Stuck between a rock and hard place....help?

[Qwee Parker]

Hello, 

I am looking for some thoughts on my recently crumbling real estate journey. My partner and I own 2 properties. We bought our most recent property in May 2023. In October 2023, I had a baby. Within the same month, my partner hurt his back at work. This put is substantially behind on bills and our mortgage. Unfortunately, this scored us 2 late mortgage payments, tanking my score that I worked my tail to get where it was. 

Fast forward to April 2024; we are both back working and would like to start setting ourselves up for more opportunities. Our goal was to 1. Use the equity in our current home to build a kitchen in the basement and convert said home to a duplex. Another option was using equity to buy a 3rd home with FHA (the first 2 loans were under VA). I am understanding that securing financing may be hard or near impossible with those late payments. We obviously are in no rush and are in the rebuilding stage. We want to continue to acquire property, just not sure how to proceed after such a big road block.

[Jonathan Greene]

Do not try to acquire more properties right now with past late payments. Your only chance would be using a DSCR on an investment property, but not on a owner-occupied loan. Did you max out all of your VA allotment on the two you own?

Also, that strategy on your first, turning it into a duplex, is very, very hard and unlikely to be allowed, depending on your municipality. Going from 1 to 2 is hard legally in most towns and doing kitchens and baths in basements are near impossible. You need proper egress even to call it a bedroom so once you start venting cooking, lining gas, and doing plumbing, the town will be very tough and as I said, unlikely to want a single-family to become a multi. Is that zoned for multi?

[Chris Seveney]

@Qwee Parker

Are you back to current on your payments with your existing mortgage?

Do you have significant reserves set aside in case you neeed major repairs or have lengthy vacancy?

I would make sure you are first setup for success before expanding as you will just get right back to where you were as life happens and never goes as planned

[Don Konipol]

Quote from @Qwee Parker:

Hello, 

I am looking for some thoughts on my recently crumbling real estate journey. My partner and I own 2 properties. We bought our most recent property in May 2023. In October 2023, I had a baby. Within the same month, my partner hurt his back at work. This put is substantially behind on bills and our mortgage. Unfortunately, this scored us 2 late mortgage payments, tanking my score that I worked my tail to get where it was. 

Fast forward to April 2024; we are both back working and would like to start setting ourselves up for more opportunities. Our goal was to 1. Use the equity in our current home to build a kitchen in the basement and convert said home to a duplex. Another option was using equity to buy a 3rd home with FHA (the first 2 loans were under VA). I am understanding that securing financing may be hard or near impossible with those late payments. We obviously are in no rush and are in the rebuilding stage. We want to continue to acquire property, just not sure how to proceed after such a big road block.

Quee, first, I’m sorry about the “hiccup” you experienced in your real estate investments.  But, I’ve seen many people recover from similar or even much worse situations, and go on to have investment success.  So, don’t get too down on yourself.
Second, late payments aren’t the worst thing in the world.  Especially when there’s a valid explanation. Have you made up the payments and are you current on your loans?  If so, credit is available, but at a higher interest rate. 
I would concentrate on ways to accumulate capital.  With time, your credit position will improve significantly, and with capital in reserve you will be in a much better position to weather any “hiccups” that occur in the future. 
You acquire more capital in your position by (1) decreasing expenses, (if possible) and/or (2) increasing income.  Increasing income could entail anything from changing jobs for better pay, becoming more proficient or expert and valuable in whatever you do to earn a living, to changing careers and or acquiring more skills and knowledge through education.  
I wouldn’t necessarily give up on your idea to add an accessory dwelling unit to your property.  Many locals have adopted policy to allow these units if they meet code that’s been adopted to make them viable.  You should follow up on this and also see if government sponsored $ or guarantees are available for construction.  
Btw, I like your creative thinking, and look forward to hearing details of your success as the years roll by. 

[Bruce Woodruff]

I just want to remind you (or make you aware) that just about every investor has problems like this, even (and especially) a lot of the guys on here. Life just happens, and all you can do is deal with it, stay positive and focused and move forward.

So you are doing the right thing, it will just take some time. I would second the advice to start saving every single dime you can and go on a serious quest to clean up your credit ASAP. There are Credit Repair Bureaus that I see out there, I would just research which ones are legit. I know there are ways to get your credit back on track more quickly.

Maybe start a thread on here asking which credit repair companies can help you out?

Good luck, you'll be fine. Just be smart and patient.

[Theresa Harris]

Talk to your town about adding a legal suite.  In many areas it isn't hard to do and is a great option.  Find out how much those late payments really hurt your borrowing power (ie get actual numbers on how much you'd pay now vs once your credit score goes back up).  I'd also work on building your reserves, so if something happens, you won't have a repeat of missing payments.

[Benjamin Aaker]

Good plan to not be in a rush and to rebuild. Now is the time to repair credit and save cash for the next down payment. This might be a good time to look into house hacking a 4 plex with an FHA loan. Learn about this strategy so you are ready when you have the credit and cash.

[Qwee Parker]

@Jonathan Greene Thanks for your response. The plan definitely isn't to acquire any more property. Lots of rebuilding to do at this point. I am not sure if my VA has been entirely used. Are there options there?

[Qwee Parker]

Quote from @Chris Seveney:

@Qwee Parker

Are you back to current on your payments with your existing mortgage?

Do you have significant reserves set aside in case you neeed major repairs or have lengthy vacancy?

I would make sure you are first setup for success before expanding as you will just get right back to where you were as life happens and never goes as planned

@Chris Seveney thanks for your thoughts. Reserves are definitely not where they should be. I by no means plan to think about buying at this point. I guess I’m looking at alternatives options, if this is to hinder me acquiring in the future 

[Jonathan Greene]

Quote from @Qwee Parker:

@Jonathan Greene Thanks for your response. The plan definitely isn't to acquire any more property. Lots of rebuilding to do at this point. I am not sure if my VA has been entirely used. Are there options there?

Yes, the VA gives you an allotment of money you can use, not a number of loans. Ask if you have maxed out your VA benefits yet.

[Nathan Gesner]

Quote from @Qwee Parker:

My immediate response was the same as Chris: build your reserves!!! If you had proper reserves in place, you would have stayed on track.

This is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc.

I like to start with one significant expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a typical scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve.

But there's more!

What if you're a cardiologist with no debt and making $250,000 annually? You could probably afford $20,000 without much impact on your budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical.

What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work.

I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cash flow from my current rentals. I also have a $175,000 line of credit ready if something catastrophic happens. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account.

The point is, that you should sit down and assess your finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.