First rental vs first flip

8 Replies

Sooo I’m bouncing back and forth between a rental (sfh or duplex) and doing a straight up flip. I’ve been working in the flipping Buisness but for someone else’s company for 2 years now. I am pre approved for a 100k loan and I’m worried about getting my first rental and being stuck not being able to get approved for another mortgage for a year. I want to keep moving foreword building my real estate empire. My goal is to accommodate rentals but the money in flipping may really help me starting out.

Any feedback would be awesome. Let me know what you would do.

@Eric Winters I personally lean towards starting with rentals. I first purchased my four unit property in Lyons, IL three years ago. It has been a cash cow and easy to manage. Since then I have purchased 29 rental units with my partner in the Chicago suburbs. Rentals have been very profitable, and very low risk honestly. 

I am currently doing my first flip here in Berwyn, which is a great market for flipping. My partner and I bought the property in cash for $140,000 and have put well over $100,000 in renovations into it. We will definitely make money, but that is a lot of risk in my opinion! You have to be properly capitalized to pull of that type of move. 

@Eric Winters Not sure of your cash position, but rehab and wholesale to generate cash to put into rentals has been a pretty good strategy. I know good rehab deals are very tough to find in most markets right now. 

What makes you think you will have to wait a year to be approved for another mortgage?

Once you get that house rented, you'll be able to count the rent against the mortgage.

Some banks might require 2 years to count it. But you can always go to a local bank and do a commercial/portfolio loan. They won't require 2 years of landlord experience to count the rent.

They'll take 75% (or 70, I forget which) of the rent and offset that against your PITI of the rental. If its positive, you'll add that to your income. If negative you'll subtract that against your debt. So it won't really affect your dti at all.

i.e. If salary is 5k/mo and your debt payments are 2k/mo, your dti would be 40%. If your rent on your rental was 1200 and your PITI was 800, they would take 75% of 1200 (900) and subtract 800 and get a positive rental income. They'd then re-do your dti calculation as:
5,000/mo income plus 100/mo rental income = 5,100 
2,000/mo debt payments Divided by 5,100 = DTI of 39.2%

So the rental would actually help your DTI in that instance.

Originally posted by @Adam M.:

@Eric Winters Not sure of your cash position, but rehab and wholesale to generate cash to put into rentals has been a pretty good strategy. I know good rehab deals are very tough to find in most markets right now. 

 What exactly do u mean rehab and wholesale?

Originally posted by @Mike H. :

What makes you think you will have to wait a year to be approved for another mortgage?

Once you get that house rented, you'll be able to count the rent against the mortgage.

Some banks might require 2 years to count it. But you can always go to a local bank and do a commercial/portfolio loan. They won't require 2 years of landlord experience to count the rent.

They'll take 75% (or 70, I forget which) of the rent and offset that against your PITI of the rental. If its positive, you'll add that to your income. If negative you'll subtract that against your debt. So it won't really affect your dti at all.

i.e. If salary is 5k/mo and your debt payments are 2k/mo, your dti would be 40%. If your rent on your rental was 1200 and your PITI was 800, they would take 75% of 1200 (900) and subtract 800 and get a positive rental income. They'd then re-do your dti calculation as:
5,000/mo income plus 100/mo rental income = 5,100 
2,000/mo debt payments Divided by 5,100 = DTI of 39.2%

So the rental would actually help your DTI in that instance.

 Wow thanks for the breakdown and advice. Do u know if I would have to have an Llc to have a portfolio 

Originally posted by @John Warren :

@Eric Winters I personally lean towards starting with rentals. I first purchased my four unit property in Lyons, IL three years ago. It has been a cash cow and easy to manage. Since then I have purchased 29 rental units with my partner in the Chicago suburbs. Rentals have been very profitable, and very low risk honestly. 

I am currently doing my first flip here in Berwyn, which is a great market for flipping. My partner and I bought the property in cash for $140,000 and have put well over $100,000 in renovations into it. We will definitely make money, but that is a lot of risk in my opinion! You have to be properly capitalized to pull of that type of move. 

 Awesome story man good for you. Thanks for the honest advice

@Eric Winters Two different types of deals: 

1. Rehab - Buy deal, rehab, sell

2. Wholesale (a real flip) - Find deal, get under contract, assign contract to buyer

@Eric Winters   

No. Most banks would not require you to have any kind of entity (i.e. llc, s corp) in order to get a portfolio loan on the commercial side. 

But here would be the one advantage to doing so. If you were to create an S Corp and get the loan under the S Corp, it would not count against one of your fannie/freddie 10 spots. If the loan is under your name OR under an LLC that you own, then it will count as one of your 10 conventional loan spots.

Just to jump ahead, the freddie/fannie guidelines state that they will allow you to have up to 10 loans in your name and still qualify for a conventional loan (i.e. 30 yr fixed rate, low rate, etc).

So those conventional "spots" or loans are really valuable in terms of cash flow. The portfolio loan will likely be a 5 year balloon or ARM and will likely be amortized over 20 or 25 years - and at a higher rate too.

So the amortization and higher rate will cost you about 100/mo in cash flow depending on the size of the loan which is why those spots have so much value. And in 5 years, youre interest rate will reset and you may get stuck with a rate that is considerably higher which will also cost you money.

So that is why it makes sense to use your conventional loans wisely. And given that a portfolio/commercial loan will take up a conventional spot if its under your name or an llc, why not stick it under an s corp and save the spot?

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