New to real estate investing community

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Hey everyone Im Dave from PA new to the real estate investing community.  Im low 30's with a wife and 2 young children (4 and 2)and wondering methods of financing a first rental property and any recommendations on the price range to start at.  The area I'm looking is a high growing area in the area I live now.  Great school district.  Currently live in a single family colonial 3 br, 2.5 ba we built for $280k 5 years ago in a nice neighborhood. In the area, newer 2 Br 1.5ba townhomes sell for around $150k.

Since you don't want to move into a multifamily a conventional loan will probably be the best solution for you.  You live in PA so you should be able to get some pretty good returns depending on where you invest.  Price is dependent on what you can afford and is not nearly as important as return.

Welcome to the community @David L Miller

I am actually in a very similar position as yourself. My fiancee and I have been brainstorming how to get into our first deal in the most efficient way possible. Honestly, your preferences for type of property/location and financial situation will have the most bearing on what financing makes sense for you. There are a few options I can think of off the top of my head that you could consider: 

1. Owner Financing - This is what my fiancee and I have been putting our time and energy into. We have been aggressively pitching owner financing to sellers, even if they aren't explicitly offering it. Many sellers are open to hearing proposals, just make sure to do your homework beforehand. You'll have more success if you find out the seller's motivation beforehand. The key to this strategy is putting together a proposal that meets the needs of the seller, but is profitable for you also. In my experience so far, the first thing a seller usually asks is what do you have for a down payment. If you can come to an agreement on a down payment, the rest of the terms will probably fall into place pretty easily. 

2. FHA Multifamily Loan - You can finance 2-4 unit multifamily properties with an FHA loan. This is appealing because of the very low (3.5%) down payment. This loan also comes with a significant caveat. In order to qualify for an FHA loan the property will need to be your primary residence. That also means you will lose the income of on of the units for at least a year (I believe you are required to live in one of the units for a minimum of 1 year for FHA). This option may not make sense for you considering you recently purchased a home. Still, it's an option.

3. Conventional Loan - Pretty self explanatory. You'll put down 20-25%, and will need to fully qualify for the loan. The catch here is that you are limited to the amount of Fannie/Freddie mortgages you can hold at one time. Not an issue when you are starting out, but as your portfolio grows this will become more and more relevant. 

4. Rental Loan - There are lenders out there who specifically fund loans on rental properties. This financing is popular because you as the "sponsor" or borrower only need a decent credit score and 25% down payment to qualify for the loan. They don't care about your income because they underwrite the loan based on the income the property generates. In most cases these lenders will want to see that the property generates at least 125% of the monthly payment, or 1.25% DSCR. From what I can see this option affords you almost as much flexibility as owner financing due to less lender overlays.

5. Private Money - I haven't looked into this option too much, but I have heard many success stories. There are many people out there flush with cash looking for opportunities that will give them good returns. The rub here is that a) You have to get out there and find these people and b) You have to be able to pitch them. There's flexibility here also. You can either use this as short term financing (i.e. you use this to get into the property then refi to pay back the investor) or cut them into the cash flow for the long term. It all depends on who you approach and what you pitch them. 

There are countless other strategies, including ones that use combinations of what I described above. All you need to do is figure out what you have to work with and you'll be well on your way to where you want to be. As for the price range, I recommend another approach. First figure out what type of property you want and in what area. From there that will give you a starting price range. If you can make the numbers work in that price range then you start looking in another area. Feel free to reach out with any questions or comments. Good luck! 

Best, 

Joshua 

I know its not the sexiest answer, but I would just go with a conventional rental loan, 25% down.  That way, when you buy, you already have a good amoun t of equity built into the house, your interest rate is fairly low compared to other options, and its just plain easier than the other options.  Thats my two cents.  

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