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Idea on first deal.
Hey, good afternoon/evening everyone. I am a new investor and have been exploring deals in a few markets outside my area for the past month and a half. While researching and evaluating homes, I had an idea for managing the down payment and emergencies for the first property.
When I find a property with good cash flow, I could use a private money lender (PML) to cover the down payment and closing costs. The cash flow would then be used to repay the PML, possibly faster if the home appreciates in value. For emergencies, I could move money from my 401k to an IRA to cover vacancies and capital expenditures.
What are your thoughts on this approach?
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Deandre,
As a Banker I am not a big fan of borrowing money for the down payment unless its from family or a close friend. PML or most private lenders do it for a profit so the rate has to be calculated into the deal. If you own a primary home have you thought about doing a cash out refinance. If you do not own a primary I would suggest buying a primary and getting a 2-4 unit to start off with a multi door cash flow.
If you buy a primary you do not need a PML you can get 100% financing under a few programs or a DPA. Then is cash is tight find a property where the seller is motivated to sell or maybe it has been sitting on the MLS and has a high DOM. That way you can ask for 4-5% Seller credits to pay for the closing costs.
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I'm with Jason. I disagree with the idea of borrowing money for the downpayment. I don't even agree with cashing out equity on Property A so you can qualify for a loan on Property B. That's how people get over-leveraged and into trouble.
If you want to invest, do it the old-fashioned way: increase earnings, reduce expenses, save, then invest.
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Quote from @Deandre Brown:
Hey, good afternoon/evening everyone. I am a new investor and have been exploring deals in a few markets outside my area for the past month and a half. While researching and evaluating homes, I had an idea for managing the down payment and emergencies for the first property.
When I find a property with good cash flow, I could use a private money lender (PML) to cover the down payment and closing costs. The cash flow would then be used to repay the PML, possibly faster if the home appreciates in value. For emergencies, I could move money from my 401k to an IRA to cover vacancies and capital expenditures.
What are your thoughts on this approach?
That's great that you want to start investing! I would highly recommend you get a 2-4 unit first if you haven't done so yet. After that I would tell you that you should try to get money from your primary property through a cash-out refinance and invest that into other multi-family properties.
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Quote from @Jason Wray:
Deandre,
As a Banker I am not a big fan of borrowing money for the down payment unless its from family or a close friend. PML or most private lenders do it for a profit so the rate has to be calculated into the deal. If you own a primary home have you thought about doing a cash out refinance. If you do not own a primary I would suggest buying a primary and getting a 2-4 unit to start off with a multi door cash flow.
If you buy a primary you do not need a PML you can get 100% financing under a few programs or a DPA. Then is cash is tight find a property where the seller is motivated to sell or maybe it has been sitting on the MLS and has a high DOM. That way you can ask for 4-5% Seller credits to pay for the closing costs.
Thank you for the response. I currently have a primary residence, which I purchased almost a year ago before I knew about real estate investing. As a result, I do not have equity to use from that property. If I were still single, I would have definitely considered purchasing a 2-4 unit property to house hack. However, my wife and daughter are not keen on moving, so I believe my best option is to save and proceed that way. I am also making calls and looking for opportunities where a seller might consider seller financing or a subject-to arrangement if the bank owns the property.
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Quote from @Nathan Gesner:
I'm with Jason. I disagree with the idea of borrowing money for the downpayment. I don't even agree with cashing out equity on Property A so you can qualify for a loan on Property B. That's how people get over-leveraged and into trouble.
If you want to invest, do it the old-fashioned way: increase earnings, reduce expenses, save, then invest.
That is most likely what I will end up doing. Just was trying to weigh in other options that could work. But I really appreciate the response. I will get find me a property just gotta do it the right way.
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Quote from @Kerlous Tadres:
Quote from @Deandre Brown:
Hey, good afternoon/evening everyone. I am a new investor and have been exploring deals in a few markets outside my area for the past month and a half. While researching and evaluating homes, I had an idea for managing the down payment and emergencies for the first property.
When I find a property with good cash flow, I could use a private money lender (PML) to cover the down payment and closing costs. The cash flow would then be used to repay the PML, possibly faster if the home appreciates in value. For emergencies, I could move money from my 401k to an IRA to cover vacancies and capital expenditures.
What are your thoughts on this approach?
That's great that you want to start investing! I would highly recommend you get a 2-4 unit first if you haven't done so yet. After that I would tell you that you should try to get money from your primary property through a cash-out refinance and invest that into other multi-family properties.
That's the way I would really want to do that but since I do have a wife and a daughter that are not keen on moving I am forced to figure out another way in. But I really do love this route and wish I would have known about it sooner. But that still doesn't stop me from trying to come up with ideas. Appreciate the response as well.
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If you are a first-time investor, I suggest NOT borrowing money for a down payment. First, it makes it a lot more difficult to get a loan on the deal (most lenders require that they be in first-position lien with no second-position lien), and second, it increases your leverage and, therefore, the risk of the deal. Once you are experienced and have a good base of cash flow and reserves, I think it makes sense to do a more creative, high-leverage deal, but doing it with low reserves and for your first deal is very risky.
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@Deandre Brown I would avoid using other people's money on your first deal. There will be learning lessons on your first deal. Banking on appreciation to pay back your investor is not ideal unless there is an immediate value add play for the property.
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Quote from @Tanner Lewis:
If you are a first-time investor, I suggest NOT borrowing money for a down payment. First, it makes it a lot more difficult to get a loan on the deal (most lenders require that they be in first-position lien with no second-position lien), and second, it increases your leverage and, therefore, the risk of the deal. Once you are experienced and have a good base of cash flow and reserves, I think it makes sense to do a more creative, high-leverage deal, but doing it with low reserves and for your first deal is very risky.
I never thought of it that way. That perspective makes a lot of sense. It is indeed difficult to achieve good appreciation in most markets I've observed. I was also considering saving up and exploring creative financing deals. Hopefully, that could help mitigate some of the risks.