Which method of creative financing is the best for a new investor? I'm sure it varies from person-to-person so I want to provide a few details of what I am looking for. Non-owner occupied loan that is either (1) a BRRRR investment that I can refinance to a conventional loan after repairs, (2) a conventional loan with a loan downpayment, or (3) another form of loan that has less money-down upon the initiation of the loan. I am open to going into the investment with a partner and losing equity in the deal. My main goal is to expand my real estate portfolio, but I do not have extensive financing to do so.

@Cody Richard you kind of hit it on the head, there's no "perfect" financing type for everyone but there will be one that suites you best.  For most investors they seek to limit their out of pocket costs.  So what you are looking for is pretty common.  Most of us seek some type of a loan that will lend up to a certain % of the value of the home.  Then we try to find homes that we can purchase and rehab at that percentage or lower.  A common % is 75%. Most of those loans would require to refinance out though.  So make sure you calculate that into your formula as well.  

Alternatively, a conventional, Fannie Mae or Freddie Mac style loans do NOT require to refinance out of....but they will ALWAYS require a downpayment if you use them to purchase.  They also have slower closing times.  So if you found a property with that you could purchase and rehab below that 75% threshold above, you would still require a downpayment.  So if I am trying to limit my cash out of pocket, these loans might be require too much up front.

Hope this helps in some way.  Feel free to ask anything additional if needed.  Thanks!

Originally posted by @Cody Richard :

Which method of creative financing is the best for a new investor? I'm sure it varies from person-to-person so I want to provide a few details of what I am looking for. Non-owner occupied loan that is either (1) a BRRRR investment that I can refinance to a conventional loan after repairs, (2) a conventional loan with a loan downpayment, or (3) another form of loan that has less money-down upon the initiation of the loan. I am open to going into the investment with a partner and losing equity in the deal. My main goal is to expand my real estate portfolio, but I do not have extensive financing to do so.

HI Cody,

If you're looking for a way to enter a deal with the least amount of capital required then you're probably going to be looking for the owner occupied financing loans like FHA or conventional home possible. Later this month, after july 28th, Freddie Mac will be changing home possible so that it will be less available for folks who wanted to use it to buy 2-4 unit properties with 5% down unless if you make 80% or less of the area median income (AMI).

In most markets its tough to be below 80% of AMI and simultaneously qualify for this 2-4 unit property, hypothetically. The reason is because the rents from the other 3 units (assuming you're living in the 4th unit) are counted towards this 80% of AMI limit. So if you're income is 50,000 and the 3 units rental income is 36000 annualized and your local AMI is 90,000 then you wont qualify because 80% of 90,000 is 72,000 and your combined rental and salary is 86,000 (example).

This basically leaves you with the FHA owner occupied option to keep your min down payment low at 3.5% up to 4 units.

The down side with FHA is the property (if 3-4 unit) will be subject to self sufficiency rules which states that 75% of the rents from all units at the property, even the owner occupied unit, must exceed the monthly mortgage payment or PITI (prin/int/taxes/ins). In lower to mid priced areas the SS rule is easier to meet but on west and east coast markets its nearly impossible unless if you're in a secondary or teritary market (aka BFE).

On the investing front (non owner occupied) you can get private or hard money financing with as little as 10-20% down options depending on folks in your specific area. These lenders may fund much quicker than your typical conventional or FHA financing but their rates are much higher and the expense or points is much higher. They are typically in the double diget rates and multiple points but the ones I've used have been able to come through with loan docs and funding/wire within 5-10 calendar days allowing me to tie up some decent properties.

Best of luck on your investing,

@Andrew Postell Thanks for the advice! I'll look more into the Fannie Mae and Freddie Mac loan options to see what is available.

@Albert Bui Thanks for the information! That's unfortunate regarding the Freddie Mac loan. I know there is at least one lender in my area that has a 10% down loan program they offer. I'll have to look around a bit more to understand which other hard-money/creative options are out there.

@Cody Richard Find a deal at a fraction of ARV. Use hard money for the purchase and rehab. Most hard money lenders I've known will fund up to 70% of ARV. After rehab, refi at 75% LTV. Then put a renter in it. I've done multiple deals this way and I often ended up with $0 out of pocket because I bought the deals at the right price.

I’ve seen quite a few posts on BP that seem to disregard the importance of equity in your investments. Why is that accepted wisdom?

