How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
My wife and I live in the suburbs in a 20+ year old, stick-built starter home in a great area and have lived there for nearly two years.
We’ve both grown up in the suburbs but have both imagined moving out to a more rural area where we could have more land and fewer neighbors.
With each mobile home and land property that I’ve bought as an investment, I’ve asked my wife if she would consider living there. The answer every time has been “no” as either the home or the land/location has always turned out to be less than ideal.
Honestly I can’t blame her. From a financial standpoint, it would be awesome to eliminate or reduce our mortgage payment, but I’m not sure that we would enjoy living in any of our investments more than our current home.
With the homes that she has searched for I’ve found major issues with each one, things such as to high of an asking price, poor location or too much repair work.
Without being obligated to move it’s been important that we’re both happy with the next home we choose.
The home we eventually decided on came across my desk in February 2014 as an investment property. The seller had filled out one of my seller forms from my website.
Here are the details of the home:
- ‘98 doublewide
- 4 bedrooms and 2 bathrooms
- 2100+ sq ft
- 4 acre lot in a rural area but with excellent schools
- Asking price: $50,000 but would take $45,000 for a cash deal
This looked to be a nice home, but it didn’t fit our business model and I responded to the seller by email that we would pass.
However, the emails kept bouncing back. I was going to call her when the thought about this home as a potential personal residence crept into my mind. After talking it over with my wife, we decided to check the home out.
It was going to take a really nice mobile home to convince my wife to move into one, but this one definitely met the criteria. I’d never seen a mobile home this well cared for. Even the carpets looked to be in great condition for being 16 years old.
The lot sold me as the home sits at the end of a long private driveway and has a secluded back yard. Also, even if we bought the home at their asking price our housing expenses would be cut in half. We talked it over for a day or so and then decided to make an offer.
I made an offer at $42,000 that included all the appliances, costing costs, and repairing of the driveway. (The home had a few driveways but only one was usable due to rain washing away the steep sandy driveways.)
The seller couldn’t go lower than $45,000. We eventually settled at $45,000 that included the appliances and repairing of the driveway as well as splitting closing costs.
I probably could have done better negotiating, but we wanted the home and the property still appeared to be undervalued (around $65,000 according to my comps).
The financing of this home blindsided me. I figured this would be an easy decision for any bank.
- My yearly W-2 income (not including investment income) exceeded the contract price of this home.
- We had more in personal liquid savings than the contract price of this home.
- The principal balance left on the mortgage of our current home was more than twice the contract price of this home.
- Good credit score (low 700’s)
(Before I get into the meat of it, let me tell a quick story. The underwriter of the local credit union could not believe that my wife and I would move into a mobile home after living in a site-built home. We had to sign a statement that stated why we wanted to move into a mobile home: more land and lower cost-of-living. The negative stigma of mobile homes doesn’t appear to be going away anytime soon.)
Back to the main point, banks are much more restricted now to federal regulations regarding lending decisions than they used to be. The red flag that came up to the credit union and national bank I had applied to was my debt-to-income ratio.
With taking out quite a bit personal debt that is used (and paid back) by my investing business, I was showing a considerable amount of debt obligations. With the banks heavily discounting our rental income that was obviously used to meet these obligations (as well as provide us a profit), our requests were rejected and I was at a crucial pivot point.
We could walk away or we could get creative.
We chose to get creative by assuming the seller’s mortgage on the land (principal balance around $23,000) and pay cash for the mobile home. This strategy allowed us to buy time so that we could eventually refinance the property with a bank once we had paid down my personal debt or found a private lender who could assess our situation like a person instead of a robot. As you can see, I’m still holding a grudge on those rejections.
I’ll keep you updated with how we’re enjoying country living in our double wide.