New deal. Will little to no money work?

Question

Hello BP community,

I am new to REI and am learning the ropes. I have read many of the books, listened to the podcasts and have started my direct marketing. It has already produced many great leads and should be closing on one of them soon. I've primarily been marketing for multi-family homes and plan to use the BRRR technique to further my investing. However, I have come across a different great deal, am not sure what to do with it. The house is a beautiful 3 unit multi-family home, located in a great neighborhood, by a great school and is walking distance to the downtown. The house is turn key and has never had any trouble renting. It is not listed on the market and is currently unoccupied. The seller is motivated to sell due to health reasons and would be willing to sell it for almost 100k under market. Here's the problem: The home is out of my price range currently and turns a negative buy and hold cashflow according to the rental property calculator (due to high taxes, low down payment and estimated mortgage payment). Initially I thought it would be possible to purchase it with hard/private money from a lender, make quick repairs and then refinance to pull out the extra equity to pay off the hard money/private loan. However, after looking into it it looks like no bank or lender would lend (even on a great deal) to someone without an extensive history of deals or collateral.

- I can provide numbers if that helps with the question.

Questions:

1. Should I look for another investor who has the funds and do a double close?

2. Is it possible to find a private lender who would fund such an investment with little to no money down

3. Should I try to offer a lease option and possibly "sandwich" it to save and buy it in the future

4. Should I find private money through family/friends/investors to fund the down payment of a conventional loan and then reimburse them upon the sale of the house?

There are so many creative ways to fund deals and options to sell. I continue to research these options and educate myself however am very confused as to what to do about such a deal. Or what type a deal it even is.

Thank you!

JD Martin · Answer

Question #1: Why is it unoccupied? If it makes money, someone should have it making money. I don't know any investors that own rental property that allow it to sit vacant unless it is undergoing rehab or it's for sale and attracts the kinds of tenants that make it difficult to sell an occupied property.

I think your best bet on something like this might be to house-hack it and live in one of the units while you rent out the other two. Then you can go conventional on a loan. It will still have to appraise in order to make that work. Use your tenants & your payment to build your equity, then move on.

Rosston Smith · Answer

You are on the right track of thinking. Look into private money. Start with family and friends.

Bonnie McCullough · Answer

In Mass you not only need the down payment but you need to have LIQUID assets equaling 6 months of the mortgage, taxes and other expenses on hand. I found this out the hard way when I tried to refinance a property we have owned for 8 years. We have 3 properties none of which are underwater, but good comps are tough to find on each of them. If I had not bought years ago I would not be allowed to own them now. Keep looking for something you can better afford or live in.

Andrew Michael · Answer

Provide the numbers if you can.  First of all, if the home is really at a 100k discount then its hard to think that the numbers do not work some sort of way.  Just curious, why do you want to do a double close?  It is possible that a private lender MAY lend on a high percentage LTV and thus eliminate the need for you to bring a lot to the deal however this is less then likely since you are new.  A work around would be to cut in a partner to an equity position.  You found the deal and negotiated terms and price.  Your partners brings the capital.  You split profits 50-50.  I think that is a perfectly normal partnership that many investors would go for.  If you can raise the private money yourself that is always a good way to get the funds but I would caution doing your first deal using friends and family members money.  If you lose their money, what implications would that have on the relationships?  Is it worth jeopardizing?  Find a business partner and let them bring the money.  Finally, there are certainly asset based lenders, portfolio loans, and ways to finance this.  I think the easiest and best way into this deal would be find someone with experience who will help mentor you through this deal and see what makes most sense for your market.

Brett Merrill · Answer

@Jd Martin and @Andrew Michael here are the estimated #'s just as an example:

Purchase price: $400,000

ARV: $510-520,000

Repairs: $5,000-10,000

Taxes: $6500

Cap ex: 10%, Vacancy: 5%, ins:10%,

Closing $4000

If I was to put $40,000 down and have a loan of $360,000 at 6% for 30yrs my P&I is 2,158 and PMI of $200

Monthly income is currently $3000 but I know that they have not bothered to raise the rates which is definitely possible.

In the end without adjusting rent cash flow is -350 but the ATR is 60% after 4 years

These are averaged numbers but will give you an idea of the deal. Hope this helps.

Brett Merrill · Answer

@Andrew Michael thanks for the reply! Thats what I'm thinking might be the best bet right now. I will expand this deal over BP as well as market through my local REIA group. There's obviously more money to be made if I had the capital myself but I am all about the "50% of a deal is better than 100% of no deal. I will definitely look for a business partner and mentor. Thank you for the advice!

Brett Merrill · Answer

@Jd Martin thanks for the reply! The owners of the home were previously renting the apt but the husband unfortunately has major health complications and the wife is too overwhelmed trying to manage and keep up with the house. They are both in their late 70's and are not investors. They own the house free and clear and just want to relieve the burden of owning and maintaining the home. I definitely was thinking of house hacking but I currently live too far away from the investment and would not be able to take advantage of the FHA loan rule of having to occupy the home within 60 days of purchase. But if I can make that a possibility it is definitely the route I would like to take.

Thomas S. · Answer

If the numbers show this as being a negative cash flow property no investor will buy it.

A bad deal is a bad deal regardless of the price. Walk away.

New deal. Will little to no money work?

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