Author Topic: Advice on Down Payment (1st Post!)  (Read 2533 times)

Thor

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Advice on Down Payment (1st Post!)
« on: October 10, 2014, 02:08:15 PM »
BACKGROUND:
I purchased a duplex as an owner-occupant years ago.  I got married and last year bought a single-family home, and keeping the duplex renting out both units.  Now I'm interested in buying a second rental, however, the down payment is hard to come by.  Wondering if I could get some advice!  Thanks in advance!

I live in Minnesota and lenders here require 25% down on rentals.  And solid turn-key rentals average around $200k, so I'm looking at a $50k down payment.  I have about $20k in my reserves/Roth/401k, but would prefer not to withdraw that.

SEEKING ADVICE:
I'm wondering about personal loans and 401k loans.  Has anyone used these tools for down payments? 

Also, on buying this 2nd rental (third house including my primary residence), are lenders concerned with debt-to-income?  I've been told by one lender that all you need is 6 months of mortgage payments for all properties held in reserves.  Is this the experience others have had?

Seems like raising the down payment to buy rentals is the toughest piece of real estate investing!  Any advice would be greatly appreciated.  Thanks!

waltworks

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Re: Advice on Down Payment (1st Post!)
« Reply #1 on: October 10, 2014, 02:13:15 PM »
You can only come up with $20k?!? Sounds like you should save up more, or HELOC one of your other properties (assuming your D/I will still get you qualified for a loan).

You need a serious emergency repair/oh-shit fund for owning rental RE. Just that simple. If you have no money, you should not be overextending yourself like this.

-W

johnhenry

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Re: Advice on Down Payment (1st Post!)
« Reply #2 on: October 10, 2014, 02:19:32 PM »
BACKGROUND:
I purchased a duplex as an owner-occupant years ago.  I got married and last year bought a single-family home, and keeping the duplex renting out both units.  Now I'm interested in buying a second rental, however, the down payment is hard to come by.  Wondering if I could get some advice!  Thanks in advance!

I live in Minnesota and lenders here require 25% down on rentals.  And solid turn-key rentals average around $200k, so I'm looking at a $50k down payment.  I have about $20k in my reserves/Roth/401k, but would prefer not to withdraw that.

SEEKING ADVICE:
I'm wondering about personal loans and 401k loans.  Has anyone used these tools for down payments? 

Also, on buying this 2nd rental (third house including my primary residence), are lenders concerned with debt-to-income?  I've been told by one lender that all you need is 6 months of mortgage payments for all properties held in reserves.  Is this the experience others have had?

Seems like raising the down payment to buy rentals is the toughest piece of real estate investing!  Any advice would be greatly appreciated.  Thanks!

The handful of lenders (local banks and CUs) I've worked with, have been MUCH more concerned with debt-to-income as opposed to assets held in reserve.  When I bought my first house, I had enough in savings and taxable brokerage accounts to pay cash for it, but it was tough to get the best rate since my credit was non-existent back then.  Now that I have several properties, lenders want a full personal financial statement and tax returns that show income, including that generated by the rentals.  They seem to be concerned with my overall debt to income across all properties.

For specific advice, it would help to know your income, and the value and equity you have in the places you already own.  And what kind of rent you get out of it.

Thor

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Re: Advice on Down Payment (1st Post!)
« Reply #3 on: October 10, 2014, 02:39:33 PM »
The current low reserves are due to putting $50k as a down payment on the primary home we bought, to avoid mortgage insurance.

PERSONAL
Household income is about $100k.  Downside is household student loan debt is around $80k.  Credit scores: 770 and spouse is around 700. 

REAL ESTATE SITUATION
In the duplex we have about 10-15% equity (because bought as owner-occupied financing about three years ago).  Mortgage and operating expenses are about $1,100 per month.  Rents for total of $1,500.  So we are positively cash flowing.

In the primary home, 20%+ equity right now, as mentioned.  Downside is that one lender has told us we couldn't get a 95% LTV HELOC, since spouse credit score is under 720.

DOWN PAYMENT
We are saving about $2,000 a month, just will take years before we've got $50k saved for a down payment.  HELOC seems like the best route, but we may be limited due to spouse's credit score.  I've been reading 401k loans only offer lesser of $50k or 50% of funds.  Personal bank loans may be an option?  Or hard money lender? 

How do investors come up with this 25% down?  Seems like without partnering with other investors, REI is very difficult.

Thanks again!


zinethstache

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Re: Advice on Down Payment (1st Post!)
« Reply #4 on: October 10, 2014, 03:02:37 PM »
DTI magic number is 38%. (End of June )
Your rental income will be calculated at 75% after  expenses, so of your net income. You will have to show 6 months reserves for all mortgages. Heloc or other hard money can be used but it counts against your DTI.  These were the variables involved in my last three rental loans...RMMV.

I had the same issue when we first started and had to think outside the box to get funding. If you dont want the source of your funds to be questioned...make sure you age it 90 days in one of your accounts and dont touch it at all. If you have a loan on it no biggie it shows on your debt side. I did not move funds early enough from my heloc account so I had to verify source of funds for closing and it was painful!  good luck...

Watch out for 401k loans as they come due almost immediately if you leave your job for any reason. It is my last source of funds for investing. Max is 50k 5 year note. I believe that is a federal law...but again RMMV. I thought the interest rate was good but payment high due to the 5 year term.

Thor

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Re: Advice on Down Payment (1st Post!)
« Reply #5 on: October 10, 2014, 03:28:52 PM »
Great info!  Thanks!  I have a few more questions...

The DTI max of 38% - is that cumulative debt?  Including student loan payments?

Could you tell me what RMMV stands for?

Have you ever used a personal bank loan for a down payment?

Thanks!

waltworks

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Re: Advice on Down Payment (1st Post!)
« Reply #6 on: October 10, 2014, 03:30:43 PM »
At your income you should be able to save the DP in a year, tops. Post a case study?

-W

Handlebar Harry

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Re: Advice on Down Payment (1st Post!)
« Reply #7 on: October 11, 2014, 07:26:16 AM »
You could always restructure your overall investment plan. Buy another owner occupied residence, live in it for a year while renting out your current house. Then either move back into your old house or just stay put. That way you could use an FHA loan, which is only 3.5% down. I know this may be hard if you're looking to settle down, but its always a way to avoid the large down payment.