How to buy my first deal

Question

Hello everyone,

I need some advice on whether this is possible or not. I came across a 4-plex that needs some rehabbing. My fiancé and I have about 20k in equity in our home. This 4 plex is listed for 128k and it is in a good area. Im not exactly sure how to guesstimate the repairs by looking At in online but it doesn’t seem like it would be too bad. Would using a conventional loan to finance the property and then rehabbing it with out homes equity be a smart move? We’ve even considered house hacking ***but we have two kids and I’m not sure about the size of these individual  apartments*** Any advice on what would be the the smartest thing to do on getting started with a rental AND if we went the house hacking way would be greatly appreciated!!

Jonathan Taylor Smith · Answer

Hello @Tessa Burks - Congrats of finding what may be a good deal for you and your family. Have you considered using a Hard Money Lender to fund both the purchase and rehab of the property? The interest rate may be in the 10% range and you may be charged 2 or 3 points, but they will typically fund 80% of the purchase price and 100% of the rehab for up to a year or so - at which point you'd ideally have the rehab done, all units rented at market rates, and can then refi the HML out with a conventional 30-year loan. If done well, you may even be able to pull out your cash + profit if 70-75% of the new value covers your prior purchase, rehab, holding and closing cost while still producing positive monthly cash-flow with at least a 1.25 DCR.

If the purchase price is $128K, you'd need about $30K to cover your 20% down and closing costs, plus they may want you to be able to show some additional amount in reserves. My wife and I got those funds for our first purchase by taking a loan from her TSP (Military 401K), even though we had savings and home equity, it was easier to use the TSP. It we had been younger with no kids, we would have also done House Hacking.

Alyssa Dyer · Answer

I would always house hack if possible! I'm worried that it's a good deal, but that it's still on the market, makes me think something is up. Or, is this something you found off market?

Kevin Hunter · Answer

@Tessa Burks, your question was would a conventional loan to purchase, and equity from a current property to rehab be a smart move in this scenario.  Yes I think it would.

The problem I see is that 20K of equity is not very much, and depending on the appraised value of your current home, I think it will likely be difficult to get that equity out.  Most times a cash out refinance from a bank will only allow up to 70-80% of the home's appraised value to be borrowed or cashed out.  The only scenario where you could tap into that ANY of the 20K of equity is if your home value was less than 80,000 total (even then you could only pull out 5,000, if there were no fees involved).  Looking at the Casper area, that doesn't look likely.  A different approach to consider might be the 203K loan.  In this case, an FHA loan is approved which covers purchase price and the estimated rehab.  Talk to a mortgage broker about it.

Good luck either way!

Damaso Bautista · Answer

@Tessa Burks

@Mike Bean and @Matt Leber have great points.

Like most of us on this forum,  the point of making this purchase would be to put you and your family a better financial situation.

That being said you need to make sure that you run all the numbers involved in this scenario before you pull the trigger.  Some financial due diligence on this deal will go along way in helping you make your decision.

Mike Bean · Answer

@Tessa Burks If I were you and I was planning on rehabbing I would go with an FHA loan and go your house hacking route. You can get in for very low cost by only having to put 3.5% plus closing costs and then you could do a live in flip (assuming a unit is big enough for your families comfort). I would only do this if you know you can get cash flow from the house you live in now if you were to rent it out. If you have holding costs for your house now plus holding costs on a new property it would be tough. But I'd get the multi and start your big projects immediately and find some tenants and let them know you'll be doing some work for the beginning of their lease.

Matt Leber · Answer

@Tessa Burks do you have an avenue already set up for accessing the equity in your home? Such as a HELOC?  If not, it may take some time to close the cash out refi or HELOC.  It typically involves getting an appraisal and other closing cost items. From my experience, you can’t really use that $20k unless you have a way to pull it out.

Also, do you have the 20-25% down plus closing costs to close a conventional loan on a multi family? You’ll find most conventional lenders will require 25% on non-owner occupied multis, or usually at least 20%. Although I’m sure there are some exceptions.

How to buy my first deal

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