Own 1 rental $800 mo cash flow, terrible FICO, finance options?

Question

Hello newbie here looking to buy my 2nd rental prop.  I own an out of state condo in Louisiana; estimating it's value at around $75K conservatively.  It has been bringing in $800/mo rent for some years now.  I've been hands off with that property (mom manages it currently) My credit score is horrible, under 600 and I have no savings at the moment : /    Wondering what my finance options might be, as in what type of loan ???  My head is spinning with all the new terminology I'm trying to learn. I've not read the book about No or Low $  Investing yet, but I will if that's where I should start.  I'm wanting to get started soon with the goal of investing in 1 property per month or as close as I can get to that #. Thanks and glad to be here!

Braden Smith · Answer

I don't mean to be the bearer of bad news, but real estate investing requires money and/or credit. Any bank, hard money, or private money lender is going to want to see a decent credit score and some money in the bank. There are many so called gurus out there that pitch their course/seminar stating you can invest in real estate with little to no money down, but that simply isn't true.

Courtney Fricke · Answer

Hi @Annabel Valencia, congrats on joining BP and starting your education! Sorry ahead of time for this novel. I would suggest a few things education wise. 1. Start listening to the bigger pockets podcast from number 1. They are free and a great tool to learn from. I listen while I drive ALL the time. 2. Find a local REIA or investor meet up in your area to learn alongside like minded individuals. This helps with networking and education - which helps with confidence when doing deals.

As for your condo, what are the numbers. Does it make a profit each month?You say it is valued at around $75K and it brings in $800/month rent. Is the $800/month rent the market rate?What is your monthly breakdown of cash flow? Rent collected  MINUStaxes (yearly property tax divided by 12)landlord policy of insurance (yearly insurance divided by 12)flood insurance if applicable (yearly insurance divided by 12)any applicable HOA feesany other expenses that the landlord may pay (sometimes includes trash, etc)

Additionally most will deduct the following percentages from the collected rent:10% for property management (you stated your mother is doing it for free but that may not always be the case and not for all your future properties so plan accordingly)8% for vacancy (this percentage allows for around one month of vacancy a year)12% for maintenance (put aside for future repairs)

Run the numbers. Is your unit still making money each month? PS: Most investors stay away from condos because the HOA fees tend to take away from the cash flow. I actually am selling my condo (primary residence) soon as I don't plan to keep it for a rental because of the dues, the management on site, and the possibility of assessments. Now, with the monthly cash flow in mind, I would suggest tucking it away for future repairs as they WILL come eventually. Build up a decent reserve so that when an AC unit or a hot water heater needs to be replaced, you will be able to pay from your cash flow pile instead of relying on your personal income or credit. As far as your future credits go, I would talk with a local community banker (in Louisiana I can recommend a few) and make a plan of what you'd need to do in order to qualify for a HELOC or a business line of credit (given that you have an LLC for these rentals) or something like that. Talk with lending professionals to know exactly what you'd need to do to become a candidate (raise credit score, be at a job for x number of years, etc), raise your debt to income ratio, etc. Braden is right in saying that investing does require a bit of credit and capital. Even if you used a hard money lender to acquire more properties, you would need credit to refinance the properties with local banks using the BRRRR strategy. The author of the book on investing in no or low money down states that it is all free info that can be found in the forums but he just compiled in one place in his book. So devour the podcasts and the forums for info on creative financing. Get educationally strong before moving forward. When I got started out with little to no capital, one of my mentors told me to study the game of investing, educate myself a lot and then be very risk averse in the beginning because if I buy a money pit property or if my numbers are off and I lose $20K on a property (which is NOT uncommon in investing)  then it would derail me entirely versus someone who has more capital. So with that in mind, set large goals but start off very risk averse in the beginning so that you can have a long career in investing rather than a short one. Stack up capital through cashflow and possibly wholesaling or reverse wholesaling. Build a solid foundation of education, cash and personal credit, then attack those goals!Best of luck in your ventures!

Paul Choate · Answer

@Annabel Valencia

Do you plan to stay in Lawton?

