Newb with No funds but great Credit

11 Replies

Hello All! This is my first post on the Bigger Pockets forums so i'm very excited! To give you a little background on myself, I am 30 years old and hope to soon be a first home buyer. I have no savings but i have a 401k that I know I can withdraw 10k for a first home purchase. I love the idea of buying a 3-4 multiplex, living in one unit and renting out the other units but since I live in NJ and I only make 55k/annually I have no idea how i would accomplish this goal of mine without getting a better job. My credit score is around 800 which is awesome but I was wondering how the pros would recommend me starting off seeing in the next year I will have to move out. Another side note is that I am considering joining the Army Reserve to help pay off my 30k of student loans and also take advantage of their VA loans and I just finished getting my Real Estate License. Any advice will be greatly appreciated and I am curious to hear what strategies you guys recommend for some one that isn't making much.

@Sandro Bianco I wouldn’t join the reserves for the VA loan or other stuff. Wrong reason in my opinion.

You need to increase your income and decrease your expenses. That’s the best way to do this. Borrowing against your 401k is also a risky and potentially bad idea

@Sandro Bianco I'd look at making a budget and saving more money. I know your eager to get your feet wet, but I see routinely how things can go wrong in this business in a hurry. You need a good amount of money to comfortably move forward. I wouldn't join the military for the student loan debt. As a former Marine I can tell you that you will deploy and unless your ready for that life your going to end up really unhappy. There are other ways to get into this industry you can wholesale properties for capital or partner up with flippers and learn the ways of flipping for capital. Going to meet ups will help you meet someone that maybe able to thrust you forward from where you are. Network, Network, Network

As a first time home buyer, you are in a great position to buy, because there are programs that will allow you to get a mortgage and put down only a 3% or 5% downpayment on the property. I believe this same low downpayment will be allowed if you buy a property with a partner.

So, a $300,000 duplex, for example, would only require a $9,000 or $15,000        downpayment. If you don’t want to wait to save the downpayment, a partner with downpayment $ is pretty much your only option to buy soon. 

If I were you, I’d do the following: 

Find an experienced investor partner, form an LLC with an operating agreement that spells out who owns what percentage of the property. This might be 50/50 or 60/40 with your partner providing the downpayment and experience, and you providing the (hopefully) increased ROI due to the low downpayment and from possibly decreased interest rate resulting from your great credit, and certainly decreased interest rate from owner occupying the property.

Can you find a property that cash flows with such a low downpayment?Run the rental property calculator on available properties to find out. Low downpayment = higher mortgage payment = less cash flow.The BP calculator is a great tool, but beware: you have to put valid info in to get valid info out of the calculator. So do your research on what those numbers you input should be, and be conservative on what you can rent the property for. Are there maintenance/repair costs that you will need to pay for up front? Who is contributing those funds? No? Are you sure?Who is paying for the home inspection, the appraisal, and the other costs of the buying process? Are their capex costs that will need to be paid for in the near term before the property has built up a capex fund?No? Then where will that money come from? So, after researching everything and identifying all upfront costs and all ongoing expenses (vacancy, maintenance/repairs, capex, property management) if it cash flows, then buy it.

If you live in the property, you would pay the LLC the same rent as any other tenant. The LLC might pay you for managing the property, if you were qualified. So learn how to manage properties. Start with Brandon Turners Book on Managing Rental Properties. Start with a duplex. Move up to more units when you have more experience.

Live in each side of the duplex for two years, doing maintence/repair on the side you are not living in, to be able to deduct your percentage of the maintenance/repair costs from your percentage of the income. Plan an exit strategy to sell the duplex in the 4-5 year time frame, so you get the capital gains exclusion on your entire capital gain (since you lived in each half of the property for two years of the five years before selling).

I'd also have both partners invest an equal amount of their profits from the LLC each year in paying down the mortgage, resulting in building more equity sooner. When you sell, your equity (less your half of the sales expenses) becomes the downpayment on your next property.

Anyway, that’s what I’d do.

Also the people recommending that you take control of your finances, reduce expenses, and start saving are right. One of the best ways to save is to start by paying off any debt you have. This will free up the money you were spending on those debt payments (mostly interest) so you can save it. A 401k loan is not bad, but be aware that if you change jobs, you will be required to immediately pay off the loan.  This can be bad if you just lost your job because the company downsized or something. on the good side, if you use the 401k loan to pay off a small debt, and then pay off the 401k loan, then repeat, you are paying interest to your retirement plan, instead of to a bank. And it is at an interest rate that you pick, which will immediately reduce your required payments vs your previous debt payments. So keep paying the same amount you were before, and the 401k loan is paid off quickly.

Work smart, and do well. Good luck.