Buying deals for less than they are worth has been a cornerstone to the growth of my business. In 2013, I bought a house using the strategy described above. I sold the house in 2015 and used the equity to buy an industrial building. I sold the industrial building in 2018 and used that equity to buy a 176 unit storage facility. The equity I captured was much more valuable than the $500/mth cash flow the house produced for me.

Don’t lose equity. Be patient. Dig deep for cheap deals.

@Austin Neal Congrats on the success with your process! I like the simplicity, yet power of the idea. For this concept, where do the rehab costs come from for the property? Is the goal to have a low enough purchase price to include the repairs in the ARV?

@Cody Richard The goal is to buy it cheap enough to have a repair budget from the hard money lender. A very basic example would be as follows:

$100,000 ARV (hard money will lend 70%/$70k)

$20,000 estimated repair budget provided by hard money lender.

Therefore, you need to buy the deal at $50,000.

This example does not account for lender fees and holding costs, but you get the idea.

If you buy it cheap enough and can rehab it under budget, then you may even make money in this process. For instance, if your hard money lender puts $20k in escrow for your repairs and you end up completing the rehab for $15k, you can still draw the full $20k and net $5k for yourself.

A conventional lender will typically lend 75% of the appraised value, or $75,000 in this example. That’s should be enough to refi your hard money loan and roll in your conventional lender’s fees.

Does this make sense?

In the big picture, buying property at the right price is far more important than cash flow (which is also very important).

@Austin Neal I'm not sure how other escrows work but our draws need receipts and sign-offs. If the rehab comes in under budget then the rehabber does not not pocket the remainder. This is why we pay rehab in arrears at each milestone.

The deal always dictate the type of financing you would use not the other way around. 

Here's an example -- I did a deal where the property was in good condition (just needed paint, carpet, cleaning and some landscaping). The owner was moving to Texas from NJ. His main concern was not being an out of state land lord; but he can't afford 2 house payments, one in TX and his NJ house. He was not behind on the mortgage and has $100k in equity (appraised at $275k, mortgage balance at $175K; monthly payments was about $1k). The house was originally listed with a Realtor for $275k and was lowered to $230k by the time he called me. 

I asked him how much he wants over and above his mortgage and he said $25k, which means I can buy the house for $200k. I asked if he needs the entire $25k to move to TX and he said no; only needs $5k now. 

I simply took control of the property, we signed an agreement that I will pay his monthly mortgage payments (PITI) and any maintenance on the property. I locked in the purchase price of $200k with the right to lease; $5k down payment, balance of $20k payable in 2 years. This is almost a Subject-to deal but I did not transfer the deed so as not to break the due-on-sale clause on the mortgage agreement. Spent another $5k for paint, carpet, cleaning and landscaping. I had a renter lined up for $1,800/month which would give me a net income of $800 monthly. However, a buyer showed up and made an offer of $265k and I accepted the offer. Took about 45 days from taking control of the property to selling it.

When you market for properties people will come to you with all sorts of real estate problems. Your JOB is to solve their problems, not take it over or create new problems for yourself; which is why I say, the deal determines the financing. The deal above did not necessitate getting a new loan, hard money or otherwise. 

Learn to solve people's real estate problems and you would be able to do deals others wouldn't know how to put together because they lead with financing in mind. By the way the seller above spoke to 4 other real estate investors before me and no one offered the solution I presented to him.  

@Austin Neal thanks for the clarification Austin! I appreciate the help!

@Jonathan Marcus I appreciate the detailed insight! This definitely seems like a way to add value to sellers based on their needs. For a new investor, I’m not fully versed on all the possibilities out there. Would you recommend anything is possible until told otherwise? Or do you have another method for mapping seller problems to creative solutions?

Approaching every real estate deal with an open mind without any preconceived notions should serve you very well. Always gather as much information you can on very deal because it will help you to structure something that works for all parties involved. Listening to sellers about their real estate situation helps build rapport with them. Many times sellers choose to work with me even though my offer may not be the highest but because they trust me and feel comfortable working with me, I get the deal. 

It looks like you're on the right track just never stop educating yourself. After many years in this business, I still learn myself. Education never stops. Cheers! 

Also, join your local Utah REIA (Real Estate Investors Association). You'll get to know other investors in your area.