Need Advice - Looking To Buy First Rental Property!

[Rionoskae]

Me and the wife are super eager to purchase our first rental property, but we are cash poor at the moment. (paid off car + credit cards + student loans this year!) I don't know if I can wait until we hit 20% to purchase our first rental property and get our feet wet with being a landlord and see if this is something we truly want to pursue further.

Relevant Info

• I grew up in the trades and can do almost all work/repairs to the property. (except foundation+roofing)
• My Wife's father was a landscaper for years and has offered to give us advice/help as needed
• Housing prices in our target area very reasonable (midwest)
• Can save approximately 1,400 per month currently (Will go up to 2k per month soon)
• Have only 2k in the bank right now after wiping out most of my debt recently
• 740+ credit score
• Properties we are looking at range from 100k-240k

We have both been patient and have been kicking ass on wiping out our debt and improving our credit to make this happen, but neither of us really want to be patient anymore.

TLDR: What advice would you give someone in my position to finance a duplex or 4-plex rental property? (Live in or otherwise)

Thanks!

[fishnfool]

You'll need more cash reserves to do anything and conventional investment loans require 25% down. Maybe you'll find a seller willing to do owner financing? Or find a partner with cash that will use your skills to get into a fixer.

Good luck!

[waltworks]

Wait until you have reserves. Murphy loves landlords with no cash in the bank.

-W

[Rionoskae]

Fair enough. I guess I expected these responses :)

Few things I would like to ask however....
-We are willing to live in the home and are first time home buyers. Does this change anything?
-how much cash reserves would you reccomend?

Thanks again!

[waltworks]

1: Not really. You can get more financed that way, but you'll cost yourself a lot of money paying mortgage insurance if you can't come up with a decent downpayment anyway.
2: I would want to have $10k as an all-around emergency fund if you own a house, duplex or not. If you don't own a house, I'd still want at least $5k. There are lots of threads about emergency funds and how to implement them here, do some reading.

The bottom line is that you're impatient and as far as anyone can see, you haven't run any meaningful numbers on how this will affect your own finances (or at least you haven't provided them here). Impatient and unprepared is a very bad combination, even if you had spare money lying around. But you don't even have that.

Take a step back, appreciate that you're kicking ass, and keep kicking ass for a year or two and save up.

-W

[Rionoskae]

That is a fair statement. I haven't provided any numbers and openly admit I am probably a bit too eager to get started. That being said, I have spent the last year looking at properties, running numbers and preparing for this to the best of my ability.

Income Numbers

• Salary: 58k (pre-tax)
• $3,734.28 Monthly Income after Taxes
• $2,000.00 In Monthly Expenses

Potential Property Numbers

• 90k-150k for a 2/2 Duplex in a nice working class neighborhood
• There have been a few nice 3 units (2/2/1) lately for ~140k as well
• Average rental price for 2 bedroom - $650 per month
• Mortgage+PMI+Taxes ranges from $580-$980 (90k-150k respectively) per month
• We are paying 760 a month for rent currently
• We will most likely be living on the property and doing all property management/repairs ourselves.

We can certainly continue to wait and save, but I think even with mortgage insurance (we can refi) or an 8/15/5 type loan I think the numbers still make sense for us.  It helps that the cost of a mortgage is (on average) the same that we are already paying in rent, so even if we have problems getting or keeping a tenant it won't effect our monthly expenses. Aside from something going terribly wrong  (water heater / furnace), I strongly feel this is the best move for us. The only thing that is concerning me at the moment is the 5-10k emergency fund you mentioned just in case something happens immediately. But worst case scenerio, I do have other assets I can liquidate if absolutely necessary.

Does having any of this information change anything?

[waltworks]

Can you qualify for a loan? If so I might consider it. But you will need to show 6 months worth of PITI in the bank on top of your DP/closing costs money (which could be very little but will still be *something*) so you'll need to save up for at least a few more months before you're there.

Lots of shit happens with a house. Expect things to go wrong and cost sometimes large amounts of money. Again, I would wait a year until you have some form of saving so that you don't have to liquidate all your personal possessions to pay for a new roof, or whatever.

I'll also note that you're well below the usual multi-unit 2% rule threshold, so these are probably not fantastic rental properties, though they could make sense if you plan to live there long term.