CJ

You are set to start. You next step is to stick pile cash savings. Without cash you are going no where. Adjust your life style, prioritise saving and work toward that goal. Yu will need cash for DB, closing costs, reno/maintenance reserves and a contingency fund.

You should never even consider investing with minimum cash reserves. $55K per year income should be sufficient for you to save 50-100K in the next few years and begin your path to investing.

Bottom line is if you want to be a successful investor you must personally have something to invest. Any other approach is 10X the work and 100X the risk. Little more than dreams that will likely result in nightmares.

Adjust your life style, prioritise saving and take the time required to start properly. Rushing in with insuficient cash can and often does result in complete failure.

I did an FHA first time home buyer loan that just required 3.5% down for my first property. You have a PMI payment to deal w but it’s a small price to pay to get you in the game.

I don't agree with the everyone commenting that you must wait and have money. I had no income, no cash, $60k in student loans, a great credit score, and I bought 3 properties. I started working and have bought another. My advice would be the following:

1) Look into cheaper areas. NJ may be expensive but there are other areas of the country, PA for example, where the barrier of entry will decrease substantially.

2) Reach out to family and friends. They may have personal loans, personal lines of credit, or home equity lines of credit that they would be willing to loan you if you find the right deal an explain how risk is mitigated. With close relationships as long as you pay everything back and it costs them nothing, then they may be willing to help just because of the equity you've built in that relationship.

3) Look into personal loans or personal lines of credit to use as the down payment. With great credit and $50k of annual income you should easily qualify. Combine that with owner financing and you have a very powerful purchasing tool that can get you with literally $0 money out of pocket.

4) Find another investor who wants your FHA loan. It reduces the barrier of entry and is valuable to other investors. I'm working in a deal now where I would bring experience and cash and they would use their FHA loan to purchase a 3-4plex. They get a house, learn the business, house hack, and I get a piece of a great property. Win-win.

5) Stay patient. Being creative means you have to be picky. Wait for the right moment and relentless pursue the deal that works. I called a seller 13 times in 4 days with 13 different offers before he finally said yes.

I’m in somewhat of a similar situation looking for my first deal and very eager. I have a good credit score, but I don’t have any money to put down at the moment. The market in my area is booming fast and I don’t necessarily have time to save for years just to make my first down payment (even though I still do recommend budgeting, cutting cost, and saving to develop good financial practices). My plan is to start with a fix-&-flip, use a personal loan and combine that with loan from a hard money lender which will cover 80%-90% of the purchase price. I can also get 100% of the rehab covered by the hard money lender as well. Once the home is fixed, I plan to sell and take the profit from that to pay back my loans borrowed (personal and hard money) and use what’s left as the down payment for my first actual rental property.

With that being said, there is risk involved but I analyze each deal and make sure that the profit from the flip will give me enough to pay all loans back and have excess. I also consider the option of holding the home for 6+ months, would I be able to cover the loan payments from just my paycheck? What’s the worst case scenario if the home doesn’t sell quickly? Can I cover that? I consider all these things before making an offer and if the answer is yes then I go for it.

In short, it’s less risky to save and be patient however, you have to determine how much risk you can take on if you want to move quicker.

Where in NJ are you looking? There are some counties that offer help with down payments anywhere from 5 - 10k for first time homeowners. Also, I have been looking for multi family in NJ. Look out and do your numbers well. What looks to be a good deal is absolutely killed by property taxes. I was just looking at one in Elizabeth, two family with 17K a year in taxes. Insane! I found better deals either south or towards PA. Unless you want to get into a market like Newark, Irvington. 

@Sandro Bianco ,

@Ian Tvardovskaya & @Cindy Larsen make some good points above. I'm in a similar spot, though granted I've saved up a bit for the down payment going FHA.. Here's my suggestions..

1) Read Set for life by @Scott Trench ..  All about controlling major spends and preparing for a house hack, etc..  I've found a super cheap apartment and have had a roommate for a while which has afforded me to stash some money aside for the first deal. Granted rents are pricey around these parts, Also look at some Mr Money Mustache posts and Fire podcasts for cost savings ideas and to get into the mindset. 

2) From what lenders have told me with FHA Loans, you can receive a credit up to 6% of sales price, which if negotiated, you can likey take care of the closing costs (and maybe prepaids??). For the 3.5% down payment, you'd still need that money, which best case scenario, you can have a family member provide you a gift amount. Otherwise, you may need to bring them in as a cash partner, with yourself as managing partner. Worst case.. start saving.. be ruthless... Most friends and family will understand your saving for a house

3) Take some time to look in areas that would be suitable to move to while not killing your commute.  I'm currently 15 minutes from work but the property I'm closing on is outside of Bridgewater, which is about 45 minutes without factoring in traffic. At the end of the day, it'll be a small price to pay to live for damn near free once all renovations are complete.  

Hope this helps & best of luck!!

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