Help on a Financing Strategy

[Mike N.]

I am a looking into purchasing my first investment property. The only other house I have bought is the home I am living in now. I am looking for a strategy for 100% financing on a property that I am intending to rent out. I cannot use my home’s equity because I bought it at the peak of the market and now it’s upside down. I cannot even rent it out because the payments exceed any rental income. My credit score is at the low to mid 700’s. I don’t want to kill any positive cash flow from the property by getting a high interest, hard money loan if I can help it. I do intend to keep this property. I liked the customer financing but the length of the loan was short. This would also eat away the positive cash flow from the rental. I have never done these types of loans so maybe I am just not seeing it right. Does anyone have any suggestions?

[Jon Holdman]

Realize, though, that private lender's aren't going to give you 6% financing. Well, unless you find a clueless person with money. The rate you pay is negotiable, but its realistic to be in or at least close to double digits. A private lender is also unlikely to lend you 100% of the purchase price plus closing costs. Again, unless they're clueless. Or really love you.

It possible to get into rental properties with little of your own cash. Its also possible to find rental properties that actually work (read in the Rental Property forum). Finding one property that does both is like finding a needle in a haystack. Even if you find a good deal, as soon as you start paying interest on 100% of the deal and especial at private money rates, or you bring in a partner, you've just killed your cash flow.

I've done a couple of deals where I used hard money to buy and fix the house, then refinanced. I've ended up with loans at about 70% of the appraised (for what that's worth) value. My purchase plus rehab was under 70% of the value. I still end up with about 10-15% of the value in my own cash into the property.

In addition, you MUST have cash reserves. If you count on the tenants paying the rent each month to keep your business going, your business plan is flawed. You WILL have sudden moveouts and unexpected bills. You must have enough cash to get through these rough spots. Three months rent, at a minimum, six months would be safer.

Rental properties, in the best of situations, don't produce much cash. A hundred bucks a month would be good. Maybe a little more if you have some cash in the deal. A few rentals won't have any significant positive impact on your personal situation. They can have a huge negative impact. Having some cash is essential to avoiding that negative impact.