Paying cash for first rental property?

[Frank Capuano]

Hello, I am a newbie here. I was looking into purchasing properties in lower income neighborhoods in Central Ohio. My plan is to go the section 8 route and fix up the house(s) to meet the required inspections. What are your thoughts on my plan and do you advice not using my own cash?

[Michael Garofalo]

Hi Frank,

Depending on the condition of the property--cash may be your only option for acquiring that type of asset. Are you going to hold the properties in an LLC? If so, almost no banks will lend on an investment property that is vacant, as they want to have assurance that an income stream is established.

If you have the means, a good strategy is to purchase with cash, rehab, stabilize with tenants and then once you have a signed lease agreement (or have satisfied the bank's seasoning requirements), you can then refinance to pull most if not all of your initial capital back out. Just make sure you don't overpay, and that the rehabbed property will appraise at the very least, at an amount that equals the purchase price+construction costs. 

Finally, I would strongly caution that you educate yourself immensely on the neighborhoods of interest, and find a reputable property management company for placement and to provide an ongoing buffer between you and the tenants.