newbie with cash constraints, advice?

Question

Hello all,

I am looking at purchasing my first inv prop, and am really trying to stick to a buy and hold strategy focusing on rental properties but i also realize right now that cash is king and even with conv financing, i'm going to have to put 20% down.

My thought was to take the capital i do have, about 15k or so, and finance a distressed property, rehab, and resell to build up more cash for buy and hold investing?  Is this a good/bad idea?

Does anyone have any advice on the best way to proceed?  Am I off on the neccessity for 20% on all Conv Fin or is that only with less then great credit?  How about using HML, will they require less than 20%? would that be a better idea for the first few flips?

Any assistance on tweaking my initial action plan would be greatly appreciated!

Thanks all!

JG

Casey Auciello · Answer

What are the loan terms? How much rehab is needed? If you're looking to buy and hold, the 50% rule that people discuss sounds good to use to cover all future expenses.

If the numbers don't work for holding, maybe you could flip it. You would want to check into recent sales in the neighborhood and check comps to see how to competitively price your property.

Charles Whitaker · Answer

Jason,

Word to the wise, post your numbers here before buying. You surely don't want your first property to be a lemon, or a vicious money sucker.

Good Luck

Jason Goldberg · Answer

Great idea, thanks Charles.

3/2 SFH ~1200 sqft - built in 2001.  Asking $55k, i can probably get it for under $50k as there have been 2 price drops in the last 4 months (one this past week) from the original 77k.  2008 Certified Tax Appraisal listed as ~132k.

One other property, slightly with more damage on same street going for about the same price and one other in another phase of the development slightly bigger going for $165k (pipe dream in my eyes) and another slightly smaller for 90k (on the market for 2 weeks so far).

One actually sold that was slightly smaller a little over 1 month ago for 124k.

Rents currently going for between 800 and 1200/mo in that area and i'm looking to be at the low end and do the prop mgmt myself.

What does everyone think?

Thanks,

JG

Jason Goldberg · Answer

Thanks all for your replies!  Upon doing some more research and speaking with a broker, it does seem as if you are correct Chevis and a year of "seasoning" may be required on a rental before attempting to refi.  Even then it may not happen but is somewhat dependant on the status/stability of the banks and of course your credit score and tenant history.

I have found the property i think will be my first deal and will let you know how it goes!

Thanks,

JG

Scott Thomas · Answer

I am in similar situation to original topic creator (Jason).  Mike OH replied about starting with conventional then doing a re-finance.  Am i correct in assuming that if the deal on the original property was "so good" that there is immediate equity to pull out in the re-fi to apply to the next deal?

Chevis Duncan · Answer

i have also been told here in nc that on investment prop, you cannot refi for one year.  does this sound correct?

Matt H · Answer

You have the right idea. Often the easiest way to build capital is to flip houses. It's a tougher market at the moment though unfortunately. But if you can do a few flips it will raise capital for you to start to buy apartment buildings.  [REMOVED] But in any case I think you're on the right track.

Adam Black · Answer

I agree with Jon ( as he seems to always give good advice ;)), using a HML will work but yuo just have to stay on top of things and get refininced ASAP. For your first deal I would probably spend a little more and hire a general contractor just to save some time if you know a good one. Shadow him for the entire process and learn how he saves time and money. Start marketing it as a rental immediately so you have income beginning as soon as it is ready. 
An alternative would be to find a true turn key investment sales company. This way you are walking into a property that is producing enough income off the abt to pay the interest on the HML while you seek out permenent financing.

Jon Holdman · Answer

A HML might be OK to buy a rental and fix it up.  As soon as you can, though, you would want to refi into a conventional loan.  HML loan rates are way to high for holding property.  And, even doing this will be expensive.  Between the cost of the refi and the cost of the hard money, figure about 10% of the ARV.  The refi will probably be limited to 70% of the ARV as determined by the new lender's appraiser.  So, you really do have to have a great deal to make this worthwhile.

Michael Rossi · Answer

If you find a GREAT deal, you can buy a rental with conventional financing and then refinance in a few months, using the money as your downpayment for the next deal and still having a low enough LTV on the first property that it will cash flow.  It just requires putting in the work to find a great deal.

I would never use a hard money lender for rentals.  That's just throwing away money!

Good Luck,

Mike