Ready to purchase 2nd rental property

[Spencer Herrick]

I've now owned my first rental property for about four months and am now looking to purchase my second property. What are my options in financing my second property with the least amount of out of pocket money and/or using the equity in my first property. I just want to make sure I'm not overlooking anything. I put 25% down on my first property so I assume I have at least 25% equity (especially since I bought at a great price). Thanks in advance!

[Nelisa Lee]

What we've done is use the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method. We've done this many times where you purchase a property at a discount with short-term financing/bridge loan, rehab it to increase the value, rent it out and then when you refinance it with long term financing, you (hopefully) get some money back. It doesn't always work out perfectly but it's been a great strategy for us to build our rental portfolio.

I'm sure there are lenders who might chime in with other recommendations. This is just what has worked for us!

[Randall Alan]

Quote from @Spencer Herrick:

I've now owned my first rental property for about four months and am now looking to purchase my second property. What are my options in financing my second property with the least amount of out of pocket money and/or using the equity in my first property. I just want to make sure I'm not overlooking anything. I put 25% down on my first property so I assume I have at least 25% equity (especially since I bought at a great price). Thanks in advance!

 @Spencer Herrick

Unfortunately you have to usually leave 20-25% equity in a property you borrow against - so that more or less means there is little you can borrow against your first rental I suspect.  if you think there is more equity there you could have an appraisal done… but some lenders will not re-evaluate a recent purchase for a set period of time… they will just stick with the old purchase price as its value (varies by lender) unless you can show significant improvements you did to justify a higher price. 

Your next cheapest option would be to buy a multi-family as your primary home.  You could do that for 3-5% down.. live in it for a year to meet typical requirements for use… then move into a new house, and ‘voila’ - you bought your second (multi-family) rental for 3-5% down instead of 20-25%.

It is entirely possible though that you will face debt to income issues on your first rental if your lender wants to see a year or twos worth of rental history before counting your rental income to offset your debt payments…so beware of that.

Otherwise you may have to look at creative financing… maybe bringing in a money person where it was a short term investment for them, like “I’ll give you 8% on your money (versus the 4-5,% you could earn from the bank CD) if you will partner with me on this purchase.” This might be a descent proposition to a family member with resources? You could secure the loan / partnership with a 2nd lien against the property to help guarantee their position. 

Those are my first thoughts for you.

All the best!

Randy