How does this deal sound?

Question

I'm looking at buying my first rental and here is the deal I found. It's a two unit duplex that looks to only need cosmetic work for the most part. Only major issue is the electric panel being fuses which I hope to have the owner change before buying. I will do most all maintenance and all managing.

Price: $45,000
Down payment: $8500
Mortgage on 10yr @ 4.9: $380

Tax per yr: 1200
Ins. per yr: 500

Rent per mo: $450 x 2
Owner pays just elec.: $60 per mo.

Price: $45,000
Down payment: $8500
Mortgage on 10yr @ 4.9: $380

Tax per yr: 1200
Ins. per yr: 500

Rent per mo: $450 x 2
Owner pays just elec.: $60 per mo.

Account Closed · Answer

Steve,

I ran the math, and it was fully amortized over 10 years at 4.9% interest rate @ $385/month.

Troy, you should be getting a residential loan, not a commercial loan. Commercial loan is typically for 5+ units. Just go with a 15-year fixed at somewhere around 4-4.5% interest rate and call it a day. Your PG&E bill seems low though, but I don't know much about the weather in your area. This deal is so small that you can screw up a little bit & would still be ok. I call it "getting your feet wet." However, knowing the area you're investing would eliminate a lot of potential hiccups.

Have fun with your new investing adventure. It can be very rewarding if you do it right.

Best of luck.

Account Closed · Answer

Troy,

The deal sounds good. If it were in my neck of the woods, I would do this deal all day and all night long. How's that for a response?  LOL!!!

4.9% for a 10 year fixed must be a seller financing deal.  Btw, who pays for the water and garbage? Tenant?

Joel Owens · Answer

Many banks will not touch under 50k loans.You need to find one that doesn't sell the note off and services the loan.They will do the loan this way as they make constant fees on the loan.

Someone that is just originating it is too small for them to justify the time involved and the money made.

Scott W. · Answer

heloc is cheapest way to go w/ a small loan.

Troy B. · Answer

A few banks are telling me a home equity would be best route for this small of a loan since I would avoid all the closing costs.

Would this be a good idea or not, since it would use up most of my equity I have in my current home?

Scott Hubbard · Answer

I have this issue with loans under $50K too.  As you get more properties under your belt, you can avoid this through the use of credit lines and portfolio loans.

Ignore the banks advice in as much as them dictating to you that a commerical loan is the way to go.  This is their way of putting a square peg in a round hole.

First, leave no stone unturned and look to smaller state and regional banks or credit union's.  You will be looking for a bank or credit union does protfolio lending (warehousing), which is typically a loan that is not resold on the secondary mortgage market, so they have some flexibility on terms and rates.

Credit union locator http://www.ncua.gov/NCUAMapping/Pages/NCUAGOVMapping.aspx

Banks Locator
http://www2.fdic.gov/idasp/main.asp

Pull a list of banks and CU's headquartered in your state and preferably near your location.  Start calling and ask for a loan officer in charge or branch manager.  Ask them the following:

1. Do you originate in-house non-owner occupied investment properties?
2. Do you originate loans under $50K?
3. What type of loan amoritizations do you offer?

Typically they cannot give you rate but they can offer you amoritizations.  Since the principal loan amount will be low, your ate will typically be much higher than the prime lendin rate.

Second, if you find it difficult to locate a lender that is willing to work with you, then you probably will need to take what you can get, then after a year or so, go back and refinance into a residential or commerical with better suited terms.

Thirdly, if you have the opportunity, you might try to raise the necessary capital from friends and family paying them a similar rate of return to what your being offered now.

Most of my capital is raised privately and I am paying much higher rates than quoted you.  The idea being is that I forgo origination costs and have the fleixibility to offer cash to the seller leveraging a better price.  So, if you have the opportunity to raise capital, this is a good way to build your invetment portfolio.

Hope this helps.

Troy B. · Answer

Also Just spoke with quicken loans and they won't do it because they said it was considered a high cost loan. Meaning the closing cost would be more then 5% of the loan amount of 34k.

Steven Hamilton II · Answer

Troy Baughman,

You should tell them you want a conventional loan for an investment property.  They should required 20-25% down. The rate increase will typically not be higher than commercial rates.

Troy B. · Answer

I have spoke with 5 banks now and they all tell me I would have to go with a commercial loan if I'm not living in one of the duplex units. The rate I was quoted was a 15 yrs, 4.99 fixed with rate adjust every 5yrs. No bank would go for over 15yrs.

Every bank told me it would be best to go for a commercial loan or the rate would be even higher and would require 25% down instead of 20%. Is this typical?

Steve Babiak · Answer

My previous post was hinting that you might be getting an amortization period that differs from the loan duration for the loan that you were describing.