I Think I Found My First Deal. Now, How Do I Fund it?

Question

Hello BP Family,

I hope everyone's new year is off to an awesome start. There's something I'd like some guidance on. Any feedback will be appreciated.

I'm just starting out and have been using my time to really educate myself. of course, I've been reading books, watching videos, and have taken up permanent residence here on BP. I've also been finding properties and then using the BP calculators to analyze deals.

A few days ago, while practicing, I stumbled upon a property that I'm really interested in. It's a 3BR 1.5 BA Condo that's FSBO. The asking price is $77,500. It's in great condition and ready to move in. During my analysis with the rental property tool, I assumed a $3,875 Down Payment and 1,200 closing cost. For the loan, I used 30 years @ 10%. And a monthly income based on rents in the area for similar units of 1400. This gave me a positive monthly cash flow of $418.89

Check Out the Rental Property Analysis Here

I'd like to pursue the property but am not quite sure how to move from the self-education phase to the taking-action phase. I also don't actually have the down payment and I won't qualify for a traditional loan. I still feel like this is the perfect first property for me, if only I could choose the right creative strategy to make it happen.

It just so happens that in addition to looking at investment properties, I'm also in need of a new home. I was thinking that if I acquired this particular property, I could live there and "house hack" the other two rooms for $700 each. This would give me $1400 in rent- the same amount I would ask for from a tenant renting the whole place.

I know of several potential tenants and don't think getting the rooms rented for $700/mos. will be a problem.

Oh yes. I've already looked up the owner's information and he lives on the same street as my daughter, with whom I'm currently living. Yes. I could literally walk to his house from here. Interestingly his B-day is in a few days, just a day after my son's. I know he owns the condo free and clear. I haven't spoken to him yet, so I'm not sure why he's selling the condo. But, I do feel confident that I can build a rapport with him.

My question is "What then?" How can I present him with an offer with terms so sweet he can't refuse, but at the same time use as little of my own money as possible? I have some ideas based on what I've learned so far but some direct guidance from those of you who've actually done what I want to do would be super helpful.

Peace, Power, and Prosperity

-Tommesa.

Scott Mac · Answer

Hi Tommesa,

It takes money to make money.

Focus number one should be write down exactly what a lender wants a borrower to be for a deal like this...then become that person.

Credit score, length of employment, minimum income, down payment cash ect.

While you are doing this, work a 2nd job or a temp job and save all of that money in an FDIC savings account.

After a while of this you should be financable, and have a down payment.

Good Luck

Steve Milford · Answer

@Tommesa Mobley

Every property is perfect if we only had the money for it. My 2 cents, find the money first, then shop.

Nathan Gesner · Answer

You can only get that low down-payment if you occupy it as the Owner. Renting out the entire property isn't possible.

If the entire unit rents for $1,400 a month, how are you going to rent single bedrooms for $700?

You put 5% for vacancy rate, maintenance, and capex, which is half of what you will typically pay. I don't see anything for HOA fees. I just saw a similar unit for $85,000 and the HOA fees are $195 a month.

Be honest with the expenses and double-check your rent rates for an individual room. Don't expect to get any special concessions just because your daughter lives on the same street.

Jon Puente · Answer

Hey Tommesa,

A great rule of thumb in this market is to find ways to NOT do the deal. Because housing is higher priced and rates have risen, your underwriting should be more conservative.

1) Use 10% Cap Ex, 10% Vacancy, 10% Management and see if it still cashflows.

2) Check HOA's fees and dues, as well as HOA regulation. You might be surprised how expensive it is.

3) Go on the lower end of monthly rents in your area, not the median or upper.

I think you will find its not as great of deal as you thought OR will force you to negotiate better to get the deal you need. Right now is not a time to buy rentals with loose calculations.

Hope this helps!!

Caroline Gerardo · Answer

To get conventional financing with 3.5% low down payment the HOA has to be 51% owners, have enough cash reserves for repairs, master insurance that rebuilds and be cooperative.

In addition to the HOA monthly fee you will need HO6 insurance so add that into the numbers.

@Bob Willis has a good suggestion ask the owner to carry a 30 year loan at 6% due in five years with your offer.

Tommesa Mobley · Answer

Hi Jon,

Yes this absolutely helps. I'm honestly, just learning all of this and don't yet know it "like the back of my hand."

As I pointed out, I stumbled upon the property while practicing. I'm not at all surprised that my numbers need adjusting.

It also helps me to know what I don't know. The clearer I become about what I don't know, the better questions I can ask and the more I'll learn.

Right now, I'm more interested in learning the fundamentals of finding great deals. What makes a great deal? And why? How to do accurate analysis? etc.

I appreciate you pointing me in the right direction and will go back and redo the calculations with the numbers you've suggested. As well as taking into consideration the HOA.

You've also help me see a few other things I need to brush up on. I thank you for that. I don't mind taking more time to learn. I believe I'm still on track to acquire my first property by the End of March. And when I'm ready, a great deal with be available for me. I'm in no rush.

Peace, Power, & Prosperity

-Tommesa M.

Jacob St. Martin · Answer

I would second what nathan said and would also add that you should check to see what the HOA rules are for renting. Some HOAs are hostile toward investors or limit what you can do with the property.

Tommesa Mobley · Answer

Hi Scott, Thank you for your feedback. And I agree. After I got the initial comments on my post this morning, I started to realize something very important, at least to me. I started thinking that many of us are introduced to REI when we learn from some guru that it can be done "with no money out of pocket." And I suspect a lot of people quit when they learn it's "easier said than done," in reality.

While I believe, creative financing strategies are great "tools" for me to learn and use when I can. As someone, who inspires to be a serious investor. I think the best and easiest path to success is properly positioning myself so that I am able to qualify for financing AND able to put money down.

I will be taking your advice. In the meantime, I will continue to educate myself and practice recognizing great deals. Thanks for taking the time to share your insights with me.

_Tommesa M.

Tommesa Mobley · Answer

Hi Steve, You know, I think you're absolutely right. At least that was the conclusion I came to this morning. Reading your message just now, along with all the other insights, I've gotten on this post is confirmation of that. "Find the money first, then shop," I think I'm going to write that down and keep it with me to remind myself to not put the cart in front of the horse. I believe if I stay the course, take the time to learn, improve my savings and credit, and create a solid plan for my REI business, I'll be as successful as I choose to be. No need to rush. Thanks so much for your feedback.

-Tommesa M

I Think I Found My First Deal. Now, How Do I Fund it?

I Think I Found My First Deal. Now, How Do I Fund it?

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