Investing in first house with line of credit or fha/conv loan?

Question

Greeting everyone.

I am a newbie interested in real estate investing. I will be purchasing my first home within 4-5 months. I am interested in buying a foreclosure for no more than $30,000 to live in, fix up, then sell it, or worse case scenario pull the equity out and start another project. I do not want to be a land lord because I watched my father go through horrific times being a land lord.. I would consider a lease to own deal though.. that way I will not be responsible with repairs..

I have access to a personal line of credit up to $30,000 with a 3.99 interest rate with a max term of 84 months which I know I can swing vs a fha or conventional loan... I will make repairs with other income that I have coming in aiming to complete rehab in one year max.

I wanted to do the personal line of credit because I would not be required to purchase all the insurance that is required for the mortgage. Insurance in Louisiana is sky high....

I need you guys input on this.. Is this a good idea? or can you suggest any other alternatives?? thanks for your time..

By the way...I have posted an introduction about myself somewhere on this website..

Kimberly Jones · Answer

I hate to say it but I do believe the days of finding a property in New Orleans under $30k are pretty much gone. If you do manage to find something, you can expect it to need a LOT of work. You really only have 3 choices when dealing with a property needing rehab because traditional lenders won't finance them. You can use your line of credit for acquisition and do the rehab as money comes in OR you could go for an FHA 203k loan (which is a rehab loan for owner occupied properties.) The third option would be to use a portion of your LOC as downpayment on a hard money loan for acquisition and repairs BUT you would not be able to occupy the property until the hard money was paid off.

Ashley St. Gelais · Answer

Hey @Lee Griff-

Great to meet you on here! Welcome to BP.  : )

I might suggest using a traditional loan. The reason for this is because repairs can add up quickly - and if you need more cash it could be more difficult to get it when you really need it...

Insurance is to cover yourself in case of a loss.  If you didn't have insurance and the home burned to the ground - what would you do?

If you plan to own the home for only a short period of time - maybe it's worth the extra money to properly insure the home. Just in case.

Lastly, I love rental real estate.  But it's got to be done correctly so that you don't get hosed.

Hope this helps! : )

A

Lee Griff · Answer

anyone believe this is a good idea?

Lee Griff · Answer

or with these new 3% down conventional loans I can put 3-5 % down out of pocket vs using the total line of credit since I would be paying it off in 4 years vs 30..

If I pay the PMI insurance for 30 years based on the conventional loan calculator it would be $ 12,600

If I pay off the house in 4 years it would be$ 2235.  vs the 20% down with the line of credit plus interest totaling $1436

Lee Griff · Answer

I understand what you mean. Yea, 30k is going to be tight.. That is the max they will give me though.. I will definitely not invest in an area where I believe it would be hard to find a buyer..

Worse case I was thinking getting approved for a conventional mortgage on a decent foreclosure in a decent neighborhood thats worth at least 100k but get it at foreclosure price for $45k-50k max, use my line of credit for the 20% down payment so I would not have to pay PMI and more interest for the life of the loan. That would leave me at a note on my line of credit for like $106 month, and a mortgage plus homeowners insurance and taxes for somewhere around $525 with a total note of $630 that I would pay off with extra funds I have in 4 years.. providing I will not have any pre-payment penalties to pay the mortgage off early...Make a few upgrades on the house and sell for at least $100k and go from there... what yall think???

Ralph Hunter · Answer

Here is another consideration. Conventional loans are sold into the secondary mortgage market. That is one way the interest rate can be so low. There is a catch, however, the secondary market (Fannie Mae and Freddie Mac) have a minimum loan amount of $50,000. Initial loans are going to be based on the purchase price not the appraised value - so even if it appraises higher you cannot finance more than the purchase price unless you include renovation costs.

Though I am not a fan of financing real estate purchases with a personal line of credit. In this case, I believe it is a viable option. 84 Months at 3.99 is very competitive. If something went wrong, you could always refinance after that and then pick up the market value of your improvements.

The clincher is that you may have trouble finding a viable property for $30k. It is not just the quality of the structure but you will need to consider the neighborhood as well. You might find the property, but are there going to be buyers for it when you are finished? Just a thought.

Lee Griff · Answer

Thanks for the suggestions guys, you opened up more avenues for me to explore.

Jay L. · Answer

Hey @Lee Griff it appears you have no desire to be a "landlord", so a fix and flip seems to be your best/only option.

I'd be very careful with foreclosures in the New Orleans area, there are some horror stories regarding tax and titles issues. But of course if it works out, then you could be sitting in a good position.

I would honestly try finding a rundown/blighted property being sold through the MLS, and they're are tons in the 504 area, and fix that up. Try looking for a blighted property that's in a upcoming area, and I can help you find something if you interested in working with a Realtor.

Let me know if you have any questions, feel free to contact me anytime.

Best,

James

Brian Holt · Answer

Similar to Ashley's response, I guess I would be concerned about skipping homeowners insurance. Or even if you are referring to title insurance. I would see both of those as protection of your investment. I recently sold a personal home and the buyers title search found something mine had missed a few years back. Since I had title insurance it literally had zero impact, but if not I would have been in much worse shape.

Investing in first house with line of credit or fha/conv loan?

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