-W

[Rionoskae]

I was pre-approved earlier this year for a loan of up to 290k. I have since wiped out all my debt and raised my credit score, so securing a loan shouldn't be a problem!

The 3 units & 3/3 duplexes in our area meet the 2% rule without a problem, but my concern there is having to deal with 3 units, 3 bathrooms, 3 heaters, etc that could potentially die on us right away. And with the 3 bedroom units, I'm not all too excited about sharing unit with kids. The last place we rented had a family downstairs and we could always hear their kid screaming during the night. Maybe down the line...but not sure it's for us as a live in.

And thanks for the advice Waltworks, I think you are absolutely right about waiting a little bit longer. I'll aim to start looking again in spring 2017 and start ignoring all my real estate alerts to avoid temptation :)

[fishnfool]

You don't need a emergency fund in case something happens....you need it because eventually something will happen!


Another option, you might find a rent to own deal out there. But in the meantime save up as much as you can. Most lenders like to see 6 months of reserves PITI.

[jbigelow]

If you are eager to get started, I'd suggest just getting a single family home once you save up like 15k-20k. You could do a 5% down conventional loan and get an appraisal after a year or 2 (depends on your lender) after fixing up the house to prove you own 20%. I think most lenders require 20% down on duplexes unless going FHA which is a ripoff now. For me, PMI was roughly $41 a month on a 100k house for 2 years. Total extra costs were $984 in PMI plus I had to pay $300 for an appraisal to prove I owned over 20% of the house. The house raised in value by over 30k, I paid off roughly $3,250 in principal, and the PITI payments essentially equal to what I'd pay for a small 1BR apartment.

Definitely worked out in my favor to buy with 5% down. Only downside is the market could tank but you could still get rid of the PMI by paying off 15% of the principal. 

[Enigma]

I would go for it....  It sounds like you have been extremely driven (paying off car, student loans, and cc debt).  Your eFund can easily be the cc if you need it.  Until then keep up the momentum in growing your wealth.

- Cut every expense you can think of with the intent to use that money towards your down payment
- Get a new pre-approval
- Don't get the most expensive property...  Shoot for the low range...  look everything over as well as you can to avoid major costs (roof, appliances, plumbing, electrical).
- You said you had skills with doing work/repairs that is a must
- Put a little more money than needed towards the mortgage

[Rionoskae]

@jbigelow
Solid advice. I plan on doing essentially the same thing by buying a fixer upper and having it re-assessed in 1 year (or after improvements) to hit 20%.

Although I was told that you don't need 20% down on a multi family unit if you plan to live there for at least 1 year. I'm not sure if that is limited to FHA loans only or not though. Either way, I really feel more comfortable with the multi unit as our first property to help alleviate some monthly expenses. I'll have to double check on the loan types available when we get closer to metting our down payment.

@Enigma
Thanks for the encouragement! I'd definately like to keep this momentum going and get my feet wet with being a landlord. To some of your bullet points...

-Currently working on trimming the fat in budget
-Was definitely looking for a good deal, would only consider a property at the upper end of our budget (~200k) if it was a 4 family in a nice location.
-Will try to put as much down as possible while leaving a small E-Fun :)

And another, more unfortunate update....

My work just announced that they are severing ties with the company I am currently contracted through in February. So I might be out of a job in 4 months time... While i'm not worried about finding another job, it would definately slow things down a bit.

~Cheers

**P.S - Thanks to everyone for their advice, encouragement and wisdom!

[darnold641]

I've been a landlord for 30 years.  I wasted years by believing I needed 25
% down and cash in reserve.  It's not true.  You substitute ideas and leg work for money. I've purchased 21 rental houses.

With my first rental house, I assumed an old loan and spent $150 out of pocket to own it.  The seller was very motivated to get rid of it.  No reason to buy a house if they are not.  You can pay full price any day of the week.  With new paint and carpet,  my place was ready for a renter in two weeks.   My fears of all my renters moving out at once and every roof leaking at the same time never happened in three decades. 

I recommend looking at 100 properties.  After that, you will know your market better  than the realtors.  ( I rarely used realtors) One or two of those will be good deals.  I look for 25% below market value (use that instead of a down payment) and a net cash flow of at least $100 per unit.  As rents creep up, mine are $200/ month net now, some are more.  Don't be afraid of smelly, sloppy, neglected properties.  The way I look at it, the bigger the mess, the more equity. 

