Author Topic: Own 2 rentals, now what to do to purchase more?  (Read 5951 times)

sequoia

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Own 2 rentals, now what to do to purchase more?
« on: October 17, 2014, 07:38:45 AM »
I been reading and learning from the forum. I like to get opinions from the experts on what you all would do next if you are in my shoes.

We have two rentals. Both are single family house.

Rental 1 - Purchased about 7 yrs ago. Equity about $40K. Rental $1050/months.

Rental 2 - Purchased last yr with cash for 45K as a foreclosed. Rental $615/months.

I like to be able to buy another foreclosed/short sale property, ideally in the $50-$70K, which can be rented at $600-$800. Every so often this type of deal appears, and I like to quickly jump at it, so I need to have the financing lined up.

I like to invest more by buying more properties, but I am not sure how, or if we even can afford to buy another property. I had a talk with a bank, and was told I am not eligible for a loan. I have about 10K cash. Should we just save until we can afford to buy another one by cash? Sell rental 1? HELOC?

Rental income is for pure investment toward FIRE.

Appreciate any feedbacks.

zinethstache

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #1 on: October 17, 2014, 11:08:43 AM »
I think selling #1 if it is a good cash flow property doesn't make sense unless you want to get something larger, a multi unit property. HELOC is a good way to go if you can get a good rate, but the line of credit is a variable rate (at least at my bank) so you need to be willing to risk that rate rising before you pay it off. The expenses incurred when you sell and the tax implications sound like alot of trouble to me unless you need to unload it. We ended up using creative financing for each of our 3 rentals, each scenario made sense to us and has allowed us to keep a healthy cash reserve in case of an emergency.

If 10k is all you have, including your emergency fund for home living expenses and your rental reserve, then I strongly urge you to save triple that, just for your reserves before going for a HELOC etc. Good Luck!

sequoia

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #2 on: October 17, 2014, 11:15:50 AM »
I think selling #1 if it is a good cash flow property doesn't make sense unless you want to get something larger, a multi unit property. HELOC is a good way to go if you can get a good rate, but the line of credit is a variable rate (at least at my bank) so you need to be willing to risk that rate rising before you pay it off. The expenses incurred when you sell and the tax implications sound like alot of trouble to me unless you need to unload it. We ended up using creative financing for each of our 3 rentals, each scenario made sense to us and has allowed us to keep a healthy cash reserve in case of an emergency.

If 10k is all you have, including your emergency fund for home living expenses and your rental reserve, then I strongly urge you to save triple that, just for your reserves before going for a HELOC etc. Good Luck!

Agree about selling. Rental 1 is cash flow positive, with very nice tenants who been there since we purchase the house.

10K is not including our emergency fund/reserve fund. This is just for rental investment that we can spend.

Would you mind elaborating "creative financing"? Is this like borrowing to individual instead of banks?

Thanks for the advice.

« Last Edit: October 17, 2014, 11:17:35 AM by sequoia »

Poorman

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #3 on: October 17, 2014, 01:27:58 PM »
When you were denied by the bank, what reason did they give?

clarkfan1979

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #4 on: October 17, 2014, 03:26:32 PM »
I would rather have 1 rental that is $500/month cash flow positive than 5 rentals that are $100 cash flow positive. As you grow your portfolio I would advocate for quality over quantity.

sequoia

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #5 on: October 17, 2014, 08:49:03 PM »
When you were denied by the bank, what reason did they give?

We have 2 mortgages - rental 1 and my own house. Debt to income ratio is too large. These two are the only debt I have. No car payment, school, credit cards etc.
« Last Edit: October 17, 2014, 08:53:09 PM by sequoia »

sequoia

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #6 on: October 17, 2014, 08:51:55 PM »
I would rather have 1 rental that is $500/month cash flow positive than 5 rentals that are $100 cash flow positive. As you grow your portfolio I would advocate for quality over quantity.

Are you saying pay off mortgage from rental 1 before buying another property? I have thought about this too.

MarkFerguson

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #7 on: October 18, 2014, 07:37:20 AM »
Is your debt to income to high because the rentals are too new and they are not counting rent income?  Many big banks are very conservative counting rental income, but smaller local banks may be more lenient. I would check with some other banks first. 

aj_yooper

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #8 on: October 18, 2014, 07:57:52 AM »
Monthly rental #2 is at 1.4% of purchase value, which seems good, assuming maintenance and taxes are not excessive.  What is your monthly return % (on current value) on #1?  Is it feasible to improve #2 sufficient to raise the rent?  And, is #1 at the correct rent level too?

escolegrove

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #9 on: October 18, 2014, 09:14:37 AM »
I would go talk to a mortgage broker (non- bank). We have had alot more luck with mortgage brokers. Wellsfargo won't qualify us but will buy our loans every time :)

jnc

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #10 on: October 18, 2014, 09:17:30 AM »
Is your debt to income to high because the rentals are too new and they are not counting rent income?  Many big banks are very conservative counting rental income, but smaller local banks may be more lenient. I would check with some other banks first.