I have seen many properties you can get into with seller financing in that area.  I have not pursed them because it is a couple hours away and I am not familiar with the entire market.  It’s not a very competitive market from what I have seen.

I would suggest driving for dollars and pitching multiple options to distressed sellers like a low cash offer (assuming you are selling the condo) and a full owner carry for a higher amount. I use this regularly to pick up properties with little down. The issue is having fix up funds available to get the property going. You have that in your condo.

Once you have done this a few times, paid down the seller financing and work on your credit, you can do to the bank and get your money back and repeat.

It’s the BRRRR program.

I’ll be at the OKC meet up if you have questions. Good Luck!

Annabel Valencia · Answer

@Paul Choate Yes I plan to stay in Lawton for a few more years.  I can't make it to the meet up this month but hope to meet everyone next month.

Annabel Valencia · Answer

@Thomas S. yes thanks for the advice.  I had a credit score in the 7s before a recent divorce and I'm digging my way out of a dive in my credit score as a result of getting behind in bills.  I now live in property owned by my mother - it also has an HOA ironically - where I have a home photography studio that makes a small amount of money, so I don't know that I'll be house hacking especially with my 3 kids but hey, maybe!

Annabel Valencia · Answer

@Courtney Fricke thanks for your time and advice.

I'll start from podcast 1.  There is a meet up in OKC soon also that I found here on the forum.

As for the condo, I just recently started looking closely at the numbers.  On a year with 0 expenses it will bring about +$170 per month taking into account vacancy, maintenance, and future property management fees.  In a year when there are any repairs (the repairs are around $4k for 2016 and 2017) it loses a lot. It probably needs to be sold.  It was purchased by my Mom in 1995 for about $40,000.  I think now it's worth about $88,000 (according to my USAA app)  I think she's emotionally attached to it since initially it was purchased as a primary residence for me and I lived in it.  It's in my name now but I hesitate to sell it out of respect for all the money she's put into it.  I'm in such a financial hole right now from a divorce that left me with debt I can't pay.  I feel like I need to prove to her that I can be financially responsible before she takes me seriously about selling.  But if I can come at her with some numbers that make sense to her that could change.   btw According to her the market rate for those condos is $750.  And I've learned now to stay away from properties with HOAs

Thanks for all your advice!

Thomas S. · Answer

If you want to be a investor you will need to concentrate on first eliminating all bad credit debt. You then only use credit when you have the cash to pay it off before it comes due. You will need a credit score preferably in the high 7s and you will need to save cash for not only a DP but also to have reserve funds to carry the property.

No down/low down is not feasible in your situation. You must first position yourself as a serious investor, cash and high credit score.

My advice would be to fix your credit then sell the condo to free up your cash to reinvest in a multi unit to house hack.

Braden Smith · Answer

Even for a home equity loan or a HELOC (Home Equity Line Of Credit) there are requirements the borrower must meet.

Having a good credit score is typically a requirement of getting a HELOC. Just like other loans, your credit score is one of the ways a lender evaluates your ability to pay back a loan. While different lenders have different eligibility requirements, people who have a higher score have a greater chance of getting their loan approved.

Having a low debt to income ratio may be even more important than having a good credit score. A debt to income ratio measures your ability to manage your monthly debt payments. It compares your debt repayment amount to your overall income. To calculate your DTI, divide your recurring monthly debt by your gross monthly income. The score is expressed as a percentage. For example, if you have total monthly debt payments of $2,000 (including auto loan and credit card) and your income is $5,000 per month, then your DTI would be 40%. Obviously, the lower the ratio better, but anyone with a DTI higher than 45 usually won’t qualify for a loan.

See here for more info:

https://www.nerdwallet.com/blog/mortgages/what-are...

https://www.bankrate.com/finance/home-equity/what-...

Annabel Valencia · Answer

Thanks Braden. LOVE New Orleans, miss the Louisiana food so much; grew up in Baton Rouge! : )  I'm hoping to finance against the rental property. I guess I forgot to mention that it is paid in full, if that makes any difference

Own 1 rental $800 mo cash flow, terrible FICO, finance options?

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