Author Topic: Questions on Loans and How Do YOU Finance  (Read 364 times)

RePatriot

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Questions on Loans and How Do YOU Finance
« on: July 20, 2018, 10:23:59 AM »
A bit of context for us:

We have identified a market that we are interested in both living and investing in.  Chattanooga, TN has a lot of potential cash flowing multifamily houses.  We will have roughly $60k for a down payment and renovation/closing costs.  There are a lot of~$150k duplexes available in decent neighborhoods in Chattanooga.  I am trying to explore different finance options, but I can't quite wrap my head around them.  We would be owner occupied, and once we felt comfortable landlording our home, we want to start expanding our portfolio of properties.  It seems like there are two options:

1. Traditional mortgage.  Expend about half our available capital on the downpayment and closing costs.  No PMI, no occupancy timeline.  Question:I've heard a lot about cash out refinancing, but don't quite understand it.  What is the typical timeline and expense for a refi?  Also, how many owner-occupied traditional mortgages can you hold at once?

2. FHA.  Significantly smaller down payment, preserving capital for expansion of portfolio.  Paying MIP.
Question:After a year, I can take out a traditional mortgage to cover the FHA loan, allowing me to get a fresh FHA and expand to another property with another small down payment, correct?  Is the 1 house/year a significant drag in our situation, or a decent pace?

Finally, how did you/do you finance your real estate purchases?  Considering we are a year or two out from the purchase, I'd like to figure out the best possible financing plan for our goals and timeline.

Mother Fussbudget

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Re: Questions on Loans and How Do YOU Finance
« Reply #1 on: July 27, 2018, 10:35:16 AM »
Up front:  I am *NOT* an expert on this, but it's frustrating to see you haven't gotten even 1 response on what I see as reasonable new investor questions.  *I* have been doing primarily conventional 30 year financing for properties over the past 20+ years.  I've also gone with wilder loans (like interest only ARM's, cash only, seller financing, etc), but primarily conventional loans from a local bank. 
[and those banks inevitably sell the loan to a bigger loan processor]  To the questions...

1.  Cash out refinancing is simply re-financing AFTER rehabbing to increase the house's value.  Investors put rehab dollars into things like new kitchens and bathrooms to RAISE the value of the house, get the house re-appraised, and borrow up to the new RAISED value.  This generally brings in more cash than the original loan (if there is one).  If the house was originally bought for cash, and rehabbed, the "refinance" goes to pay back the original cash payment, and the investor pays back the new loan like any other mortgage - from the rents coming in.

2.  An FHA loan requires a high quality building - class A or class B.  FHA loan requirements are VERY strict.  They won't lend FHA if there are ANY issues with a house - ex: aluminum wiring in older houses, mold, pieces of siding or gutters needing repair, double-layer roof, etc.   These are desirable loans because of the low rates.  I get an FHA loan, I want to keep it long term - in this case pay down the principle until it's above 20% equity, and have PMI removed.  I would put all profits toward paying down principle until at >20% equity. 

I'm not sure how to address the 1 house per year pace.  For me, I'm trying to build my 'fleet' quickly, and have a goal of buying 1 house per MONTH.  I'm well behind that pace, but I feel 1 house every other month is doable. 

3. Financing requires finesse and research. There are books dedicated to financing deals, and for good reason.  ALL DEALS ARE DIFFERENT.  For myself, I start by trying to finance via FHA with a local credit union. If that falls through for some reason (wiring, roofing, etc - yes this has all happened), I look to commercial lenders.  If the commercial lenders can't do the loan, (ex: the house appraises as a C5 needing more repairs than deferred maintenance, and lenders will NOT loan against it) then I take the appraisal back to the seller, and say "this place won't appraise", and ask for seller financing.  If that fails (and IF I still want the deal - a BIG IF...), I look at doing cash.  As a last resort, I would go to hard money lenders.

Keep in mind there are as many paths to get financing as there are deals.  Since every deal is different, you may need to use different financing approaches for each deal.  If one lender won't lend to you (because you have too many mortgages, etc) go to another lender.  Get a loan through the Fannie Mae program that allows up to 10 mortgages. 

I hope this helps.  There are really good blog posts, and books on this topic.  Some starter links:
https://www.biggerpockets.com/real-estate-investing/financing
https://www.biggerpockets.com/renewsblog/finance-your-first-deal/
https://www.biggerpockets.com/renewsblog/2012/10/07/real-estate-financing-guide/


All the best!  MFB

(now perhaps waltworks, boarder or others will chime in)