Anxious about financing the first deal

[Heather D.]

Where to start -- I'm a newbie when it comes to actually applying all the information I've pounded into my head about real estate over the last decade. Finally got the stars all lined up to leap off the cliff and do something and now I'm getting anxious about the financing and questioning myself over and over again.

I'm trying to stay with what I'm comfortable with at first so I can build more experience before adding different twists to the mix. I'm targeting a "cookie cutter" rent house - less than 10 years old, under 1500 sq ft, 3/2/2. I've found a number of listings in my area that fit my requirements as well as my target price and market rents. I think I have all my ducks in a row but I'm anxious about the financing route.

I have one rent house that I bought 5 years ago as my primary residence then later converted to a rental. I owe about $73K on it with a market value of ~$105K -- not enough equity to really do anything. However, I've got a vested balance in my 401K of ~$40K.

I was thinking of going through a hard-money lender which will require me to draw the money out of my 401K to serve as a cash reserve.

OR should I try to do a few small flips to build up some $$?

OR should I target a cheaper property for my first few rentals... ?

I have to believe the first deal is the hardest... because I know I'm likely making something out of nothing.

Thanks for reading through all my anxious rambling!!!

[Shanti S.]

Do I read correctly that you do not have the closing funds needed to purchase your 2nd rental conventionally?

You say you have all your ducks in a row but the money is the first duck if you ask me :-)

Where are you living now, you say you have one rental without enough equity in it to refi - are you pretty confident about the appraised value of that one?

I would definitely say stay away from the hard money for now, you do NOT want to get stuck in a long term relationship there on a single property. That would be for purchase, rehab, quick sale of a property that you KNOW you can turn over quickly at a high profit, making the extremely high interest rate acceptable.

In short, if you have one rental that's doing well for you, I'd leverage that experience and repeat with today's wonderfully low FIXED rate conventional loans - depending on your current living situation, if you purchase another single fam and move into it, you can qualify for low $ down owner occupied conventional loans. You can move on later and keep that loan, but you would need to actually move into the property to start with. My local banks have told me they don't have a problem with that plan, but be sure you're updating your insurance company on the owner occupied / non owner occupied status or they will have issues with it.