Hello BP peeps,
I would like to share my account of my second rental deal, while it wasn't smooth sailing, I have learned a lot from my struggles and a few NOs along the way. But it's all worth it.
So I stayed at my first investment home, while I live up top and rented out the whole bottom for a year as required by my owner occupancy saved me some money, enough where I I started to look at my second deal. I actually plan this 4 months out before i was seriously looking. And what i m looking is similar set up.
So how can you buy a second (investment) home with 50k/year? We'll 48.7k to be exact. When I started this conversation with friends and family, folks are rolling their eyes, saying; "It's hard to get a second mortgage, you going to be cash poor if you were even able to get it", "you can't do that?" I heard it all. So I was face with lots of skepticism, but nevertheless, I had a plan and I will follow through with it.
Here's my plan; get qualify for a loan with minimal down payment, easy said than done. After I talked to several institutions, and several No's later, I was back to square one. I was introduced to a local correspondent lender, they have flexible terms and work with you, instead of saying no, they give you a list of what's needed to be done to get you qualify.
So the best loan at the time, where you can leverage high DTI and low down payment was an FHA, you can actually buy single res to 4 plex as owner occupied FHA loan. This come with a cost via way of PMI that will roll into your overall monthly mortgage.
Things that I did to pre-qualify for a loan, I was able to use the potential income (75%) of rental market rate from my first home to use toward my DTI, and because I had 30% equity in the first home, i was able to use this leverage. So it is very important that you buy your first or second rental that will potentially be yielding you this equity or else you will have hard time with DTI ( I knew this coming in) unless you make big $$$ or find private loan.
So armed with 200k pre approval letter, I started looking for a split entry, with two separate living quarters in Seattle, and the market in early 2014 was getting very hot, and pricing are shooting up by the week and it's definitely a seller's market. I looked at over 100 homes in the span of one months putting in 7 offers and loss all of them, because every home were multiple offers and most are cash offer. I came to dread the term "best and final offer". So, I was little deterred, and exhausted and but knew if I rest now prices aren't going to rest either. So I decided to change my strategy, and that strategy prove to be the winning ticket. And the strategy is instead of shopping for 200k and under and compete with cash buyers or institutional investors, where FHA loan won't have a chance. Why don't I shop for 200k and up to 275k, because the difference in additional monthly mortgage is not substantial as say compare to 50k+ that cash buyer has to folk out, so there's a possibility that I have more homes to chose from and less investors.
That's exactly what happened, I have been eyeing on this REO home, a move in ready, a few months back, that's been lowering their prices every 30days, was listed originally at $299k, and kept lowering to by $10k, $20k and down to $259.9k in the span of 4 months, that's when I went and looked at, the first good sign that I knew that I might have a chance was the lack of or actually there were one agent business card, so there weren't much showing for this listing, it stated 2 less bedroom and less square footing than at the actually home. So went ahead and put in the offer. But how did the lender pre approved me with more money you might ask? Well, it was simple I had to sacrifice my one car payment by selling one of my car to make up for the difference,
Any rate, we put in an offer at 230k that's $30k less, to our surprised, the bank countered with back with $237.5k, so we countered with $237.5k but seller pay closing cost worth $6k, so totaling of $1.5k more than our asking price. So we closed the deal on $237.5k. Call it lucky, but I believe it's just part of the story, but I think the home was originally overpriced at first and didn't show well for awhile, and was on market for too long so didn't get showed. When they got my offer, it was the only one. So they had to act and so we did.
A month after we moved in, we rented the whole lower separate part for $1,200, with 3br upstairs we decided to rent an extra room upstairs to a student for $400. so that covered our mortgage.
In conclusion, I think this setup may not work for most folks, but if you looking at the big picture and have a plan and do what needed to be done to get there, then all the sacrifices, hard work and do the things that needed are just little speed bumps. As folks in Seattle are well aware, 5br 3bath 2300sqf near Burien area for that price is almost impossible to find right now. But again, you never know until you go out there and look and/or exhausted every avenue.
So I hope this post will find some inspirations and may be of value to you.
Disclaimer: Apologize in advance for any misspelled, mistyped or grammar error. I am a horrible writer; Otherwise Cheers!
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