I used private lenders when I first started.  If the deal is good enough, there is profit to share by paying higher interest to friends or family.  No one asked for financials or did a credit check.  I was never asked to put money down.   When one lender wanted his money back, I rounded up someone to take their place.  Later, I did get bank loans.  It was a little scary how easy that was.  You can over-borrow and wreck your cash flow.  Remember, the numbers must add up before you buy the property. They don't magically change because it's in your name now. 

For fix-up, I have phase one: paint and carpet only.  Do not move walls, redo the kitchen or bath.  Don't buy a house that needs a roof right away.  You're not moving in.  Don't make it to your standards.  Get it rented.  Most stay a year, or year and a half. (though my record is 17 years with the same tenant) When they move out, then do a more extensive fix and raise the rent. 

Good luck on finding a great rental property. 

[Rionoskae]

@darnold641
Thanks for taking the time to share your experience, It is truly appreciated.

Me and the wife have looked at about 12-15 properties so far and hundreds of more online at this point and I feel like we have already learned so much, I can definitely see the value in looking at more properties. I especially like what you said about finding a motivated seller, I honestly think that phrase will stay with me the rest of my life. powerful stuff.

For Reference:
"The seller was very motivated to get rid of it.  No reason to buy a house if they are not.  You can pay full price any day of the week."

[Enigma]

I've been a landlord for 30 years.  I wasted years by believing I needed 25% down and cash in reserve.  It's not true.  You substitute ideas and leg work for money. I've purchased 21 rental houses.

Looking back I have been a landlord for about 7-8 years.  My father has been doing it the past 25 years.  If I had to wait for 25% down on my first rental investment I would have gotten no where.  I also borrowed from a wealthy family friend and father when I was ready to invest.  My interest rates have always been 10-12% with them then later with banks at 5-7%.  Currently I have 26units (6-plex, 3x 4-plx, 2x 3-plex, 1 SFR, 1 commercial) and I have about 75% of them paid off.  I have been using a domino effect to pay off the highest interest rates first.

[Rionoskae]

Hmmm... Perhaps I have been looking at borrowing money the wrong way.

If I can write everything down on paper and it is a win-win for both parties involved then It doesn't seem as awkward asking to borrow money from family. It's not something I have ever done before, but I don't think my parents or grandparents wouldn't have any problem loaning me the money. I'll have to run the numbers, but being able to jump ahead 1 year would be amazing.

Any further advice regarding financing or property evaluation would be greatly appreciated :)

For what it's worth, I think we will be living in the first property. So we should be able to secure financing with a smaller % down payment, but on the flip side it is more difficult to get a "Fixer upper" with an FHA loan. Should I consider something like a 80/15/5 or how would you proceed?

The properties that we are looking at easily meat the 1% rule in all cases and occasionally close to the 2% rule. That being said, We are focusing on a nice area in a blue collar neighborhood and shouldn't have too many problems with vacancy. We can get properties that rent for 2-4% of their purchase price in the ghetto all day long by us but i do not want to deal with the headaches involved in purchasing such a property.

Thanks!

[waltworks]

Do not borrow money from family. You can find many, many horror stories about ruined relationships based on loans/joint ownership of real estate/etc.

You will get there in plenty of time.

-W

[Rionoskae]

Yea I've heard that business + family never works out. While I don't think it would be a problem for me personally, probably best not to risk it. I'll find a different way :)

Any advice on how you would secure financing then? It looks like my options are limited to either saving 20% down myself, getting a 80/15/5 type loan or going with a hard money lender.

With a solid credit score, I would think that doing a 80/15/5 type loan would make the most sense, but I'm honestly not sure if it would be that much better than a FHA loan w/ PMI. I'm thinking that an FHA would be easier if the property deosn't need much work, otherwise I would be forced to start looking at more creative financing options. What do you think?

[DeanW5]

I would recommend to wait until you have enough money. In order to figure out how much you can borrow, you can use a mortgage calculator and plug in the basic property information (price, loan amount, etc.).  

Nevertheless, if you decide to buy a rental property,  it is important to remember that you need to look at buy to let mortgages, not just regular owner occupied mortgages.