Using a bank loan to buy a house.. am I crazy?

[Fred Tracy]

So I've been trying to buy houses in the 20-40k range. I've actually found places that will do a mortgage that small, but the problem is these houses are in terrible condition so they won't lend on them. The only options I can see is to use a FHA 203k renovation loan, which isn't good because of the costs... or to use a bank loan.

I actually called a bank looking for a mortgage and they mentioned that I could simply get a loan from them for $25k to $50k and use that to buy the house. The interest rate was in the 5% range with 15 year term.

My question is, is this something people do? I mean, is it prudent? I'm going to buy a foreclosure, fix it up, then I assume get a conventional mortgage on it (or would it be a HELOC at that point?) so I would only carry the bank loan for maybe 6 months or so. It seems plausible.

I'm just trying to make sure that it's feasible. I get the personal loan which I assume has no or low closing costs, buy the place, fix it up, then get the money back out through some other means and pay off the loan. Why doesn't everyone do this? Is this considered 'hard money?"

Thanks for any input!

[Rural]

We considered buying our place on a straight signature loan – I assume that's what you're talking about? A couple of them were offered, but in the end a farm loan had a better (not good) interest rate.

[Dicey]

Hey Fred, the interest is still deductible, so no worries there. As long as the rate is fixed and there is no prepayment penalty, (very small 1-2 years might be okay) I see nothing wrong with it.

Years ago when Denver housing was in the toilet, a friend of mine bought a condo for 25k. She paid for it with her AMEX card, as she had a high-interest CD (anyone remember those?) that was maturing the following month. There are all kinds of alternative financing methods out there. The classics are seller and family financing. Since they small scale/special circumstances, it's no wonder you don't hear about them, as they are private deals.

And no, yours is not a hard-money loan. Yours is a perk of being a credit-worthy citizen during a time of historically low interest rates. Some day you will tell your story and your listeners will be amazed that such a thing existed. Just like my friend's 25k "credit card condo" in Denver.

P.S. My sister bought a foreclosure a few years ago. They'd had their eye on it for some time, but were outbid.  After almost a year of waiting, the first buyer dropped out, so the bank contacted my sister. Their smart Realtor found out why the previous deal had fallen through (The bank wouldn't lend because there were no appliances in the house), so my even smarter sister combed through Craigslist for appliances free for the hauling. They put them in place in the kitchen (Wink, wink, they just "happened" to have them in their truck when their Realtor showed them the house again.) and the bank signed off on their deal. They never even plugged in the appliances to see if they worked. A year later, they had gutted and rehabbed the entire house themselves and it is now a thing of beauty that they can comfortably afford. Hope this qualifies as "input".

[meadow lark]

5% is probably a good rate considering how hard financing is to get on those places.  I am in the middle of considering this too.  I called Wells Fargo and they told me a personal loan for 3 or 5 years would have an interest rate north of 7.5%.  I am considering using credit cards.  I assume the easiest way for that would be taking out cash advances, then immediately doing balance transfers to credit cards that offer 0% on balance transfers for 15 or 18 months. Rinse, repeat until paid off.  Most have an initial 3% fee but not all.  My plan would be to pay it off in 4 years.  However, if anyone knows of a better way to use credit cards to pay for it, or if you would be willing to share the name of the bank with 5% personal loans I would love it.  PM me if you prefer!

[unpolloloco]

I almost put half of a house on a credit card for this very reason (using a balance transfer check with 18-month 0%, but 2-3% upfront fee)!  Would have been cheaper than a mortgage (if I would have been able to get one in the first place!)!  But my offer wasn't accepted (due to lowballing - oh well!) so I didn't go through with the credit card thing.

[Forcus]

I think the true answer to your question is what is your target rate of return and will you reasonably achieve that. The funding source is (mostly) secondary.

It sounds like you are just starting out. Questions I'd ask are if you have the mental and financial strength to rebuild / renovate a house before having it produce revenue. We moved to a new(ish) house and it took me 6 months to lightly renovate the old one (work demands, sloth, and travel time along with the actual work). I blew through my budget by 2x. But thankfully we are high income and we were able to do what we needed to do.

And of course the ROI calculations. Assuming you know the market, what rentals get, etc.

The cost of the mortgage / alternate funding is just a factor in the ROI.

The benefit I see it taking out a relatively low interest loan is in getting the work done quicker by not having to pace your work with (personal) income. Therefore, you start seeing the revenue quicker. I'm just making the assumption that a $25k house is going to need substantial work.

I also would not necessarily pay off a mortgage in 6 months if the rate was relatively low. In other words, if the cost of the mortgage is 5% but you can make 10% by taking that cash you'd use to pay off the mortgage, and buying another house to rent, it might be worthwhile. Of course, it's also riskier, and I don't think anyone doesn't know what overleveraging is. Would I do it for 2-3 houses with a reasonable cushion and backup in case of vacancy, maybe. Would I play that game with no reserves and 10 houses, no.

Just some thoughts.

[Fred Tracy]

All great answers.. thanks guys. I do have one rental now but am looking to get another one soon as I mentioned. I haven't considered doing it on credit cards but of course I don't have particularly high limits on my cards either.

I may end up doing a construction loan if anything.. not really sure quite how I want to pull this off, but if I make sure my ROI will be what I expect and stay up with doing all the work then I should be just fine. An extra $1000 bucks paid or not paid for the loan won't matter too much. All I know is I'm not getting a 203k loan and paying several grand just to refinance for several more grand later on!

[Hotstreak]

5% is probably a good rate considering how hard financing is to get on those places.  I am in the middle of considering this too.  I called Wells Fargo and they told me a personal loan for 3 or 5 years would have an interest rate north of 7.5%.  I am considering using credit cards.  I assume the easiest way for that would be taking out cash advances, then immediately doing balance transfers to credit cards that offer 0% on balance transfers for 15 or 18 months. Rinse, repeat until paid off.  Most have an initial 3% fee but not all.  My plan would be to pay it off in 4 years.  However, if anyone knows of a better way to use credit cards to pay for it, or if you would be willing to share the name of the bank with 5% personal loans I would love it.  PM me if you prefer!

Be careful, you would get hit with 2 fee's for this (one for the CA and one for the BT).  Some cards will let you balance transfer directly to a checking account, which is a great option, and others will send you "convenience checks" occasionally, which are a good second option.

[meadow lark]

Yeah, still trying to figure it out!  Have checks for up to $20k on one card, 1% fee and 0% interest for 13 months.  Now I am looking for more - but again, not sure I am going to do the deal at all.