How to purchase first rental in Houston, Tx

Question

We recently spoke with a banker who explained how to get a conventional loan to purchase a rental. We are wondering what other way can we get into our first door? All advice is good advice!

Cody L. · Answer

I used to do seller financing, seller seconds, hard money loans, friends and family, etc.  Basically whatever I Could do to get the property.  I'd then sell it or refi it to get my $ back and off to the next.  Until I built up enough of a cash flow machine (from the properties I held) and equity (from my profits at sale or refi) to start buying more traditionally.

I still run into walls where I can't buy the property I'd want to due to the down payment.  It's just that wall is a different height.

Cody L. · Answer

• If buying a 1-4 family, your best bet would be a traditional 'vanilla' loan (think Quicken Loans, or just calling Bank of America and getting a regular 30 year fixed loan)
• If buying a 5+ unit, talk to a commercial lender.  Most likely a local bank.  If you get something under contract and are serious about closing, message me and I'll suggest some good ones but I'd rather wait till you knew you could buy and had something so you were not spinning their wheels on an exercise. 
• Both options might have a seller financing option.   You can easily do that on a property that's owned free and clear.  And not-as-easily do it on a property that isn't owned free and clear (I had a URL that talked about that in detail but BP has nuked it as "self promotion" despite the fact there was no promotion on the page, and it wasn't mine.  Just google 'mortgage wrap'
• You could always buy cash if the deal is small enough.  If you don't have the $, but it's a great deal, then put on paper why it's a great deal and start talking to friends and family
• Go to a local real estate meet up.  I promise if you find a deal, someone there will help you get it.  Money is in high supply. It's everywhere.  It's deals that are hard to find.  So focus on that challenge.

There is no such thing as "buying real estate with no money", but nothing says it has to be YOUR money. Almost everyone uses "OPM" on deals -- it's called a bank. The only difference is the % of OPM used.

Good luck.

Brian Alfaro · Answer

I think it really depends on what you’re looking at, as Cody mentioned.

If the property is turn-key (rent ready) and doesn’t need any major work, going the conventional route may be your best bet IF you have the 20% to put down. Nothing wrong with taking this route depending on your goals. Realize that if you go conventional, unless you have a lot of cash, you are going to be buying slower if you have to put down $20-40k per door as a down payment not including closing costs. Some people are fine with this. Good news here is you have equity from the beginning and likely need very minimal repairs

If you want less cash out of your pocket or are trying to buy properties that need to be rehabbed, consider finding private money or using hard money. Yes, the fees and interest rates are high, but ideally you’re in and out of that loan in less than 3 months, so the interest rate isn’t a deal breaker. You refinance out of the hard money and into a conventional 30 year mortgage at whatever interest rate the market is at based on your credit. With this type of loan, they’ll loan 70-75% of your after repair value (ARV) which includes your rehab funds. If you can buy right, it is possible to bring very little money to the table. Way less than you would on a conventional loan. I just picked up a property as a rental that needs $40k in renovations, but I only brought $9,800 to the closing table because I got it at a good price.

Long story short, don’t only focus on the interest rate. There are other variables to consider including your goals (how many you want or need to own to be financially free and how fast do you want to get there). Make sure you focus on learning to run your numbers for cash flow. A lot of great potential rentals in Houston can get killed by property taxes, HOA fees, etc.  If you buy a home that’s too expensive as a rental it won’t cash flow because you won’t be able to pull in enough rent to cover PITI, CapEx, OpEx, Property Manager, etc.. Make sure you speak to a licensed realtor or broker to get a market analysis. Reach out if you need some help - I am a realtor.

Joshua Brazle · Answer

@Cody L. Thanks man. I like your thinking. You’ve been a great help!

Joshua Brazle · Answer

@Brian Alfaro thanks for the great information!

Joshua Brazle · Answer

@Cody L.

Thank you Cody for the response.

Joshua Brazle · Answer

@Helen De la rosa

Thanks for the response. So my concern on a conventional loan was the 20% down. Looking for creative ways to come up with the funding? Also any other loans for 1-4 bedroom single family homes? Just trying to get into our first door.

Helen De la rosa · Answer

@Joshua Brazle Hello, Houston!! What's your concern of the conventional loan?

I am new here too, so sharing for your reference...

recently got 4.875% for 30-year conventional loan on investment SFR, which was about 1% higher than a primary residence loan...

I later asked around,

* home equity loan would be around 5.5% , which is higher than taking an investment loan...

* a commercial loan would run around 6%

* hard money would be even higher starting around 8-9%

How to purchase first rental in Houston, Tx

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