Agree with this. Bank should be able to count income from your rental properties if they have been on your tax return for at least 2 years.
Sounds like the first property should qualify but not your second for now... Perhaps check with another mortgage broker if you think having this income count will get your debt-to-income ratio above the threshold.

sequoia

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #11 on: October 18, 2014, 10:26:22 AM »
Monthly rental #2 is at 1.4% of purchase value, which seems good, assuming maintenance and taxes are not excessive.  What is your monthly return % (on current value) on #1?  Is it feasible to improve #2 sufficient to raise the rent?  And, is #1 at the correct rent level too?
Rental 1 - after mortgage, tax etc, we probably make $150/month. Property now probably worth $160K and the price is going back up. I know it is not great return. This was our first rental, and we were not planning to rent it out when we bought the property in the first place (its a long story). The house is 10 yrs old, great neighborhood, great school. Very little maintenance and current tenants who been living there took great care of the property. We could probably raise the rent $25-50, but I am not wanting to risk losing the current tenant. They are older couple with no kid, and with a pretty fixed income. Just very nice people to deal with.
Rental 2 - When we bought it, we put about 5K on improvements and fixes (included in the 45K purchase price): new appliances, carpet, windows, paints etc. The house was foreclosed, and empty for more than 1 yr. The area isnt as good as rental 1, so I think we cant raise the rent. I dont expect any expensive maintenance anytime soon unless some disaster struck. Roof is probably the next big maintenance, but thats a few years down the road.

MarkFerguson, escolegrove,jnc: I am going to start calling mortgage brokers and see what they say. Really appreciate this!
« Last Edit: October 18, 2014, 10:33:10 AM by sequoia »

yddeyma

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #12 on: October 18, 2014, 04:37:45 PM »
Have you thought about something like propser or Lending Club?  Not sure what your cashflow is, but you can get up to $25k or so (I think they may've just upped it to $35k) on a signature loan.  The cons of this are that the loan term is much shorter, so the payment is a lot higher.  They also do business loans, which have a higher limit.  When I started thinking about how to buy my first rental (I'm about to go after my third, too!) here are the options I considered:

1. 401k loan
2. Conventional Mortgage in my name
3. Commercial Mortgage in my business's name
4. Business Loan
5. HELOC
6. Propser/Lending Club
7. Signature loan from a regular bank
8. Auto Loan (both my cars are paid off, so some equity there)

The other thing is that the numbers on your first house don't make a lot of sense.  To me, it would almost be better to sell that house, eat the closing costs, and buy another.  Not because its the best way to fund the third house, but because the first house does not make a great rental numbers wise.  While good tenants are definitely a blessing, I'm not sure I would keep a property with that little profit just because the tenants were good.  Just my two cents, though.

MarkFerguson

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #13 on: October 18, 2014, 08:07:52 PM »
Monthly rental #2 is at 1.4% of purchase value, which seems good, assuming maintenance and taxes are not excessive.  What is your monthly return % (on current value) on #1?  Is it feasible to improve #2 sufficient to raise the rent?  And, is #1 at the correct rent level too?
Rental 1 - after mortgage, tax etc, we probably make $150/month. Property now probably worth $160K and the price is going back up. I know it is not great return. This was our first rental, and we were not planning to rent it out when we bought the property in the first place (its a long story). The house is 10 yrs old, great neighborhood, great school. Very little maintenance and current tenants who been living there took great care of the property. We could probably raise the rent $25-50, but I am not wanting to risk losing the current tenant. They are older couple with no kid, and with a pretty fixed income. Just very nice people to deal with.
Rental 2 - When we bought it, we put about 5K on improvements and fixes (included in the 45K purchase price): new appliances, carpet, windows, paints etc. The house was foreclosed, and empty for more than 1 yr. The area isnt as good as rental 1, so I think we cant raise the rent. I dont expect any expensive maintenance anytime soon unless some disaster struck. Roof is probably the next big maintenance, but thats a few years down the road.

MarkFerguson, escolegrove,jnc: I am going to start calling mortgage brokers and see what they say. Really appreciate this!
based on those numbers I would sell the first one and 1031 exchange it into another if possible to save on taxes.  I would talk to an accountant to see what your tax basis is on the property to see if a 1031 exchange makes sense. You'll have to buy a house for at least as much as you sell the rental for.

Setters-r-Better

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #14 on: October 25, 2014, 07:53:40 AM »
Check with smaller local banks.

tracylayton

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #15 on: October 25, 2014, 08:19:59 AM »
Every once in a while, I see a rental property that is in the MLS with owner financing. The seller gets a $10,000 down payment and finances the rest over 10 years at a higher interest rate than the market rate (8 to 10%). If the property still cash flows, you might consider looking for an owner financing deal.

zinethstache

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #16 on: October 27, 2014, 04:19:01 PM »
Im just getting back to this thread, sorry for the delay. I see someone posted a great list of options. In addition to those, here's what we did personally to fund our 3 rentals.

