So I just wanted to start a discussion that focused on the little hangups that new investors face when getting into REI. I've hit these and I'm sure others have and will too.
Problem: You have no experience. You're buying your first rental. You don't make enough to cover the debt of the building. You can't use the income of the building to qualify since it's your first rental.
Solution: Increase your W2 income or save up and buy the property cash. You should also be able to cosign on the loan to increase the income. This should only be an issue for the first property.
Problem: You're going to finance your next rental. You need to have enough money in reserves to cover the debt, for three months, for each of your existing loans, plus the one you intend on taking on. This reserve money must not include your down payment or closing costs.
Solution: I ran into this on my second purchase and it hurt a ton. I lost the deal. What I ended up doing was leveraging my company 401k plan to build up reserves super fast. My company offered a 401k match also. So with the 401k match and me dumping tax free funds into the account, I was able to build up enough fast so that I'd never have this issue again.
Problem: BRRR works great until you have to many loans. One thing I didn't realize until I was well on the path was that most big banks have a max amount of loans that you're allowed to have. I've heard 5, I've heard 10. I believe the answer is 4 not including your primary residence.
Solution: This is a tough one. Once you reach this point you'll need to either start buying cash, exploring private lenders who don't have this restriction, or start trading your properties up. I'm currently looking for a long term, low cost, solution to this. My answer right now is using a HELOC to purchase properties cash. I'm also looking at doing a 1031 exchange to trade one of my properties for something larger.
Problem: House hacking works great until you attempt to move into a smaller property. I've run into this before. The underwriter won't sign on a loan for a house hack if the property your going to is a reduced standard of living. It's considered abuse of the system.
Solution: If you wish to continue house hacking, you'll need to consistently find bigger units for you to move into. You'll also need to write a letter to the underwriter explaining that the new place is an increase in standard of living for X, Y, Z. For example, more bedrooms, bigger back yard, closer to work or school.
Problem: You buy a property, you renovate it, you rent it out, now it's time to refinance it. Except you managed to renovate it and rehab it within two months of buying it. So now the bank won't refinance it because there's a minimum amount of seasoning required. Seasoning is the amount of time that you hold the property after purchase.
Solution: The only REAL solution here is time. I've currently heard three different time frames from lenders. Big banks often require 12 months. I had a private lender tell me 6 months and I recently had a small local bank say 3 months. You just have to wait, so be ready for it.
These are just a few of the things I've found to be a pain. I'm sure the community has some input as well. I'd love to hear it. Including if you have better solutions for the problems I faced.
