Advice on Financing Options for SFR

[Tripp Warren]

Hi All, 

I posted this on the facebook groups, but I wanted to get some advice from some of you that don't frequent social media that much. 

I'm looking at a 3/2 SFH listed at 125K (probably could get for 100K) that needs about 8k rehab. I'm considering two options;

1) FHA loan and do the rehab then rent after a year. I can rent out my current home while doing this. Or

2) Conventional 25% down, hurry to rehab, then rent out.

The cash flow is much better obviously with the lower mortgage payment using Option 2. The down payment is nicer with option 1 but cashflow won't be realized until I move out and rent after year 2. Although, renting my current primary could help offset. I suppose I could cash out refi after the rehab to put into another property but I don't know that the rent could sustain the mortgage after the increase in value. 

Looking for suggestions or other options. Also, do they offer DSCR loans on SF?

[Andrew Postell]

@Tripp Warren thanks for posting!  Always great to hear from a fellow Texan.  @Joe Funari thanks for the mention.  Greatly appreciated.

I'll address your options one at a time if you don't mind:

1) FHA loan and do the rehab then rent after a year. I can rent out my current home while doing this. - I firmly believe in "leveraging" money. Meaning, using as little that I can to purchase an income producing asset. Tons of investors buy a new primary home every year or so. When you purchase a new primary home, the downpayment is lower, the rate is lower, and your commitment to live in the home is for 12 months. AND you have a rental property with your current home (which probably has a low rate as well). Now, there are some requirements to doing this with an FHA loan. So make sure that you work with a lender that knows what the requirements are. **Here's a hint** - it's something to do with your current primary home. But even using conventional lending is just 5% down.

2) Conventional 25% down, hurry to rehab, then rent out. - This route is fine, but man is that downpayment a killer. You can certainly use 20% down as mentioned above (and sometimes 15% down) on a single family home.  But that's still a chunk of change for anyone.  Your "cash on cash" return going this route will still be 12%-18% so I can make a case for it.

3 (sort of) - Do they offer DSCR loans on SF? - DSCR loans are available on Single Family Homes (just not on your primary home) but the downpayment is usually higher than 15% down and the rate is also usually higher. We use them mostly when we cannot use the lower rate conventional loans.

Hope all of that makes sense.  Thanks!