I feel like now is the time ... but am I ready?

Question

I have lurked BP for a few years, posted a few times over the last two years, always with some form of trepidation of entering the real estate market .... I really do believe now is the time, but ****, I don't even know if I'd qualify for a mortgage.  Here's my story, I would GREATLY (and that's an understatement) appreciate any advice you have. I was in finance, I do understand #'s but how I handle it wouldn't reflect that ... I am risk adverse, from a monetary perspective, which explains why I am now a Train Operator working for the city lol.

I have no large debts looming, the wife and I maybe have $4k combined across a few CC's.

Salary: $67k/annual but you can't escape OT, and I was at $90k last year

I was left an estate, sold it, invested it conservatively - I utilize gains to help an aging family. Last year I partnered with a banking buddy of mine to purchase a home in CT, cash for $175k (I finance it, he does all the work - we split profits), but after a more critical inspection, he found water damage that ultimately led to the deal falling through. Like, an idiot, I had already had securities liquidated for the deal, so they've been in a money market since early last year.

Credit Score - 680 ... I have money, but still manage to pay a bill one day late.  I am in idiot, don't say I didn't warn you.

The deal from early 2019, was going to be a fix and flip, but I know now, that isn't the route I want to go.  I want to own units, and lots of them. I reside in NYC, but want to invest in Jersey, where I can still find multi-family homes for sub $200k.  My question is, I've heard working for the MTA is a big plus, but how bad will my credit score impede on me obtaining a mortgage? I want to get into the BRRR method ... If a mortgage broker/lender reviews my finances, will they grant me a mortgage or attempt to force me to collateralize my estate investment in order to secure a loan?  That is something I would never do ... I would simply reinvest my funds back with my money manager at that point.

I feel like now is the time. I am also looking into moving into one of my investment properties, and renting out the other units.  As a first time home buyer, are there any lenders like Fanny Mae that host programs that may boost my potential as a qualified buyer?

I have so many questions.  Please .... any advice. Thank you for reading, if you made it this far.

Account Closed · Answer

I enjoyed the read. You are in a "self destruct" loop. You allowed yourself to"slip" and pay one bill late to keep the FICO score low. There is an environment or there are people around you that you believe you will lose if you are successful. Sorry, it's the "success psychologist" in me kicking in.

To get out of that destructive loop, you need to team up with someone who will help you through the tough spots. Kind of like a buddy who helps an alcoholic when he needs support. First you have to see the future for what it is, bright, prosperous and all yours for the taking. Then you need an action plan. Then you need someone to help you realize that goal. It is all doable, you have shown the ability to succeed, you understand the numbers and the process, you just need to put your upbringing and past into the rear view mirror and commit to a successful future with a clear path and plan in writing.

Twana Rasoul · Answer

@Richard Wilson if you want to be a conservative investor, I am a big fan of starting off locally with a house hack. For your situation, look into buying a 2-4 unit property using an fha loan to put 3.5% down. This way you’ll have a place to live and at the same time have an investment property. I would not suggest going out of your area to invest unless you have at least done the above first.

Best of luck to you!

Albert Ellis · Answer

@Richard Wilson

680 credit score is absolutely fine and not a deal breaker as a new investor. I sit and research loan products for investing all day for fix and flips in New Jersey. 600 is often the minimum credit score I see for fix and flips. For refinancing,  and bridge loans 680 will be acceptable for most lenders in the area.

Matthew Porcaro · Answer

Hey Richard - I live in NYC (Long Island City) so I'm not far way from you. NYC is just an extremely tough market to play in, for a number of reasons. If I were you, I'd do what I did, and extend your reach to the tri-state area. My first property I bought was out on Long Island. Properties are much more affordable when you're about an hour outside the city, and with all the public transportation like the LIRR and MTA, its feasible to do the commute if you work in the city like I do.

Upstate, northern jersey, and Connecticut are also nice locations. It's just contingent on you willing to up your commuting distance.

