New to Real Estate · Los Angeles, CA · Member since 2017 · 118 posts · 60 votes
How’s it going BP family? I’ve been reading, listening to podcasts and I hear a lot of people(new and seasoned investors) picking up deals left and right. I am in the Los Angeles market and just comparing the prices to these deals people are finding it seems a little more feasible. Correct me if I’m wrong, in the LA market you’ll need a bit more capital compared to some other markets.
If you’re buying a 80-100k property it’ll be easier to save up the 20 or 30 percent requires to get a hard money loan or something. Here in my market you can find something maybe 200-300k on the lower end and that’s if the price isn’t driven up by other investors, and that 20-30% increases drastically.
I know that there are deals out there I’m not complaining just curious how LA investors are findings their deals. Do you first save up 50-100k first or is there another route that you are using to get funding for these deals.
Any advice is greatly appreciated.
Los Angeles, CA · Member since 2016 · 156 posts · 113 votes
9y
Hey Dorian!
I hope you're doing well and I'm so glad you asked this question because this would be a great topic for our next meeting.
So to answer your question; there are a few ways to get funding for your property with a lower downpayment than the 20%-30%.
1. Get Government-guaranteed financing aka FHA, VA, USDA loans. I'm not as familiar with VA & usda loans but they also have low down payment options. FHA provides financing for SFR & 2-4 unit properties as long as you are occupying the property for a minimum amount of time (I believe it's 12 months but double check on that). The downpayment requirement is as little as 3.5% but also varies based on lender and other factors. So for the duplex, I only had to put down 3.5% on $400k property = $14,000. Better than 20%-30% down, right? You'll also need cash for closing costs; I estimate about an additional 1%-3% for closing costs (mine was about 2% of purchase price). FHA will require you to pay a monthly insurance premium until you get to 80% Loan to value. If you find a value-add property, then you can rehab the property, get the property to 80% LTV or less and refinance the property to a conventional loan to remove the monthly insurance premium.
2. Depending on your local neighborhood of interest/location of property, you can qualify for low-downpayment loans at community development financial institutions (CDFI). Check Broadway bank and OneUnited and other local banks to see if they participate in the program. Usually CDFI and small community banks provide more attainable loans for home purchases in the local neighborhoods.
3. More Consumer banks are offering mortgages with lower down payments (I heard Wells Fargo is promoting a 5% downpayment for primary residence home mortgages) so you can check with your bank to see if they'll offer similar options. However if you purchase a 2-4 unit, they may require a higher downpayment than a standard SFR. Also if you put less than 20% down, there is a good chance these consumer banks will also charge a mortgage insurance premium (PMI) until you get to an 80% LTV.
Also, if you don't have all the downpayment + closing cost cash in a savings account but you have it in an IRA, you can use up to $10k from your account tax & penalty free for your home purchase.
Let me know if you have more questions. I forgot to mention at the meeting that my professional background is in banking/finance 😑😑😑(that probably would've been helpful). Haha, I hope this helps!
Los Angeles, CA · Member since 2016 · 156 posts · 113 votes
9y
Hey Dorian!
I hope you're doing well and I'm so glad you asked this question because this would be a great topic for our next meeting.
So to answer your question; there are a few ways to get funding for your property with a lower downpayment than the 20%-30%.
1. Get Government-guaranteed financing aka FHA, VA, USDA loans. I'm not as familiar with VA & usda loans but they also have low down payment options. FHA provides financing for SFR & 2-4 unit properties as long as you are occupying the property for a minimum amount of time (I believe it's 12 months but double check on that). The downpayment requirement is as little as 3.5% but also varies based on lender and other factors. So for the duplex, I only had to put down 3.5% on $400k property = $14,000. Better than 20%-30% down, right? You'll also need cash for closing costs; I estimate about an additional 1%-3% for closing costs (mine was about 2% of purchase price). FHA will require you to pay a monthly insurance premium until you get to 80% Loan to value. If you find a value-add property, then you can rehab the property, get the property to 80% LTV or less and refinance the property to a conventional loan to remove the monthly insurance premium.
2. Depending on your local neighborhood of interest/location of property, you can qualify for low-downpayment loans at community development financial institutions (CDFI). Check Broadway bank and OneUnited and other local banks to see if they participate in the program. Usually CDFI and small community banks provide more attainable loans for home purchases in the local neighborhoods.
3. More Consumer banks are offering mortgages with lower down payments (I heard Wells Fargo is promoting a 5% downpayment for primary residence home mortgages) so you can check with your bank to see if they'll offer similar options. However if you purchase a 2-4 unit, they may require a higher downpayment than a standard SFR. Also if you put less than 20% down, there is a good chance these consumer banks will also charge a mortgage insurance premium (PMI) until you get to an 80% LTV.
Also, if you don't have all the downpayment + closing cost cash in a savings account but you have it in an IRA, you can use up to $10k from your account tax & penalty free for your home purchase.
Let me know if you have more questions. I forgot to mention at the meeting that my professional background is in banking/finance 😑😑😑(that probably would've been helpful). Haha, I hope this helps!
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
9y
Hi Dorian Jones , right now it's a lot harder to find the deals versus finding funding.
Then when the market changes it'll be easier to find deals but harder to find the funding .
New to Real Estate · Los Angeles, CA · Member since 2017 · 118 posts · 60 votes
9y
Joseph M. Supply and demand. That’s why I want to get some deals now and get the capital so that when the market does turn around I’ll be equipped with the cash to be able to dish out more out of pocket. I am also open to partnering with people so that we can split costs. I have the W-2 income and credit score, I just don’t have $30k laying around at the moment.
New to Real Estate · Los Angeles, CA · Member since 2017 · 118 posts · 60 votes
9y
Kysha McNeal thanks for the response. I will be using the FHA loan to purchase my first house hack. I want to aim for a tri or quad-plex preferably. I will consider a duplex if the numbers are right also. Correct me if I’m wrong, I heard that USDA loans were only for rural areas and VA loans are exclusively to veterans?
Now that I know that this is your back ground I can pick your brain with any questions regarding it. Thanks in advance.
Los Angeles, CA · Member since 2016 · 156 posts · 113 votes
9y
@Dorian Jones Yes, you're correct. VA Loans are for active service members, vets, and limited family members. USDA loans are for rural areas however their definition of rural vs. what we think of as rural can vary so I always suggest double checking to see if your property location is within their territory (I'm going to assume the LA proper is not included in USDA territory but of course I strongly recommend verifying all information ^_^).
The FHA loan is a great option and the underwriters will use current/prospective rents to help support the debt service coverage ratio. Let me know if you have any questions, I'm happy to help.