1. We took a 4% loan out on an annuity account. Back in the 80s these were hugely popular, we were newly married and got one each. You pay in every month and typically a portion is for death benefit, another goes to the admin fees and any extra you pay in goes to an investment type of account. We wanted to move on our first property and we needed a bit more cushion because we did not want to wait and I had JUST received my annual statement on my account with the amount available for a loan. I called them and the process was very simple. (in my case I cannot close my annuity because I no longer qualify for term life)
2. Retirement account, pulling all $$ out of it. yes... taking it ALL out to put into real estate. Now this is not for everyone and it bothered me greatly to see it done, but the huge returns we are seeing from this property made our decision to close out my hubby's meager retirement a sound one. Yes, it was enough for a full 25% on our second duplex, we did pay the tax penalty, it is all behind us and the property is awesome. I have a large retirement account that we will keep, don't want all our eggs in one basket...But seeing how well real estate is doing, it sure is tempting!
3. Family $$. Where and when it makes sense. We are using some family $$ which is working great in our particular situation. They earn extra $$ as they are a small silent partner in one unit. We can buy them out at any time...

Remember that if you want a fast closing, be sure to age ANY money 90 days, move it around at all and the underwriter will start digging about the source of funding. So, if you are ready to begin serious shopping, have all your finances figured out. It will make the process so much less stressful.

If your DTI is low and you can carry the burden of a smaller bank unsecured loan, that could work nicely.

I keep a list of all available funds we could use for our next project. I have them listed by % interest and term duration. We just finished rehabbing #3 and have some medical stuff to take care of this winter so will not start to work on the hunt for #4 until next spring. Can't wait to hear what you come up with!

The Vacant Road

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #17 on: October 27, 2014, 07:52:07 PM »
First off, please tell me what your cash on cash return (net annual cash flow / cash out of pocket) is for each property. 

You may be able to do a cash out refinance with the first property.  Just depends on appraisal value vs. equity in the home.  Most lenders will allow you to cash out anything over 25% of the appraisal value. 

Because you have to own a single family property for more than two years to cash out refinance, your equity is stuck within the second home for another year.  This is why we use maximum leverage and never purchase real estate all cash.

It's okay though.  Google "hard money mortgage lender" for your area and contact them for details on "hard money double close" loans.  You could purchase another home with all $10K, and if you're diligent you could even buy another with zero money out of pocket.  This is far too complex to explain here, but check out my site [MOD EDIT: Spam link removed.] for details.

Or, you could liquidate all properties and purchase a multi-family property.  Multi-family is the fast road to millions.  Again, you will need to check out my site for details.
« Last Edit: October 28, 2014, 08:42:54 PM by arebelspy »

Handlebar Harry

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #18 on: October 28, 2014, 11:09:01 AM »
Again, you will need to check out my site for details.

No.

Bobberth

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #19 on: October 28, 2014, 02:10:37 PM »
I'm a big fan of lines of credit (LOC) on my properties that I purchased for cash.  I like that I only pay interest when the money is in use and that I can make additional payments to reduce my interest expense while still being able to pull that money back out if needed instead of paying off a mortgage and the money is exchanged for equity.  There are some downsides in renewal fees, variable interest rates and the possibility that the bank doesn't renew the lines.  I have several of these LOCs and I always pay them back in the order I would like to keep the properties just in case the stuff does hit the fan and the bank doesn't renew the lines, they can take my least favorite properties in that case.

I have my LOCs through a local bank's commercial lending department so you may want to start talking to the commercial side of the bank too.

usmarine1975

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Re: Own 2 rentals, now what to do to purchase more?
« Reply #20 on: October 28, 2014, 02:25:24 PM »
I am in your shoes.  Mortgaged out so to speak.  We could go for more and possibly get it.  I tend to wait a few years let the ones you have season and give yourself time to make wise decisions.  I would not jump and make any quick decisions.  I have read the books, and took some of the classes on how to do no money down lending and quite frankly I have yet to find a way to make it work.  I have checked with Mortgage Brokers, Banks, Credit Unions, etc...  Not saying it's not possible but for me I haven't found it to be.  Bank's have gotten very fussy with what they will take.  Gone are the stated values etc...  I was fortunate to purchase quite a few before 2008 which changed the way banks handled loans.  Real Estate in my opinion is not a Fast Track to Millions.  It's like any other business. 

If I were you I would analyze your current buildings find out what is working, what's not working.  And decide if you need to change one or the other. 

I could pick up a ton of properties in my area for under $1,000 on the Tax list.  The problem becomes the rehab, and the tenants you get, and the property values don't support the money you would have to put into them.  In my own portfolio I have tried to stick to Quality.  Certainly some could criticize my portfolio, but I am proud of what I have accomplished and I sleep well at night.  I also have a great group of tenants that send me checks every month.

Check out some of the other Forums on this site.  And other property owners that might have more insight for you.  But take it all with a grain of salt and decide what works for you.

Good Luck