refinance to pay out the lender(s). The rehab and other closing costs I would bring the money for ($20,000 roughly). I've been informed that as I can't get a loan from a traditional lender I also can't get approved for refinancing. This to me presents a problem but I would appreciate further input whether or not it actually is.
So if you get the hardmoney loan what will be your exiting strategy out of that loan? It is clear that you may not be able to refinance so I would suggest figuring out that part of it before you purchase a home. I would shop around to maybe local small banks maybe you can get a small business loan if you started a company.
Logan Crowder your financing costs alone are astronomical. Maybe Canada’s different I’m not sure, but those points seem high. Typical hard money lender here is probably 8-12 percent and 2-4 points.
I’ve been approached for private money at 10 percent and 2-3 percent origination.
You will need better financing terms or find a way to earn/save more money for this to work.
Someone who may be helpful as I believe he’s a “former” (having immigrated) Canadian is Omar Khan . He deals with Canadian investors a lot, so he may be able to help some.
The options for an exit strategy is either refinancing after the home is renovated and rented or continuing with the payments on the loan until I am able to refinance. I'm thinking that as I'm not able to refinance the property, If there was a cosigner or someone else on title who could refinance such as my parents then that could be an option?
@Caleb Heimsoth Thanks for the shout out.
@Logan Crowder Always great to see more Canucks on these forums. BP is a great resource but the advice here is very US-specific. Most of it does not apply to Canada as the lending and real estate market is very different up north.
Both options 1 and 2 sound horrific. 7-8 points is highway robbery.
Although, I do understand the MIC’s concerns especially as your RE market has significantly slowed down. With the Big 5 Banks reducing lending, the lower BC/GTA markets will be in for a world of hurt (that’s assuming there is not a hard landing).
The interest rate you are being charged is going to:
- leave very little cushion in case things go south;
- will make it harder to refinance as you will have made minimal, if any, dent on principal due to the high interest rate/terms;
- You didn’t mention the other terms you are getting – loan term, amortization, etc? In all likelihood, your hard money option will crush you when you run a full financial analysis especially if you have 2-3 months of vacancy or any unforeseen capital expenditure
Buying in Kamloops might help you avoid some of the price volatility of lower BC, but how do you plan on managing the property from afar? Most reputable PMs charge between 8-10% of gross revenue.
The realtor in your office is right. This is an ultra high-risk loan especially because the market is slowing and lending is tightening up.
Furthermore, what is your exit strategy? How do you plan on refinancing out of this loan? It won’t be as easy as you think in Canada. The US is a different ballgame as there are so many options. With interest rates rising, they will be inching towards the 5-6% rate by the time you do decide to refinance.
You know what has also happened when interest rates rise? House price drop off a cliff esp. in super-hot markets.
Mommy-loans/parent co-signers are being scrutinized more and more as regulators clamp down and lenders become stricter in Canada.
Not saying what you're saying is impossible, just that due to the nature of your income/assets/market conditions, you will have a way harder time. It might pay to assess your options, develop your realtor business, have a bigger savings/safety net before deciding to take the plunge.
Most of the above analysis is based off a few factors:
- BC pricing being crazy high vs. other parts of Canada or even the US
- Financing terms you will get
- Market slowing down
- The volatile nature of your income (especially in light of these market slowing down) coupled with the fact that you are a new realtor i.e. all your money should be going towards marketing your business as it is a cut throat and competitive sector
- My assumption that you have less than $50-75K of total liquid assets and do not have retirement savings to help you tide over in case things don't work out/take longer than expected/you lose your job
I'm of mind with Omar on this one. While a rate of 6% is actually cheap the 7-8 points is a pay-me-now before you pay-me-again-later move and vastly excessive.
Here on the other side of the continent, you would be looking at 8-10% on a private first and 13-16% on a second ... and usually only 1-3, occasionally 4, points.