Jaysen Medhurst · Answer

Always happy to take a look, @Richard Wilson. I do use the 1% rule as a quick-and-dirty filter (2% deals are pretty much non-existent). I don't really use the 50% rule, since actual expenses can vary so much from property to property and location to location. I'm comfortable quickly running the math in my head or on my phone. I open a spreadsheet when I'm ready to get serious.

As far as your analysis:

• Break out the rent for each unit, plus any additional income, like coin laundry.
• Put in a budget for initial repairs. Turnkey or not, there's always something!
• I think you should be able to find a better rate than 5.4%. Call around to all the local banks and CUs. I'm seeing rates in the mid 4s. Even with a 30-year amortization.
• I prefer 8% Vacancy when underwriting MFR. That works out to 1 month empty per year. SFR, I use 5% since they tend to draw families who stay longer. 
• Insurance looks very low for a property worth almost $400k. Talk with a local insurance agent.
• You will likely be responsible for water/sewer on any MFR. I figure $30-40/unit/month.
• Those taxes! Ouch.
• I like that you used 15% combined for Repairs and CapEx. That's generally what I use. You may be able to expect lower expenses for the first few years, but over time it will all even out.
• 12% Management is conservative. Hopefully, you can get it at 10%. Shop around.
• What about lawn care, snow removal, and admin/professional fees?

My math shows this running about $175/month in the red. You're not quite hitting the 1% rule and those taxes are killing you. Maybe you could break even or even squeak out a small profit, if your Repairs/CapEx stay low. I wouldn't do this deal at this price.

Richard Wilson · Answer

Jaysen, much appreciated .... Sound advice here.

Question, how much of a heavier down payment do you think I would be facing; 20-30%? Greater even?

So I am looking for properties in the Essex County area, specifically East Orange, Newark, and Irvington. For a first home project, looking for a 2-family home, roughly around 2,000 sq ft., with some work needed. I am willing to open up the rehab budget up to $70k, as long as the numbers make sense and add value to the property, but again, with my credit, I am not sure I would even qualify for a rehab loan, and I am not sure I'd be willing to come out of pocket. I liked the fact that the bank holds the funds in escrow, and will only disburse funds as work is due, and they follow up on the project themselves.

I have to sharpen my pencil with analyzing deals.  I recently made a few attempts, but I don't know how much water and electric coast. I have no idea how to estimate a rehab project, or project the ARV. I am lost in that aspect of the deal.

Thank you again for the response!!

Ujwal Velagapudi · Answer

You should be able to get loans, rates of course will be a bit higher. Get a plan in place for your budget, pay of small debt like your CC's, get everything on auto pay, etc. to try and get your credit score into the mid-high 700's within the next few months. You have an easily fixable problem, which is your credit management, whereas most people have issues in getting the cash reserves to invest or a stable income. If your wife is up for it, house hacking would be a great first step!

Richard Wilson · Answer

Thank you for taking the time out to respond. I would prefer to avoid the PMI, so I don’t mind dropping a heavier down but with the 203k loan, it’s $35k max right? I feel like I’m misunderstanding something about the loan ...

Unfortunately, the good parts of Newark are out of reach of my the budget I’ve set for my initial dive. I’m hoping to find something $180-250ish, depending on rehab needed. I don’t think I could manage a full overhaul with zero experience. That’s why I’ve been looking slightly further out, like Irvington and East Orange. I’ve recently saw a few distressed properties sub $100k fly off NJMLS. I appreciate any and all information. Thanks again for responding!

Johnathan Boyle · Answer

@Richard Wilson congrats on your first steps. I'd say go with an FHA 3.5% owner occupied loan. But of course don't overspend, you want to have equity and want to be able to cash flow. Maybe 203k would be great as well. Overall, it depends on your level of comfort because some areas of Newark can have great cash flow but a little more dangerous. While other areas have better appreciation but less cash flow.

Richard Wilson · Answer

I appreciate all the advice brother.  I am going to exercise these tools, and give it a go. I'll post in here and also tag you - it would be awesome if you could review/critique.  Thank you again!

I feel like now is the time ... but am I ready?

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