All Forum Posts by: Ethan Tomlinson

Hi Ethan, ignore everything that was said on this thread. A lot of people are intelecualizing, moralizing, and complicating things. This can be much simpler than people are making it. 

First off, it is kind of your grandmother to offer to lend you money at 5%. It shows she believes in you and wants to help you be successful. Thank her for that. 

Secondly, you need more experience and understanding to become a good real estate investor. With a savings rate of $2000 - $2500 a month you have shown that you can manage your personal finances successfully so great job!

This would be my suggestion, continue to go to real estate meetups in your area and start connecting with other investors on a regular basis. If possible, invite a real estate investor to lunch each week and pay for their lunch. Ask them how they got started and what type of deals they are doing currently and what the numbers look like. After doing this for a few months and having gotten to know several (ideally 20 or more) investors, ask one of them that you felt most aligned with regarding the type of real estate they are doing if you can lend to them short-term on their next deal and if you could see the process of how they invest. Make sure your interest in the property gets recorded with the title company and then learn as much as you can about the process. 

After doing this on 2 or 3 deals, you will be much better prepared to recognize a deal, how to get into a deal, what's important and what's not important in a deal, and how to make the deal profitable.  

You are getting too much feedback on how people buy houses the normal way and get loans the normal way. Well your regular average person that buys a house the normal way gets rich very slowly if at all. Skip all of that. Learn how to find really good deals, and then get into a really good deal and turn that deal into a great place for you. 

This is an idea of what I would do specifically if I were in your current situation after having dove head first into learning, networking, and participating in deals.

1. find a house from a wholesaler that is an older build but that doesn't need things like electrical upgrades or things like that. Look for a house that is around 1800 - 2200 square feet where you can change a 3 bedroom home into a 4 or 5 bedroom 2 or 3 bathroom home. This would make an ideal situation for a house hack/rent by the room situation which would exponentially build your income quicker. 

2. Purchase the house with a hard money loan from a lender you met over the past year of doing deals with successful investors. Get a 90% or higher loan with rehab reimbursement draws where you can get money draws from the lender to reimburse what you spend on repairs. This will make it so you can recycle your rehab money and make it go much further.

At this time you should have an additional 20k - 30k in savings so you should be at about 50k or more to work with on the purchase and rehab. 

3. After the repairs are complete and you have started renting the property by the room, look into either refinancing as a primary home or get a DSCR loan if the primary home loan lender is giving you a hard time.

If done well, you should be at only a 75% - 80% loan to value and you would have taken your $50,000 in cash and turned it into $100,000 or more of equity. You should be able to live in one of the rooms for free and cash flowing $500 or more a month on the property.

After doing this, go back to your grandmother and show her the deals you have been a part of, what you have learned, and the deal you put together. Then ask her if she would like to be your money partner on deals and go start crushing it. Outline the partnership expectations in paper, continue to build your support system, don't get over leveraged, and improve your craft. 

I would encourage you not to use grandma's money at the beginning until you are already doing your own deals successfully. It makes it too easy to use easy money and it doesn't push you into finding really good deals. It would likely make you into a mediocre investor. So don't do that. Focus over the next year at building the investing rocket ship and then let your grandmother provide the fuel.

@Ethan Tomlinson all this jazzy talk on finance this way, finance that way, FHA this, FHA that.... Forget all that noise!

Remember when I said keep it SIMPLE. 

You want to be an Investor/Landlord. Ok, keep it SIMPLE. You will be using DSCR financing. 

Why? 

Because that is financing literally designed for landlords and Landlording. 

It will give an assist in analysis because there looking at the property, the performance of the property to secure the financing. It forces you to do and understand all that math which is paramount for long-term success. 

The "oh no but it will cost you 1% more on interest"..... No, it won't, it will cost your tenant. Because that's who's actually paying to cover all debt service isn't it, the tenant? 

Keep your priorities straight. 

1st priority is geting "in", cracking that nut of going from 0 too 1, doing it SAFELY, profitably, in a way that set's a stage for the next priority of getting from 1 too 2. 

That means this first 1 is all about SAFE, learning, cutting your teeth. The learning is worth it's weight in gold. 

The Carpenters Creed is applicable here: Slow is Steady and Steady is Fast. 

Keep it simple, small steps forward, that will add up over time to being a staircase into the clouds.

For traditional loan options, you generally cannot borrower any part of the cash to close (downpayment and closing costs). All of this money will be sourced unless seasoned, so the only way around this would be to A) get a personal, unsecured loan from your grandma several months in advance, and B) lie about this fact on your application (you will be asked about any undisclosed debts). Mortgage fraud is a terrible idea, so dont do this. 

Secondly, if your grandma intends to secure her loan against the property with a mortgage/DOT, then this will be a consumer loan since you will occupy it. Dodd-Frank/consumer finance laws at the state and federal level will apply, and since your grandma is an outside party to this transaction, she will most likely need to be licensed as a mortgage lender to lend in the way you described.

Most importantly, though, you need to weigh the potential negative outcomes of this situation. Is your grandma independently wealthy where she can absorb the loss of this money without any major impact, or is this her life savings that you'll be risking? In other words, if this blows up and you lose her money, what would the outcome be? If she cant afford the loss, then this is a horrible idea and should be abandoned. It's one thing to gamble with your own assets, but entirely another to gamble with someone else's money just because they trust you when it could have life-altering consequences for them.

If she's going to lend to you, I would recommend that she be in first position only with a healthy margin of safety (equity cushion) and then seller-finance whatever property to you. This means you'll have to go out and find a crazy good deal for her to buy on your behalf and will likely need to invest your own cash as the downpayment, although I dont know how far $20k will really go these days.

Another option would be for her to buy the property herself with a mortgage and then rent to you with a purchase option for when you can eventually qualify for your own loan. This will also increase her risk, though, as half of the reason that lenders require a downpayment is that this equity soaks up the first losses before the lender takes a hit.

You're on the right track, but the reality is that you might need to wait longer until you're able to qualify. Both Conventional and FHA programs exist to help people in your shoes get started, and the requirements really arent steep - 2 years of job history to prove income stability, 3-3.5% down, and good credit. There are also nonQM programs that allow you to use the type of work history you currently have, but they typically require 10-20% down at a minimum. Since you have a some cash and know how to hustle, some of the other pathways into REI may be a better starting point (like wholesaling).