This is my first post and it’s going to be a long one, looking for some advice on the next steps I should take.
Myself and two friends are looking to buy a home to live in for a few years, fix it up, and eventually turn into a rental. the three of us are living with our parents so we’ve had time to save up money, $21,000 between all of us. We have been working with an agent/mortgage broker and we were approved for a loan up to $500,000 until one of my friends had some late payment that ruined his credit. Unfortunately with only myself and my other friend we only got approved for a $300,000 mortgage loan, We’re in the Seattle market so it’s extremely hard to find a property at that price.
My friends credit could take 6 months to a year to return to what it was and we don’t want to wait that long, we have money saved and we want to get our first property under our belts. I’m currently reading David Greene’s brrrr book and I think this is an option we’d like to go with because of all of the benefits you get over buying a home the traditional way. But we’re not sure if you can brrrr with three people with one having bad credit.
If you have any suggestions please let me know, Thank you.
1)finding a property for 330k or under in king county will be tough to do so make sure you have every detail with the financing lined up ( down payment verified / becoming formally pre approved ) 2) make sure you have details in writing set up with partners with regards to owning property and how things will work in future ( eg - who gets the funds when selling / r e tc) 3) find a new partner as the credit of the one with missed payments will Be slow to get better - what did his score drop to?
Hi @Ethan Daniel Dacar , I am sorry you this happened, although it is better to have happen before you are tied together financially versus after. I know it can be hard to be patient, but patience is something that is required with real estate. When you get antsy to make a deal happen, you are much more likely to make a bad deal.
As Dave mentioned, make sure you have everything tied up legally first. Specific to your friends situation, what happens when one of you cannot contribute the required capital when it is due? Your partnership agreement should spell out everything that could potentially happen. This is potentially more permanent than a marriage, and your partnership agreement is your prenup.
Now to your current situation, but this ties to your friend's credit. As you have found, lenders will typically quote based on the partner with the lowest credit rating. Bringing in another partner, could help increase the loan availability, but then you need to figure out how that person is compensated, and the interest rate and any points will likely be based on your credit rating.
Looking for a different lender could free up some more availability.
@Ethan Daniel Dacar I think there are more ways this could go wrong for you than there are ways it could work out well. Just be really careful when getting into partnerships with others. The transaction costs on real estate are very high and if you were to have to sell the property before you are ready it could really mess up your numbers.
I generally recommend that people start by house hacking and utilize smaller down payment loan options & roommates to get started. If that could be an option for you, it would allow you to better control your own destiny with this investment.
Hi Ethan - you mentioned doing a BRRRR - were you thinking of a 203K rehab loan? Does anyone on your team have rehab / construction experience?
I'm in Seattle as well, and in our market BRRRRs are typically bought with cash (private money or hard money) then refinanced into a traditional bank loan after renovations are complete. Most of the properties that will qualify for conventional loans (aka "cosmetic fixers") won't have enough margin/upside in them for you to pull most of your money out with a BRRRR, so you may not be able to do the "repeat" part as quickly as you'd like :).
As @John Barrett has already mentioned, given your experience level and financial situation a house-hack would be a far better first investment for you. Let me know if you'd like to grab a coffee and chat about that more, we house-hacked most of our portfolio of rentals and are a huge fan of the strategy!
Cheers and Best of Luck!
@Ethan Daniel Dacar I 100% agree with the guidance so far. I'll give a different spin on this though. You mention you want to invest with 2 friends as partners. Business partnerships can be very taxing. Just because you are great friends does not mean you'll make great partners. I would caution being new to investing and jumping into it with friends as partners. There is a high probability your friendship will not last. Are you OK with that?
As far as the deal, I like the idea of doing a house-hack in Seattle if you can find one that will cashflow... for many reasons. Do be careful of the ever changing landlord tenant law right now with COVID. Many investors I work with are actually selling their Seattle properties to be in a more business favored state.
To echo what others have said, if your friend managed to do a late pay on a bill after the three of you had already agreed to this plan (which required you all to maintain stellar credit), how can you count on this friend in the future to hold up his end of the bargain? Pick your partners carefully.